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标题: Portfolio Management and Wealth Planning【Reading 21】 [打印本页]
作者: hinsafdar    时间: 2012-3-24 10:00     标题: [2012 L3] Portfolio Management and Wealth Planning【Session 8 - Reading 21】

Carl Allen and Cliff Hanes are analysts for Tacticon Advisory (Tacticon). Allen and Hanes have been assigned the task of documenting some of Tacticon’s asset allocation techniques. After receiving accolades in a recent trade magazine article featuring investment firms with innovative trading strategies, their supervisor, Amos Ridley, decides it is time the firm began formally documenting the firm’s proprietary asset allocation process.
Ridley wants Allen and Hanes to record the specifics of Tacticon’s investment process for internal use. He also wants them to compile a document explaining a variety of allocation techniques to be used by the marketing staff and portfolio managers when working with prospects and clients.
At their first meeting after receiving the assignment, a discussion of strategic and tactical allocation commences. Allen and Hanes feel confident about the distinction between the two, but are less certain about the differences between asset-liability management (ALM) versus asset-only approaches to asset allocation.
Hanes states “ALM and asset-only approaches are used for strategic asset allocation. With ALM an investor’s optimal asset allocation is directly related to explicit liability modeling. On the other hand, with asset-only strategies, liabilities only indirectly impact the return objective.”
Allen replies, “I’m not so sure. I thought that tactical, asset-only approaches like immunization and cash flow matching are more precise than ALM for controlling risk.”Strategic asset allocation:
A)
establishes a portfolio’s long-term asset class exposures by integrating each element of investment policy with capital market expectations.
B)
sets a portfolio’s asset class exposures to unsystematic risk.
C)
involves short-term variations from an investor’s normal asset mix.


Strategic asset allocation establishes a portfolio’s long-term asset class exposures by integrating each element of investment policy with capital market expectations. It affords an investor the ability to control systematic risk exposures by aligning their risk and return objectives with the actual portfolio of investments. Tactical asset allocation involves adjustments away from the strategic mix to take advantage of short-term projections of relative asset class performance.
Concerning the discussion between Hanes and Allen about ALM versus asset-only allocation approaches:
A)
both are correct.
B)
both are incorrect.
C)
only one is correct.


ALM and asset-only approaches are used for strategic not tactical asset allocation. With ALM an investor’s optimal asset allocation is directly related to explicit liability modeling. With asset-only strategies, liabilities only indirectly impact the return objective. Asset-only approaches are less precise than ALM for controlling risk. Immunization and cash management are ALM approaches.
作者: hinsafdar    时间: 2012-3-24 10:01

Which of the following statements regarding the strategic asset allocation process is least accurate?
A)
The strategic asset allocation must be rebalanced periodically for changes in the valuation of the various asset classes in the portfolio.
B)
The strategic asset allocation review is typically performed once per year.
C)
Strategic asset allocation, similar to tactical asset allocation, employs a short-run capital market projection.


Strategic asset allocation employs a long-term capital market projection.
作者: hinsafdar    时间: 2012-3-24 10:02

Strategic asset allocation is based upon:
A)
long-term capital market expectations and risk/return preferences of the investor.
B)
short-term capital market expectations and the investment policy statement.
C)
long-term capital market expectations and the investment policy statement.


Strategic asset allocation is based on long-term capital market expectations (which forms the basis for the generation of the efficient frontier) and the investment policy statement (IPS) of the investor. The IPS includes not only the risk/return objectives of the investor but also the investor’s constraints.
作者: hinsafdar    时间: 2012-3-24 10:02

Assignment of asset class weights for a portfolio based on long-term capital market expectations is called:
A)
strategic asset allocation.
B)
portfolio optimization.
C)
tactical asset allocation.


Strategic asset allocation is the assignment of weights to different asset classes based on long-term capital market expectations. Tactical asset allocation is based on short-term capital market expectations.
作者: hinsafdar    时间: 2012-3-24 10:02

In a market that can be characterized by up-down or down-up movements, rather than a sustained up or down trend, which of the following statements is least accurate with regard to the benefits of rebalancing the asset mix of a portfolio?
A)
Under a buy and hold strategy, asset allocation changes occur solely in response to changes in relative market values.
B)
Disciplined rebalancing strategies are superior to a buy and hold strategy.
C)
Momentum-based rebalancing strategies outperform disciplined rebalancing strategies.


Disciplined rebalancing (e.g., maintaining a 60% stock / 40% bond mix) is superior to a momentum-based rebalancing strategy when the market is not following a sustained trend.
作者: hinsafdar    时间: 2012-3-24 10:03

Each of the following statements concerns either strategic asset allocation or tactical asset allocation. Which of the following statements is least accurate?
A)
Strategic asset allocation is typically a constant mix strategy.
B)
Strategic asset allocation employs a long-run view of capital market conditions.
C)
Tactical asset allocation employs a long-run view of capital market conditions.


Tactical asset allocation is an attempt to take advantage of temporary capital market inefficiencies and takes a short-run view of market conditions. Both of the other statements are true.
作者: hinsafdar    时间: 2012-3-24 10:03

Strategic asset allocation reflects what systematic risk exposure?
A)
Investor’s desired systematic risk exposure.
B)
Asset class systematic risk.
C)
Long-term systematic risk exposure.


Strategic asset allocation reflects the investor’s desired systematic risk exposure.
作者: hinsafdar    时间: 2012-3-24 10:04

What does Strategic Asset Allocation allow managers to do with respect to systematic risk?
A)
Reduce.
B)
Monitor and control.
C)
Identify and minimize.


Strategic asset allocation reflects the investor’s desired systematic risk exposure and allows the manager to monitor and control risk – not to reduce or minimize it.
作者: hinsafdar    时间: 2012-3-24 10:04

According to the modern portfolio theory, which risk is rewarded?
A)
Systematic risk.
B)
Total risk.
C)
Efficient risk.


According to modern portfolio theory, only systematic risk is rewarded. Total risk (may be measured by standard deviation) is comprised on systematic and unsystematic risk.
作者: hinsafdar    时间: 2012-3-24 10:04

Tactical asset allocation analysis:
A)
assumes that investor's risk tolerance decreases with wealth.
B)
is often based on deviant beliefs.
C)
assumes lack of inefficiencies in the market.


Tactical asset analysis often operates on the assumption that the market overreacts to information.
Tactical asset analysis is typically performed routinely as part of a continuing asset management, attempts to take advantage of perceived inefficiencies in the relative prices of securities in different asset classes, and assumes that investor’s risk tolerance is unaffected by changes in wealth.
作者: hinsafdar    时间: 2012-3-24 10:05

Which of the following statements regarding asset allocation strategies is least accurate?
A)
Tactical allocation is a contrarian investment strategy.
B)
In order to effectively implement a strategic asset allocation strategy, the investor's risk tolerance must remain constant.
C)
Strategic asset allocation is a drifting mix strategy.


Strategic asset allocation is a constant-mix strategy. It requires that a portfolio is rebalanced in order to maintain a prescribed allocation.
作者: hinsafdar    时间: 2012-3-24 10:05

Strategic asset allocation analysis:
A)
often results in a buy and hold strategy.
B)
often results in constant mix strategies.
C)
is usually done more frequently than tactical asset allocation.


This is often expressed as a percentage of total value invested in each asset class.
Strategic asset allocation analysis is usually done whenever the investor's circumstances change significantly and is often done as frequently as yearly. It is based on long-run capital market conditions, and requires transactions to rebalance the mix periodically.
作者: hinsafdar    时间: 2012-3-24 10:06

Deviation from the policy portfolio due to short-term capital market expectations is called:
A)
strategic asset allocation.
B)
targeted asset allocation.
C)
tactical asset allocation.


Tactical asset allocation is the deviation from the policy portfolio (Strategic asset allocation) based on short-term capital market expectations.
作者: hinsafdar    时间: 2012-3-24 10:07

Bruce Calloway is interested in utilizing an appropriate asset allocation strategy for his portfolio. His long-term view of the capital market conditions is that there will always be change and opportunities to capture excess returns in the market. As a risk neutral investor, he is a consistent risk taker and his risk tolerance on his portfolio can be expected to be constant based on such market expectations. Which asset allocation strategy is the most appropriate strategy for his portfolio?
A)
The tactical asset allocation strategy is most appropriate since this strategy assumes the investor’s risk tolerance is constant and his capital market expectations are subject to frequent change.
B)
The dynamic strategic asset allocation strategy is most appropriate since this allows the capability to quickly move in and out of different assets as market conditions change.
C)
The strategic asset allocation strategy is most appropriate since this strategy allows the portfolio to be periodically rebalanced according to market conditions.


The most appropriate asset allocation strategy is the tactical strategy. This strategy assumes that the investor’s risk tolerance is constant and his capital market expectations are subject to frequent change. The tactical strategy assumes that investment allocation decisions are based on current market conditions, but the risk tolerances do not change with changes in wealth levels. For example, when the market conditions are bearish, the investor’s view of risk does not change with respect to capital commitments to stocks and will allocate a consistent level of his portfolio to cash or bonds. In bull market or when markets rally, the investor’s risk tolerance will not change and would continue to allocate consistent amounts to stocks and cash or bonds.
作者: hinsafdar    时间: 2012-3-24 10:07

Empirical studies indicate that the majority of the variability in a portfolio’s returns and a portfolio’s long-term performance are each respectively explained by:
A)
strategic asset allocation for both the variability in returns and the portfolio long-term performance.
B)
strategic asset allocation for the variability in returns and tactical asset allocation for the portfolio long-term performance.
C)
tactical asset allocation for the variability in returns and strategic asset allocation for the portfolio long-term performance.


Strategic asset allocation combines long-term capital market expectations, investor risk and return objectives, and constraints to determine target weight to asset classes. A study by Brinson, Hood, and Beebower (1986) found that 94% of the variability of portfolio returns is explained by the portfolio’s strategic asset allocation. A second study by the Vanguard Group (2003) showed that more than 100% of the long-term performance of a portfolio is explained by its strategic allocation. Based on these studies and others, the importance of strategic asset allocation for portfolio performance is without question.
作者: hinsafdar    时间: 2012-3-24 10:08

Professor Erik Rickel, an instructor for Babcock College asked his Investments 340 class to identify reasons that support the conclusion that strategic asset allocation is the most important factor for defining portfolio performance. Three of Rickel’s students raised their hands and gave answers to his question. The answers given are as follows:
Prickett:   “Defining an investor’s strategic asset allocation helps the portfolio manager focus on the investor’s goals with respect to risk and return.”
  
Rorrer:   “Results of academic studies show that the overall returns to market timing and security selecting are minimal at best and in many cases do not cover a portfolio’s operating expenses and trading costs.”
  
Cloe:   “Since the assets within asset classes tend to have a similar response to macroeconomic changes, the target weights of the portfolio’s chosen asset classes will tend to drive the variability of portfolio returns.”

Which of the students’ statements accurately support the conclusion that strategic asset allocation is the most important factor for defining portfolio performance?
A)
Prickett’s and Cloe’s only.
B)
Prickett’s, Rorrer’s, and Cloe’s.
C)
Rorrer’s and Cloe’s only.


All three of the students’ statements are accurate and all three support the conclusion that strategic asset allocation is the most important factor for defining portfolio performance. A clearly defined asset allocation provides discipline and focus on an investor’s goals by ensuring that the investor’s portfolio accurately reflects the investor’s desires with respect to risk and return. Also, empirical studies support the conclusion that strategic asset allocation (not timing or security selection) defines the vast majority of a portfolio’s long term performance, and the variability of portfolio returns.
作者: hinsafdar    时间: 2012-3-24 10:08

Brad Windbigler and Crystal Williams, portfolio managers for Lucite Investment Management, are discussing the importance of asset allocation for portfolio performance. In their conversation, Windbigler makes two statements:
Statement 1:“A clearly defined strategic asset allocation provides discipline in ensuring that the investor’s portfolio accurately reflects the investor’s desires with respect to risk and return.”
Statement 2:“Over the long run, asset classes seem to respond somewhat homogenously to systematic risk factors, which means that tactical asset allocation will tend to explain the majority of the variability of portfolio returns.

After listening to Windbigler’s statements, Williams should agree with:
A)
Statement 1 only.
B)
Statement 2 only.
C)
both Statement 1 and Statement 2.


Williams should agree with Statement 1. Even though investment managers are “experts” at selecting good investments, investment managers need discipline in the search for reward versus systematic risk. A clearly defined asset allocation provides such discipline by ensuring that the investor’s portfolio accurately reflects the investor’s desires with respect to risk and return. Williams should disagree with Statement 2. It is true that over the long run, asset classes do respond somewhat homogenously to systematic (macroeconomic) risk factors, however, this supports the conclusions drawn by empirical studies that strategic asset allocation tends to explain the majority of the variability in portfolio returns. This is because the asset class selected (not necessarily the security or timing) will tend to dictate the response of the portfolio to changes in interest rates or other macro economic factors.
作者: hinsafdar    时间: 2012-3-24 10:08

The investment committee of a life insurance company recommends a strategic asset allocation for the company based on the projected policy premium inflows and payouts along with long-term capital market expectations. This approach to strategic asset allocation is known as the:
A)
static approach.
B)
asset-liability approach.
C)
investment policy statement approach.


Because the committee takes into account the company’s inflows and outflows (liabilities), the approach is called the asset-liability approach to strategic asset allocation.
作者: hinsafdar    时间: 2012-3-24 10:09

Mark Zedon, a financial consultant prepares a strategic asset allocation for his client based on the client’s risk/return preferences. This approach to strategic asset allocation is called the:
A)
efficient frontier approach.
B)
asset only approach.
C)
investment policy statement approach.


Because the consultant only takes into account the investor’s risk and return preferences, he is using the asset only approach to strategic asset allocation.
作者: hinsafdar    时间: 2012-3-24 10:09

Which one of the following most closely matches an advantage of the asset-liability approach over the asset only approach to strategic asset allocation?
A)
Asset classes have different systematic risk exposures.
B)
Liability funding is more accurately controlled.
C)
Liabilities and assets are highly correlated.


The asset-liability approach to strategic asset allocation is desirable because liabilities are more accurately controlled.
作者: hinsafdar    时间: 2012-3-24 10:09

Dynamic asset allocation is most suitable for investors who:
A)
undertake the asset-liability approach to strategic asset allocation.
B)
have insignificant liabilities.
C)
have a long time horizon.


Dynamic asset allocation is most suitable for investors who have significant liabilities and utilize the asset-liability approach to strategic asset allocation.
作者: hinsafdar    时间: 2012-3-24 10:10

What is the major difference between dynamic asset allocation and static asset allocation? Dynamic asset allocation:
A)
considers more than one asset class while static asset allocation only considers one asset class at a time.
B)
considers asset and liability management simultaneously while static asset allocation does not.
C)
takes a multi-period view of the investment horizon while static asset allocation does not.


Dynamic asset allocation takes a multi-period view of the investment horizon while static asset allocation does not. Dynamic asset allocation and static asset allocation both can be used for asset only or asset-liability approaches to strategic asset allocation. Both dynamic and static asset allocation approaches consider more than one asset class.
作者: prashantsahni    时间: 2012-3-24 10:11

Kimbo Slice has several different places where he has assets in which he manages as separate accounts such as his checking account which he uses for short term cash and emergency needs, his 401(k) account for retirement, and his children’s college fund. In his 401(k) he owns a small cap stock in a company which makes catheters to be used in experimental cancer treatment in which the catheter is used to deliver cancer killing drugs to hard to reach tumors in the body. The stock has recently taken a downturn in price due to the FDA not approving their most recent catheter. As a result of the downturn in price, Slice purchases more of the stock in hopes of recouping his losses at some future time. Slice’s management of his portfolio is indicative of:
A)
money illusion and fear of regret.
B)
mental accounting and loss aversion.
C)
asset allocation and pyramiding.


Slice is exhibiting mental accounting by having separate accounts for his assets which he manages each account separately for a specific purpose and does not manage his assets as a complete portfolio for asset allocation purposes. He is also exhibiting loss aversion by not accepting the loss on the stock which is also leading to risk seeking behavior by buying more of the losing stock. Loss aversion is similar to fear of regret which also results in holding onto loser too long because you regret selling at a loss, but fear of regret does not lead to risk seeking behavior as loss aversion can. Also fear of regret tends to lead to safer investments and undiversified portfolios as can be seen in mental accounting, too. Pyramiding is similar to mental accounting, but pyramiding is where a person layers their investments in the shape of a pyramid in which their most pressing and important needs are on the bottom layer in the most conservative investments. As one moves up the pyramid, investments move more towards equities and riskier investments until you get to the top which reflects investment for wish list type items. Money illusion deals with inflation and thinking that you have more money if your investments (or income) went up by the same amount as inflation.
作者: prashantsahni    时间: 2012-3-24 10:12

Sam and Ellen Smithson have recently retired after numerous years of working as a heart surgeon and pediatrician, respectively. The Smithsons were unable to have children, so they devoted their lives to helping others through their professional and charitable activities. Sam is involved in the local “Pantry Pass,” an organization that gathers food items for distribution to the needy. Ellen is involved in her local “Housing for the Homeless,” chapter. Over the years they have served the two organizations as active volunteers and as board members.
The Smithson’s professional activities generated high incomes, well in excess of expenses. Prior to retirement, their lifestyle could be described as comfortably frugal. Over the years, a retirement savings account in the amount of $4,000,000 was accumulated.
Marcus Medley, CFA is an investment consultant who serves high net worth individuals. During his discussions with the Smithsons, Sam and Ellen mentioned the following:
During the course of their meeting, Medley asks the Smithsons whether their approach to investing has been passive or active. Ellen Smithson says “Oh, I’m definitely the passive type – I don’t believe in getting too involved, so I let Sam make most of the decisions on our portfolio. He’s done a wonderful job up to now, but I guess it’s time we had someone else take an active role in helping us.”
Sam comments, saying “Yes, it’s pretty much been up to me. My investment philosophy has been to invest 70% of our assets in a total return bond fund and 30% in an S&P 500 index fund, thus ensuring that we track their performance fairly closely while holding down costs. Then I’ve tried to get a little more juice by investing selectively in individual companies that produce surgical instruments or products for the cardiovascular field. That way I can leverage my expertise and judiciously use my limited time for investing.”
Later, Medley reviews the Smithsons’ personal statements and the latest economic activity forecasts. He then begins to formulate an Investment Policy Statement (IPS) and some general asset allocation recommendations.
Which of the choices below most closely matches the investment strategies of Ellen and Sam?
A)
Ellen has a passive approach; Sam has a semi-active approach.
B)
Ellen has no investment approach; Sam has a semi-active approach.
C)
Ellen has no investment approach; Sam has a passive approach.


Ellen is describing a passive personality type, rather than a passive approach to investing. Sam’s investment methodology is closest to that of semi-active (risk-controlled, enhanced index) managers. He seeks to track an underlying index while trying to provide extra value by more heavily weighting the medical technology and services sector. (Study Session 9, LOS 23.b)
While writing the risk objective statement, Medley ponders the Smithson’s ability and willingness to accept risk. The Smithson’s appear to have the ability:
A)
to take below-average risk; willingness to take above-average risk.
B)
to take above-average risk; willingness to take below-average risk.
C)
and willingness to take below-average risk.


Given the data regarding the Smithsons’ situation, it appears that they are able to take above-average risks (large absolute and relative sized portfolio), but are only willing to accept below average risks (“neither of us has a high tolerance for risk”). (Study Session 8, LOS 21.g)
One of the first concepts Medley wants to explain to the Smithson’s at their next meeting is the idea of holding an “optimal” portfolio. Which of the following will dictate the selection of an investor’s optimal portfolio?
A)
The global minimum variance portfolio.
B)
The tangential intersection between an investor's risk and return and the efficient frontier.
C)
Any portfolio lying above the efficient frontier.


An optimal portfolio is any set of assets yielding the highest returns for given risk levels (dictated by the efficient frontier). Assuming the risk free asset is available to invest in then a straight line, the capital allocation line (CAL), would be drawn from the risk free rate to the efficient frontier touching the efficient frontier at the point of tangency representing the global market portfolio. The CAL then becomes the efficient frontier. Any point on this line would represent the optimal portfolio combination of the risk free asset with the global market portfolio resulting in the highest Sharpe ratio (highest return for a given level of risk). (Study Session 8, LOS 21.n)
According to the Smithson’s risk profile, a general asset allocation that would fit well with their objectives is:
A)
a conservative, total return asset allocation to meet their current income and wealth transfer goals.
B)
an asset allocation heavily-weighted toward risk-free securities to meet their current income needs and minimize the possibility of losing any of the original $4 million.
C)
an asset allocation heavily-weighted toward fixed-income to meet their current income needs and provide for modest growth.


An asset allocation that focuses on total return would appear to best meet the Smithson’s objectives given the apparent disconnect between ability and willingness to take risk. The Smithson’s need to earn a 3.75% return ($150,000/$4,000,000) to meet their current income needs in today’s dollars. To protect their purchasing power, they must also generate an additional 3.25%. A conservative total return approach provides an appropriate balance between meeting their retirement needs and their goal of maximizing the amount of their charitable estate. The risk-free and modest growth portfolios would not meet all their objectives. (Study Session 8, LOS 21.g)
Which of the following dynamic asset allocation strategies would be most appropriate for meeting the Smithson’s charitable objectives?
A)
Buy and hold.
B)
Constant mix strategy.
C)
Constant proportion portfolio insurance strategy.


A constant mix strategy would have a zero floor value, hence would not be an appropriate strategy for meeting Smithson’s objectives. A buy and hold strategy is not a dynamic asset allocation strategy but is the "do nothing" strategy where once your initial asset allocation is chosen you do not reallocate but instead just let the allocation fluctuate according to any changes in the market. (Study Session 16, LOS 40.j)
A constant mix asset allocation strategy assumes that an investor’s risk tolerance:
A)
is constant, regardless of wealth levels.
B)
increases as the portfolio value rises and falls as the portfolio value falls.
C)
falls as the portfolio value approaches the floor value.


With a constant mix strategy, an investor’s risk tolerance is constant, regardless of wealth levels. CPPI assumes that risk tolerance increases as stocks rise and falls as stocks fall. (Study Session 16, LOS 40.j)
作者: prashantsahni    时间: 2012-3-24 10:13

Which of the following statements regarding the characteristics of asset classes is most correct? Asset classes should:
A)
have an index.
B)
be negatively correlated.
C)
not be highly correlated.


Asset classes should not be highly correlated with each other is a desired characteristic. Furthermore, asset classes should be mutually exclusive and collectively mutually exhaustive.
作者: prashantsahni    时间: 2012-3-24 10:13

Which of the following would indicate that the asset classes used for describing the returns of a portfolio are desirable?
A)
High R-squared and large confidence intervals.
B)
High R-squared and easily measured manager asset proportions.
C)
Low R-squared and easily measured manager asset proportions.


Desirable asset classes would explain a high proportion of portfolio returns and thus have a high R-squared. The asset mix proportions for each manager should be easily measured.
作者: prashantsahni    时间: 2012-3-24 10:14

Which of the following is NOT a desirable characteristic of an asset class used for describing the returns on a portfolio?
A)
It should be easy to construct a bogey portfolio for each class.
B)
The asset classes used should explain a large part of the variability of portfolio returns.
C)
The residual from the regression model of returns should be heteroskedastic.


The asset classes used should explain a large part of portfolio return variability, and it should be easy to construct a bogey portfolio for each class. Heteroskedasticity refers to a non-constant variance of the error terms in a regression, which makes the regression model unreliable.
作者: prashantsahni    时间: 2012-3-24 10:14

Which of the following would indicate that an asset class is useful for describing the returns of a portfolio?
A)
The error term is high.
B)
The intercept term is significantly different from zero.
C)
The R-squared of the model is high.


A high R-squared would indicate that the model explains a good proportion of portfolio returns.
作者: prashantsahni    时间: 2012-3-24 10:14

Which of the following characteristics of asset classes is most desirable? Asset classes should:
A)
be mutually exhaustive.
B)
have an index.
C)
be negatively correlated.


One of the desired characteristics of asset classes is that they should be mutually exhaustive- or cover most of the investable assets. They also should not be highly (positively or negatively) correlated with each other.
作者: prashantsahni    时间: 2012-3-24 10:15

Which of the following characteristics of asset classes is most desirable? Asset classes should:
A)
be mutually exclusive.
B)
have an index.
C)
be negatively correlated.


One of the desired characteristics of asset classes is that they should be mutually exclusive. They also should not be highly (positively or negatively) correlated with each other.
作者: prashantsahni    时间: 2012-3-24 10:15

Suzanne Melby, a newly hired analyst for Taylor Capital Advisors, is making a presentation to Taylor’s investment committee about the practical concerns when adding new asset classes to an investment portfolio. In her presentation, Melby makes two statements:
Statement 1: We have seen from the previous charts that adding international securities can increase the returns of a portfolio; however, from the investor’s standpoint, risk may be perceived as higher due to the inclusion of currency, political, and legal risk.
Statement 2: The investment committee has decided that some type of alternative investment such as hedge funds should be included in all client portfolios, but the large amounts of capital required and the difficulty of finding information may prevent us from investing in alternative investments in some client portfolios.

With regard to Melby’s statements, the Taylor Capital Advisors investment committee should:
A)
agree with Statement 1, but disagree with Statement 2.
B)
disagree with Statement 1, but agree with Statement 2.
C)
agree with both Statement 1 and Statement 2.


The Taylor investment committee should agree with both of Melby’s statements as she has correctly identified some of the practical concerns when investing in global securities and alternative investments such as hedge funds. The practical considerations of including global securities in a portfolio relate to risks that an investor does not face with a domestic-only portfolio such as currency, political, and legal risks. Even if there are diversification benefits from including global securities, a portfolio manager needs to consider that the investor would be exposed to risks that they would not otherwise be exposed to. Melby’s second statement is also correct as a lack of information, large amount of required capital, and the need to carefully select out-performers are all drawbacks to alternative investments that potentially could prevent the investment manager from using them in client portfolios.
作者: prashantsahni    时间: 2012-3-24 10:15

Wahid Sedique, portfolio manager with Fort Meigs Investment Advisors is discussing the practical and theoretical benefits of adding additional asset classes to client portfolios with his colleague Elizabeth Alvarez. In their conversation Sedique states, “From a practical standpoint, adding emerging markets to a portfolio consisting of developed U.S. and International equities provides valuable diversification in the event of a global crisis due to their low correlation with other asset classes.” Alvarez replies, “I think we should include U.S. TIPS in our client allocations because they are a liquid and virtually risk-free way to increase portfolio cash flows in the event of rising inflation.”
With respect to their statements:
A)
Sedique is correct; Alvarez is correct.
B)
Sedique is incorrect; Alvarez is incorrect.
C)
Sedique is incorrect; Alvarez is correct.


Sedique’s statement is incorrect. Although emerging markets have been shown to have a low correlation with other asset classes, and thus, diversification benefits, in a global crisis, the correlation between emerging markets and developed markets tends to be high. In other words, the diversification benefit of emerging markets is weak at exactly the time when the investor needs it the most. Alvarez’s statement is correct. U.S. TIPS are highly liquid and virtually risk free because they are issued by the U.S. government. In addition, as inflation rises, the principal on which the TIPS coupon is based also rises, resulting in higher portfolio cash flows in an environment of rising inflation.
作者: prashantsahni    时间: 2012-3-24 10:16

Adding an allocation to alternative asset classes such as private equity and hedge funds has what theoretical impact on the return and risk of an investment portfolio?
Impact on ReturnsImpact on Risk
A)
IncreaseIncrease
B)
DecreaseDecrease
C)
IncreaseDecrease


Each category of alternative investments, such as private equity, hedge funds, and real estate, on its own is fairly risky, but can have significant diversification effects for an investment portfolio. In a portfolio context, alternative investments can significantly increase returns and lower the risk of the portfolio due to their low correlation with traditional asset classes.
作者: prashantsahni    时间: 2012-3-24 10:16

Darlene Szuch is constructing an asset allocation for a client and just completed the step of formulating her expectations for the capital markets and making projections for the risk and return of various asset classes. Which of the following is her next step in the asset allocation process?
A)
Determine the client’s risk objective and return requirement.
B)
Monitor the various asset classes and make adjustments to market and asset class expectations as necessary.
C)
Determine the mix of asset classes that best meets the objectives defined in the Investment Policy Statement.


The asset allocation process starts with determining the investor’s risk tolerance and return objectives. Step 2 is to formulate capital market expectations and the potential effects on various asset classes. Step 3 is to determine the mix of assets that best meet the objectives defined in the IPS. Once the strategic asset allocation has been implemented it should be monitored regularly and adjustments should be made to the strategic allocation as needed. Also, if identified market changes are short-term only, the manager should determine if implementing tactical asset allocation measures is appropriate.
作者: prashantsahni    时间: 2012-3-24 10:16

Sarah Berndt recently hired Phil Ruyle as a new portfolio manager with her firm, Private Wealth Consultants. Ruyle spends his first day with the firm shadowing Berndt and learning about her process. During the day, Berndt makes two statements regarding the asset allocation process:
Statement 1:“The downside to the strategic asset allocation process is that if the long-term capital market expectations that formed the basis of the strategic asset allocation change dramatically, the client’s long-term returns are likely to suffer significantly.”

Statement 2:“Tactical asset allocation has no role in the formal asset allocation process.”

  
With regard to the statements made by Berndt:
A)
Statement 1 is correct; Statement 2 is correct.
B)
Statement 1 is incorrect; Statement 2 is incorrect.
C)
Statement 1 is correct; Statement 2 is incorrect.


Both of Berndt’s statements are incorrect. Once the strategic asset allocation has been implemented, it should be monitored regularly and include a “feedback loop” such that changes in long-term market factors are incorporated back into the process and an assessment can be made to determine whether adjustments to the strategic allocation are justified. The key point here is that asset allocation is a flowing, flexible process. Also, if identified market changes are only short-term in nature, the manager should consider implementing tactical asset allocation measures which have been approved in the IPS. Tactical asset allocation definitely has a role in the formal asset allocation process.
作者: prashantsahni    时间: 2012-3-24 10:17

Paul Kelley and Marie Dascenzo are portfolio managers for Myers and Schmolenberger Investment Advisors. Kelley and Dascenzo are discussing the asset allocation process that their firm should follow for its clients. Kelley states, “The asset allocation process should always start with determining the risk tolerance and return objective for each client.” Dascenzo replies, “While about half of the steps of the asset allocation process is the responsibility of the portfolio manager, the other half of the asset allocation process is the responsibility of the client.”

With regard to their statements about the asset allocation process:
A)
Kelley is incorrect; Dascenzo is incorrect.
B)
Kelley is correct; Dascenzo is incorrect.
C)
Kelley is correct; Dascenzo is correct.


Kelley’s statement is correct. The asset allocation process starts with identifying the investor’s return requirement and risk tolerance. From there, the portfolio manager must identify capital market expectations, select the appropriate asset classes, and monitor and adjust the allocation as necessary. Dascenzo’s statement is incorrect – each of the steps in this process is the responsibility of the portfolio manager.
作者: prashantsahni    时间: 2012-3-24 10:17

The first step in the portfolio construction process is called:
A)
strategic asset allocation.
B)
tactical asset allocation.
C)
capital market expectation.

The steps in the asset allocation process are:
Strategic asset allocation is the first step in the portfolio construction process which is step 3 above. Tactical asset allocation is the subsequent deviation from the strategic asset allocation based on short-term capital market expectations. Capital market expectations are used for the generation of the efficient frontier used in step 2 above which occurs before the portfolio construction takes place.
作者: prashantsahni    时间: 2012-3-24 10:17

Any mean-variance efficient portfolio has the:
A)
lowest standard deviation and the highest expected return.
B)
lowest standard deviation for a given level of expected return.
C)
highest return among all other portfolios.


A mean-variance efficient portfolio has the lowest standard deviation for a given level of expected return. Note that the lowest standard deviation portfolio and the highest return portfolio are just two of the infinite number of efficient portfolios.
作者: prashantsahni    时间: 2012-3-24 10:18

Which of the following does NOT accurately reflect a statement describing the resampled efficient frontier?
A)
A single portfolio with specific asset class weights at each level of return.
B)
At each level of return the most efficient of the simulated efficient portfolios is at the center of a distribution.
C)
A portfolio may be considered statistically equivalent if the manager’s portfolio is within a 90% confidence interval of the most efficient portfolio.


A single portfolio with specific asset class weights at each level of return describes traditional mean variance optimization. The other answer choices describe the resampled efficient frontier where Monte Carlo simulation is used to create an efficient frontier at each return level and run thousands of times resulting in an efficient frontier that is the result of an averaging process. The efficient frontier becomes a blur rather than a single sharp curve. At each level of return, the most efficient of the simulated efficient portfolios is at the center of the distribution.
作者: prashantsahni    时间: 2012-3-24 10:18

Constrained optimization usually involves an additional constraint that:
A)
each asset class weight should be positive.
B)
short sales are not allowed.
C)
the weights of all asset classes add up to 1.


The weight of all asset classes adding up to one is part of un-constrained optimization. Constrained optimization has an additional constraint that the weights of all the asset classes should be non-negative or that there be no short sales. The weight of asset classes can be zero or positive.
作者: prashantsahni    时间: 2012-3-24 10:18

Constrained optimization usually involves an additional constraint that:
A)
asset class weights add up to 1.
B)
all asset class weights are non-negative.
C)
all asset class weights are positive.


The weight of all asset classes adding up to one is part of un-constrained optimization. Constrained optimization has an additional constraint that the weights of all the asset classes should be non-negative.
作者: prashantsahni    时间: 2012-3-24 10:19

Reid Williams is responsible for training new analysts and portfolio managers for Grames Investment Advisors. Since Grames specializes in institutional clients, Williams wants to make sure that his new trainees know the needs of various institutional investors. Reid gives an assignment to all of his trainees to identify general differences in asset allocations for different types of institutional investors. One of Williams’ trainees, Phil Nagy, turns in his assignment with the following statements.
Statement 1:   A bank is likely to hold more bonds than an insurance company’s surplus portfolio.
Statement 2:   An endowment is likely to hold more equities than the portfolio that funds an insurance company’s fixed annuities.
Statement 3:   An endowment is more likely to hold more emerging market equities than an insurance company’s surplus portfolio.
Statement 4:   A private foundation is likely to have higher cash needs than a pension fund with a low ratio of retired to active lives.

When grading the papers, Williams gives his trainees 25 points for each correct statement. Given the grading criteria, Nagy’s grade on the paper is most likely:
A)
50%.
B)
75%.
C)
100%.


Three of Nagy’s four statements were correct, for a score of 75%. Statement 1 is correct – a bank’s portfolio is concerned with funding liabilities, and therefore requires more fixed income instruments, while an insurance company’s surplus portfolio is focused on growth. Statement 2 is also correct – the portfolio that funds an insurance company’s fixed annuities is likely to rely more on fixed income securities, while the endowment has more of a total return focus. Statement 3 is incorrect – an insurance company’s surplus portfolio is very aggressive and should therefore have more emerging market equities than an endowment that likely spends a portion of its portfolio each year. Statement 4 is correct – the private foundation has an annual spending requirement and therefore is likely to have higher liquidity needs than a pension fund with a small number of retired employees relative to working employees.
作者: prashantsahni    时间: 2012-3-24 10:19

Lynette Kelly is a principal with Beta Asset Advisors. Traditionally, the firm has always invested with an extremely long time horizon; however, Kelly’s outlook is for generally flat returns for the market over the next 5 to 7 years. In an effort to generate stronger returns for clients, Kelly believes the firm needs to make tactical allocation adjustments to client portfolios in order to achieve higher returns. Kelly is not very familiar with tactical asset allocation, so she asks Jacob Cannon, an analyst with the firm to prepare a report on tactical asset allocation. Cannon’s report contains the following points:
Point 1:The most common way to implement tactical asset allocation is through a derivative overlay.
Point 2:   Tactical asset allocation is only performed at the asset class level.
Point 3:   Tactical asset allocation can only be performed at regular intervals (i.e., monthly or quarterly).
Point 4:   In order to effectively implement the tactical asset allocation changes, our firm should hire additional personnel so that there will be internal experts on staff.

After reading Cannon’s report, Kelly should agree with:
A)
Point 1 only.
B)
Points 1 and 4 only.
C)
all of the points in the report.


Point 1 is correct. Tactical asset allocation can be accomplished through trading assets or through a derivative overlay, but as a result of cost savings and saving time, a derivative overlay tends to be a more common approach. The other three points are incorrect. Tactical asset allocation can be performed at the asset class, sector, industry, or in some cases, asset level. Also, tactical asset allocation can be performed at regular intervals (part of a regular program) or sporadically as market conditions warrant. Because of the flexibility of tactical asset allocation, it could be performed by internal personnel or by outside firms that specialize in tactical allocation.



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