Portfolio Construction - Booth

Question 1

Which of the following is the best reason for an investor to be concerned with the
composition of a portfolio?
A) Risk reduction
B) Downside risk protection
C) Avoidance of investment disasters

Answer 1

A) Risk reduction

Question 2

In defining asset classes as part of the strategic asset allocation decision, pairwise
correlations within asset classes should generally be:
A) equal to correlations among asset classes.
B) lower than correlations among asset classes.
C) higher than correlations among asset classes.

Answer 2

C) higher than correlations among asset classes.

Question 3

Changes in asset mixes are driven by predictions concerning the asset’s potential returns
when utilizing:
A) strategic asset allocation
B) tactical asset allocation
C) constant proportion portfolio insurance
D) market timing

Answer 3

B) tactical asset allocation

Question 4

What are the two major classes of assets in constant proportion portfolio insurance
strategies?
A) Domestic and International Equities
B) Corporate Bonds and Equities
C) Corporate Bonds and Treasuries
D) Equities and Treasuries

Answer 4

D) Equities and Treasuries

Question 5

Which of the following is least likely to be placed in the appendices to an investment policy
statement (IPS)?
A) Rebalancing Policy.
B) Strategic Asset Allocation.
C) Statement of Duties and Responsibilities.

Answer 5

C) Statement of Duties and Responsibilities.

Question 6

If inflation is expected to increase, a consultant may choose to do all of the following
except:
A) sell commodities.
B) purchase precious metals.
C) sell Treasuries.
D) buy TIPS.

Answer 6

A) sell commodities.
Read “treasuries” as fixed income in this case

Question 7

Managers are selected during which phase of the investment allocation process?
A) Evaluation
B) Consulting
C) Monitoring
D) Analysis

Answer 7

A) Evaluation

Question 8

A drawback to utilizing holding-based style analysis is:
A) complexity.
B) simplicity.
C) data is not readily available.
D) the returns are regressed.

Answer 8

A) complexity.

Question 9

A style-based attribution method that is used to create portfolio benchmarks may be:
A) returns based.
B) holdings based.
C) misleading in bull markets.
D) alpha seeking.

Answer 9

A) returns based.

Question 10

An investment advisor sells appreciated investments and asset classes and subsequently
purchases depreciated investments and asset classes based on an original allocation
model . . . this strategy is best known as:
A) dynamic asset allocation.
B) portfolio rebalancing.
C) constant protection portfolio insurance.
D) tax-loss selling.

Answer 10

B) portfolio rebalancing.

Question 11

Consultants may choose to utilize a rebalancing strategy in order to:
A) manage risk and potentially improve performance.
B) increase risk characteristics of the base portfolio.
C) optimize the risk-reward trade off based on the Efficient Market Hypothesis.
D) reallocate assets based on expected return models.

Answer 11

A) manage risk and potentially improve performance.

Question 12

Frequent rebalancing in a declining market would:
A) increase returns.
B) decrease returns.
C) have the same effect on returns as a buy-and-hold portfolio.
D) continually decrease the risky assets in the portfolio.

Answer 12

B) decrease returns.
In decreasing markets, bonds and cash would be liquidated in favor of decreasing stock. This also adds risky assets to the portfolio. The opposite would be true in a rising
market environment.

Question 13

A consultant is formulating his hypothesis for portfolio return in the coming year and for
the next 10 years. He determines that clients should have a higher equity exposure than
in years past. This analysis starts with:
A) capital market expectations.
B) the Investment Policy Statement.
C) fundamental analysis.
D) portfolio beta.

Answer 13

A) capital market expectations.