LOS j: Formulate and implement the major steps in asset allocation.
Q1. 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.
Q2. 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 incorrect; Statement 2 is incorrect.
B) Statement 1 is correct; Statement 2 is correct.
C) Statement 1 is correct; Statement 2 is incorrect.
Q3. 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 mix of asset classes that best meets the objectives defined in the Investment Policy Statement.
B) Determine the client’s risk objective and return requirement.
C) Monitor the various asset classes and make adjustments to market and asset class expectations as necessary. |