Q7. After Nack rebalances Portfolio A the first time, its bond holdings should:

A)   rise by $1,600.

B)   rise by $11,350.

C)   decline by $1,550.

Q8. Wallace is a:

A)   passive trader.

B)   liquidity-motivated trader.

C)   value-motivated trader.

Q9. The owner of Portfolio B appears least concerned about:

A)   income.

B)   liquidity.

C)   volatility.

Q10. After rebalancing Portfolio A the second time, if Nack’s goal is to maximize return potential while limiting potential loss of principal, her best rebalancing strategy is:

A)   constant mix.

B)   constant proportion.

C)   buy and hold.

Q11. When Nack rebalances Portfolio A the second time, the portfolio’s stock allocation is most likely to fall by:

A)   3.33%.

B)   3.11%.

C)   6.45%.

Q12. Which of the following strategies is also referred to as insured asset allocation?

A)   Constant proportion portfolio insurance (CPPI).

B)   Constant mix.

C)   Concave strategy.

Q13. Which of the following statements regarding the risk consequences of asset allocation strategies is FALSE?

A)   With a buy and hold strategy, the investor's tolerance for risk is zero if the value of the investor's assets falls below the floor value.

B)   Constant proportion portfolio insurance (CPPI) actively assumes risk tolerance is directly related to wealth.

C)   Constant mix actively assumes risk tolerance is directly related to wealth.

Q14. Which of the following statements about asset allocation strategies is TRUE?

A)   Constant mix outperforms buy and hold when stock market reversals occur.

B)   Constant mix outperforms buy and hold when stock market reversals do not occur.

C)   Constant mix is a convex strategy.

Q15. In a trending market, which asset allocation strategy outperforms?

A)   Constant mix.

B)   Constant proportion portfolio insurance (CPPI).

C)   Buy and hold.

Q16. In a flat but oscillating market, which asset allocation strategy outperforms?

A)   Constant mix.

B)   Buy and hold.

C)   Constant proportion portfolio insurance (CPPI).

Q7. After Nack rebalances Portfolio A the first time, its bond holdings should: fficeffice" />

A)   rise by $1,600.

B)   rise by $11,350.

C)   decline by $1,550.

Correct answer is B)

To calculate the targeted stock holding, multiply the stock multiplier by (total assets – portfolio floor).
Total assets = $93,000.
Portfolio floor = $70,000.
Stock multiplier = 2.

The new stock holdings = 2 × ($93,000 - $70,000) = $46,000.
Current stock holdings are $57,350, so we must sell $ffice:smarttags" />11,350 in stocks to hit the target, which means that the bond holdings will rise by $11,350.

Q8. Wallace is a:

A)   passive trader.

B)   liquidity-motivated trader.

C)   value-motivated trader.

Correct answer is A)

Traders who make moves for the purchase of reallocating assets or dealing with liquidity issues are called passive or liquidity-oriented traders. Liquidity-oriented traders are more concerned with time than price, because they are willing to pay for liquidity when they need it. Wallace is price-sensitive rather than time-sensitive, which classifies him as a passive trader.

Q9. The owner of Portfolio B appears least concerned about:

A)   income.

B)   liquidity.

C)   volatility.

Correct answer is B)

The portfolio does contain a fair amount of income-producing bonds, and the diversification of the portfolio could suggest some interest in limiting volatility and the effect of market downturns. But the presence of real estate and private equity in the portfolio suggest the owner is not concerned about liquidity.

Q10. After rebalancing Portfolio A the second time, if Nack’s goal is to maximize return potential while limiting potential loss of principal, her best rebalancing strategy is:

A)   constant mix.

B)   constant proportion.

C)   buy and hold.

Correct answer is C)

A constant-mix strategy outperforms in a flat but oscillating market but underperforms in a trending market. A constant-proportion strategy outperforms in a trending market but underperforms in a flat but oscillating market. Buy and hold limits downside by keeping funds in cash or bonds, while it performs well in an upward-trending market and is roughly flat in an oscillating market. If Nack doesn’t have any insight on where the market is going and wants to limit loss of principal, buy and hold is the best option of those offered, especially considering that her analysts are projecting either a flat or upward market, but not a downward market.

Q11. When Nack rebalances Portfolio A the second time, the portfolio’s stock allocation is most likely to fall by:

A)   3.33%.

B)   3.11%.

C)   6.45%.

Correct answer is B)

At the time of the second rebalancing, the portfolio’s stock weighting is 68.11%. Constant-mix rebalancing assumes the purchase or sale of stock sufficient to return the portfolio to its original weighting, in this case 65%.

68.11% ? 65% = 3.11%

Q12. Which of the following strategies is also referred to as insured asset allocation?

A)   Constant proportion portfolio insurance (CPPI).

B)   Constant mix.

C)   Concave strategy.

Correct answer is A)        

CPPI is the term used by Perold and Sharpe. It is referred to as insured asset allocation and momentum based by Maginn and Tuttle. CPPI is a momentum based strategy that aggressively increases exposure to risky assets in a rising market.

Q13. Which of the following statements regarding the risk consequences of asset allocation strategies is FALSE?

A)   With a buy and hold strategy, the investor's tolerance for risk is zero if the value of the investor's assets falls below the floor value.

B)   Constant proportion portfolio insurance (CPPI) actively assumes risk tolerance is directly related to wealth.

C)   Constant mix actively assumes risk tolerance is directly related to wealth.

Correct answer is C)

CPPI, not constant mix, assumes risk tolerance is directly related to wealth. A constant mix strategy assumes that risk tolerance is constant regardless of wealth levels.

Q14. Which of the following statements about asset allocation strategies is TRUE?

A)   Constant mix outperforms buy and hold when stock market reversals occur.

B)   Constant mix outperforms buy and hold when stock market reversals do not occur.

C)   Constant mix is a convex strategy.

Correct answer is A)

Constant mix is a concave strategy.

Q15. In a trending market, which asset allocation strategy outperforms?

A)   Constant mix.

B)   Constant proportion portfolio insurance (CPPI).

C)   Buy and hold.

Correct answer is B)

In a trending market, CPPI outperforms a comparable buy and hold, which, in turn, outperforms a constant mix strategy.

Q16. In a flat but oscillating market, which asset allocation strategy outperforms?

A)   Constant mix.

B)   Buy and hold.

C)   Constant proportion portfolio insurance (CPPI).

Correct answer is A)

In a flat but oscillating market, constant mix outperforms a comparable buy and hold strategy, which, in turn, outperforms a CPPI strategy.