WMS Portfolio Management & Strategy 2 — Questions and Answers
Question 1: A client's portfolio has a beta of 1.4. If the market returns 8%, what is the expected portfolio return according to CAPM (assuming risk-free rate of 2%)?
- 10.4%
- 11.2% (Correct answer)
- 9.6%
- 13.2%
Correct answer: 11.2%
CAPM expected return = 2% + 1.4 × (8% - 2%) = 2% + 8.4% = 10.4%... wait: 2 + 1.4×6 = 2 + 8.4 = 10.4%. The answer is 10.4%.
Question 2: Which portfolio construction technique minimizes variance for a given level of expected return?
- Black-Litterman optimization
- Mean-variance optimization (Correct answer)
- Risk parity
- Factor-based investing
Correct answer: Mean-variance optimization
Mean-variance optimization, developed by Markowitz, identifies portfolios on the efficient frontier that minimize variance for each expected return level.
Question 3: A portfolio manager uses a 'core-satellite' approach. Which best describes the satellite portion?
- Low-cost index funds tracking broad markets
- Active or alternative holdings seeking alpha (Correct answer)
- Cash and short-term treasuries for liquidity
- Fixed-income bonds for income stability
Correct answer: Active or alternative holdings seeking alpha
The satellite portion consists of active, tactical, or alternative investments intended to generate alpha above the passive core.
Question 4: Tactical asset allocation (TAA) differs from strategic asset allocation (SAA) primarily because TAA:
- Sets long-term target weights based on client goals
- Makes short-term deviations based on market outlook (Correct answer)
- Ignores market conditions entirely
- Rebalances only when thresholds are breached
Correct answer: Makes short-term deviations based on market outlook
TAA makes deliberate short-term deviations from the strategic targets to capitalize on perceived market opportunities or risks.
Question 5: An investor holds a portfolio with an annual standard deviation of 15% and expected return of 10%. The risk-free rate is 3%. What is the Sharpe ratio?
- 0.47 (Correct answer)
- 0.67
- 0.87
- 1.07
Correct answer: 0.47
Sharpe ratio = (10% - 3%) / 15% = 7% / 15% ≈ 0.47.
Question 6: Which strategy involves systematically selling assets that have appreciated and buying assets that have declined to maintain target weights?
- Momentum investing
- Rebalancing (Correct answer)
- Tactical tilting
- Dollar-cost averaging
Correct answer: Rebalancing
Rebalancing restores the portfolio to its target allocation by trimming outperformers and adding to underperformers.
Question 7: In a liability-driven investing (LDI) framework, the primary goal is to:
- Maximize total return relative to a benchmark
- Match or exceed future liability cash flows (Correct answer)
- Minimize portfolio volatility at all times
- Achieve the highest Sharpe ratio possible
Correct answer: Match or exceed future liability cash flows
LDI focuses on structuring assets to fund future liabilities, reducing surplus volatility rather than maximizing standalone return.
WMS Portfolio Management & Strategy 2
A client's portfolio has a beta of 1.4.
If the market returns 8%, what is the expected portfolio return according to CAPM (assuming risk-free rate of 2%)?