WMS Portfolio Management & Strategy 3

Question 1

A portfolio manager identifies that small-cap value stocks have historically outperformed the market. This phenomenon is best explained by which framework?

Accepted Answer

Fama-French Three-Factor Model

Answer

The Fama-French Three-Factor Model adds size (SMB) and value (HML) factors to the market factor to explain cross-sectional return differences.

Question 2

An endowment uses the Yale model. Which allocation is most consistent with this approach?

Accepted Answer

Heavy allocation to private equity, hedge funds, and real assets

Answer

The Yale model emphasizes illiquid alternative assets—private equity, real assets, and absolute return strategies—to capture illiquidity premiums.

Question 3

Which risk measure captures only downside volatility, making it preferred by investors concerned with losses rather than gains?

Accepted Answer

Semi-deviation (downside deviation)

Answer

Semi-deviation measures volatility of returns below a target (often zero or the mean), focusing solely on the downside investors want to avoid.

Question 4

A wealth manager employs a 'barbell' fixed-income strategy. This means the portfolio is concentrated in:

Accepted Answer

Short-duration and long-duration bonds with little in the middle

Answer

A barbell strategy combines very short-term and very long-term bonds, avoiding the middle of the yield curve to balance liquidity and yield.

Question 5

Which of the following best describes the information ratio (IR)?

Accepted Answer

Active return divided by tracking error

Answer

The information ratio measures a manager's active return (alpha) per unit of active risk (tracking error), assessing consistency of outperformance.

(WMS) Wealth Management Specialist Certification Practice Test

(WMS) Wealth Management Specialist Certification Practice Test

WMS Portfolio Management & Strategy 3