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标题: Portfolio Management and Wealth Planning【Session16 - Reading 40】 [打印本页]
作者: mouse123    时间: 2012-3-24 13:04     标题: [2012 L3] Portfolio Management and Wealth Planning【Session16 - Reading 40】

Heidi Burke was recently hired by Beekley Capital Advisors as a portfolio manager. On her first day on the job, Cynthia Beekley, owner and founder of the firm, asks Burke to write down the fiduciary responsibilities of a portfolio manager as they pertain to monitoring a client’s portfolio. Burke writes down the following items and hands the paper to Beekley.

Item 1: Watch for changes in client objectives that may necessitate changes to the portfolio.
Item 2: Construct the investor’s portfolio to meet the needs of the client as specified in the IPS.
Item 3: Identify changes in capital market conditions and asset class risks.
Item 4: Look for changes in client constraints that could cause changes in the client’s allocation.
Item 5: Avoid trying to make tactical timing changes to a client portfolio because evidence shows that market timing increases risk without increasing return.

Which of the following most accurately describes Burke’s statements?
A)
Only Items 1 and 4 address Beekley’s question, while Items 2 and 5 are a fiduciary duties not related to monitoring.
B)
Only Items 1, 3, and 4 address Beekley’s question, while Item 2 is a fiduciary duty not related to monitoring.
C)
Only Item 3 addresses Beekley’s question, while Items 1 and 4 would be part of a client’s investment policy statement.


Since the portfolio manager is in a position of trust, he has the fiduciary duty to construct the needs of the client as specified in the IPS and the duty to monitor the portfolio to be sure it continues to meet the client needs. The monitoring process includes monitoring a client’s objectives and constraints as well as changes in market conditions. Therefore, Item 2 is a fiduciary duty not related to monitoring, while Items 1, 3, and 4 address fiduciary duties related to monitoring. Item 5 is not necessarily true since a skilled manager could use tactical asset allocation to reduce risk and/or increase returns.
作者: mouse123    时间: 2012-3-24 13:04

Darrell Woolaver is the founding principal for Woolaver Capital Management. In his marketing materials, Woolaver makes it a point to tell clients the two primary responsibilities he has as a fiduciary when it comes to portfolio management.

Responsibility 1:    Construct each client’s portfolio so that it offers the maximum return per unit of risk.

Responsibility 2:    Regularly monitor the investor’s portfolio to make sure it continues to meet the client’s needs.

With respect to his statements about the responsibilities Woolaver has as a fiduciary when it comes to portfolio management, Woolaver is:
A)
incorrect with respect to Responsibility 1, and incorrect with respect to Responsibility 2.
B)
incorrect with respect to Responsibility 1, but correct with respect to Responsibility 2.
C)
correct with respect to Responsibility 1, and correct with respect to Responsibility 2.


Woolaver is incorrect with respect to Responsibility 1. The portfolio manager has a fiduciary duty to construct the portfolio to meet the needs of the client as specified in the investment policy statement. Although seeking the maximum return per unit of risk is as admirable goal, the client’s goals with respect to risk tolerance, liquidity, legal considerations, or other factors may not be fully considered under Woolaver’s first statement. Responsibility 2 is correct. The portfolio manager has a fiduciary duty to monitor the portfolio to be sure it continues to meet the client’s needs. This means monitoring the client’s circumstances and capital market conditions, and making changes to the portfolio as necessary.
作者: mouse123    时间: 2012-3-24 13:05

Which of the following choices best describes the reason(s) why a fiduciary must monitor a portfolio?
A)
I, II, III and IV.
B)
I only.
C)
II only.


The initial construction of an investor’s portfolio is based upon the client’s circumstances and long-term capital market expectations at the time of construction. The reason why a fiduciary must monitor the portfolio is because both of these broad categories are subject to change. Changes in the investor’s circumstances (risk tolerance, liquidity, establishment of a trust, or other factors) or changes in economic conditions or capital market expectations may necessitate changes to the client’s portfolio which should be carried out by the portfolio manager.
作者: mouse123    时间: 2012-3-24 13:05

The cost of not rebalancing the portfolio includes all of the following EXCEPT:
A)
holding assets that no longer fit the needs of the client.
B)
the costs of desirable trades that never happen.
C)
holding an overpriced asset.


This is a cost of trading due to rebalancing.
作者: mouse123    时间: 2012-3-24 13:05

Which of the following would NOT be a condition for rebalancing a portfolio?
A)
Changing time horizons.
B)
Impact of trades on security prices.
C)
Availability of new asset classes.


Impact of trades on security prices represents a cost of rebalancing.
Changing time horizon may necessitate changes in asset mix. New securities may allow asset allocation shifts with lower transaction costs or create more efficient portfolios.
作者: mouse123    时间: 2012-3-24 13:05

Which of the following statements regarding rebalancing strategies is least accurate?
A)
Using futures contracts can significantly enhance the benefits of tactical asset allocation.
B)
Market timing strategies will tend to outperform constant mix strategies.
C)
Drifting mix strategies tend to perform poorly compared to disciplined rebalancing strategies.


Market timing strategies have been shown to perform poorly relative to constant mix strategies. The other statements are true.
作者: mouse123    时间: 2012-3-24 13:06

Jim Cantore is a 45 year old client with a $1.5 million portfolio that is heavily weighted toward equities. Cantore will continue working for the next 20 years and has a substantial retirement portfolio through his current employer. Cantore's three children are now nearing college age and will all attend premiere universities in the U.S. which each cost $50,000 per year to attend. All college expense will be paid out of Cantore's portfolio. Cantore should:
A)
Not rebalance his portfolio because his children should all pay their own way through school.
B)
Rebalance his portfolio toward high quality, intermediate-term debt instruments to service the expected liquidity needs of his portfolio.
C)
Rebalance his portfolio toward large-cap common stocks and international securities because education costs are highly correlated with the returns to these securities.


The liquidity needs of sending his children to school should take precedence over his retirement needs, which are already well funded.
作者: mouse123    时间: 2012-3-24 13:06

Which of the following statements regarding disciplined rebalancing is CORRECT? Disciplined rebalancing (e.g., maintaining an asset mix at 60% stocks and 40% bonds):
A)
allows for the possibility of a drifting mix.
B)
prevents substantial gains from market timing.
C)
eliminates periodic departures from the policy mix.


Disciplined rebalancing prevents drifting of the asset mix with market variability. Evidence suggests that market timing fails to add value.
作者: clearlycanadian    时间: 2012-3-24 13:07

Which of the following represents the most effective way to reduce the costs of using a tactical asset allocation strategy?
A)
Rebalance using futures contracts.
B)
Use package trading.
C)
Increase the size of cash balances.


Because futures are so inexpensive, using them significantly reduces transaction costs and can increase the benefits of a tactical strategy. Excessive cash balances have been shown to decrease overall portfolio returns, and using package trades may reduce costs, but may not be viable alternatives for some investment strategies.
作者: clearlycanadian    时间: 2012-3-24 13:08

Mimi Smith, a client of Osborne Capital, Inc., believes that her portfolio should be rebalanced. She supports her claim by stating that she just won the lottery and wants to retire 10 years earlier than before. Does she have a valid claim?
A)
No. Not enough information is given to determine.
B)
Yes. Her wealth and time horizon have changed.
C)
Yes. Her time horizon has changed.


Changes in wealth, time horizon, and liquidity requirements all dictate the need to rebalance. Taxes, laws, and regulations, as well as unique circumstances, also play into this decision.font>
作者: clearlycanadian    时间: 2012-3-24 13:08

Jill Frenkel, 62, works for the Smithton Company as the firm's controller. Frenkel is covered by a generous retirement package upon her retirement which is not indexed for inflation, she is in excellent health, and is also covered by the company health plan in retirement. Frenkel's current asset allocation is 70% large cap stocks, 25% intermediate-term, high quality bonds and 5% cash for emergency needs. Given Frenkel's circumstances, she should:
A)
Sell stock index futures and buy bond index futures to synthetically create a 20% stock / 80% bond allocation and save on transaction costs.
B)
Not rebalance her portfolio at this time.
C)
Reduce her allocation to stocks significantly and buy low quality bonds for her portfolio with the proceeds because Jill faces the need for inflation protection in this stage of her lifecycle.


Given the fact that Jill is in good health, is covered by the health plan and also has a healthy retirement portfolio, she should leave her allocation intact because since the retirement plan is not inflation indexed, she may need the growth potential of equities in the future.
作者: clearlycanadian    时间: 2012-3-24 13:08

Which of the following statements regarding asset rebalancing approaches is least accurate?
A)
A "constant mix" asset allocation strategy is also referred to as a "drifting mix."
B)
Disciplined rebalancing strategies tend to beat momentum-based strategies over the long term.
C)
Market timing strategies tend to perform poorly relative to a constant mix strategy.


Constant mix is the same thing as disciplined rebalancing.
作者: clearlycanadian    时间: 2012-3-24 13:08

Which of the following statements about trading strategies is CORRECT?
A)
A disciplined rebalancing strategy typically underperforms a buy and hold strategy.
B)
A buy and hold strategy is best with respect to asset allocation because it has the lowest trading costs.
C)
A buy and hold strategy may not satisfy the current asset allocation needs of a client.


Buy and hold strategies “drift” over time. Because of this, initial asset allocation decisions may not be evident in the resulting portfolio. Disciplined rebalancing performs better than buy and hold strategies in a flat but oscillating market.
作者: clearlycanadian    时间: 2012-3-24 13:09

Which of the following costs are NOT considered component costs of trading prompted by portfolio revisions?
A)
Interest expense.
B)
Opportunity costs.
C)
Brokerage fees.


Brokerage fees, spreads, trader timing costs, and opportunity costs are component costs of trading.
作者: clearlycanadian    时间: 2012-3-24 13:09

Which of the following statements regarding rebalancing and correlation is CORRECT?
A)
Negatively correlated asset classes need rebalancing more frequently than positively correlated asset classes.
B)
Perfect positive correlation between asset classes implies the greatest need for rebalancing.
C)
The need to rebalance is independent of the correlation between the securities or the asset classes.


Because the denominator and the numerator (the value of the individual asset class divided by the total value of the portfolio) both change in the same direction when asset classes (and securities) are positively correlated, the portfolio manager needs to rebalance less frequently. However, negatively correlated assets require more rebalancing. In this case the numerator and the denominator might change in opposite directions.
作者: clearlycanadian    时间: 2012-3-24 13:09

Which of the following statements correctly identifies a benefit of active management?
A)
Trading provides liquidity to capital markets.
B)
Most portfolio managers can add value through active management.
C)
Studies have shown more frequent rebalancing to increase portfolio returns.


After costs, it has been shown that few portfolio managers add value through active management. Studies have shown that more frequent rebalancing can increase portfolio returns, but only before costs. After costs, increasing rebalancing frequency has a detrimental effect on returns.
作者: clearlycanadian    时间: 2012-3-24 13:10

All of the following are costs associated with rebalancing a portfolio EXCEPT:
A)
brokerage commissions.
B)
tax costs.
C)
deferral costs.


Tax costs are the key costs associated with rebalancing a portfolio and are often underestimated. Investors focus on brokerage commissions and forget trading costs such as market impact, trade execution inefficiencies and opportunity costs.
作者: clearlycanadian    时间: 2012-3-24 13:10

Jennifer Engle, CFA, Chairman of Engle Capital Management wants to implement a defined rebalancing process for all of the portfolios managed by her firm. Engle is aware that calendar rebalancing or percentage-of-portfolio rebalancing are the two primary methods of rebalancing a portfolio. Engle asks Michael Buening, an analyst, to prepare a report on the best rebalancing method for specific criteria. Specifically, Engle wants to know which method would be best under three different criteria: (1) time spent on the rebalancing process, (2) expense of trading, and (3) consistency of portfolio asset allocation. Which of the following correctly lists the best rebalancing method for each of Engle’s criteria?
Time Spent on ProcessExpense of TradingConsistency of Allocation
A)
Calendar rebalancingPercentage-of-portfolioCalendar rebalancing
B)
Calendar rebalancingUnknownPercentage-of-portfolio
C)
UnknownCalendar rebalancingPercentage-of-portfolio


The primary benefit to calendar rebalancing is that it provides the discipline of rebalancing without the constant need to monitor the portfolio. The result is that calendar rebalancing is the less time intensive rebalancing method.

Trading expense related to rebalancing is a result of where asset thresholds are set under the percentage-of-portfolio method, and also the volatility of the portfolio. For a portfolio with low volatility and wide thresholds, calendar rebalancing would result in more frequent trading, while a volatile portfolio with tight thresholds would lead to more frequent trades under the percentage-of-portfolio method. Therefore, the best method if trading expenses were the primary criteria is unknown.

The primary benefit of percentage-of-portfolio rebalancing is that it minimizes the degree to which asset classes can violate their allocation corridors, resulting in the most consistent asset allocation. With calendar rebalancing, the portfolio allocation could vary widely in between rebalancing dates.
作者: clearlycanadian    时间: 2012-3-24 13:10

Michael Severino and Jeffery Chalmers are portfolio managers for Parthenon Asset Advisors. Severino and Chalmers both believe that having defined criteria for rebalancing a portfolio provides discipline in their portfolio management process, but they have different opinions on how to go about it. Severino states, “With calendar rebalancing, a portfolio could spend the majority of its existence looking extremely different from the target asset allocation, but trades made to rebalance the portfolio may only have a minor impact on how the portfolio is allocated.” Chalmers replies, “If we use percentage-of-portfolio rebalancing, there may never be a trade placed to rebalance our client portfolios.”

With regard to their statements about rebalancing methods:
A)
Severino is incorrect; Chalmers is correct.
B)
Severino is correct; Chalmers is correct.
C)
Severino is incorrect; Chalmers is incorrect.


Both Severino and Chalmers make correct statements. With calendar rebalancing, the rebalancing process is related to the passage of time rather than the value of the portfolio. In theory, a portfolio that is rebalanced using the calendar rebalancing method could stray considerably from the target asset allocation before the rebalancing date, but move closer to target on the rebalancing date, resulting in minor trades in the portfolio. In the case of percentage-of-portfolio rebalancing, a tolerance band is set for each asset class in the portfolio, and the portfolio is rebalanced when it moves outside of the tolerance band. Under the percentage-of-portfolio method, if the asset classes never stray outside of the tolerance levels, the portfolio will never have to be rebalanced.
作者: clearlycanadian    时间: 2012-3-24 13:11

Tyrone Wilkins and Deborah Ortiz are portfolio managers for Meabon Asset Management. Both Wilkins and Ortiz believe that rebalancing is an important part of portfolio management, but are unsure which rebalancing method would be best for their respective clients. Wilkins wants to maintain his client’s exposure to systematic risk factors, but does not want to spend his time constantly monitoring his client’s portfolio. Ortiz is most concerned that two or more asset classes in the portfolio could stray too far from the portfolio’s target allocation. Given their concerns, which rebalancing method would be best for Wilkins and Ortiz respectively?

Rebalancing Method for WilkinsRebalancing Method for Ortiz
A)
CalendarPercentage-of-Portfolio
B)
Percentage-of-Portfolio Monte Carlo Portfolio
C)
Percentage-of-Portfolio Calendar


The two primary methods of rebalancing are calendar rebalancing and percentage-of-portfolio rebalancing – Monte Carlo is not a rebalancing method. With calendar rebalancing, the portfolio is rebalancing on a predetermined date. Since calendar rebalancing provides discipline without the need for constant monitoring, calendar rebalancing would be appropriate for Wilkins. Percentage-of-portfolio rebalancing is triggered by changes in value rather than calendar dates. Since Ortiz is most concerned about asset classes straying from a target allocation, Ortiz could use percentage of portfolio rebalancing to set a target corridor for each asset class and rebalance the portfolio when the portfolio’s asset allocation moves outside of the corridor.
作者: clearlycanadian    时间: 2012-3-24 13:11

Rebecca Riley and Daniel Gray are portfolio managers for Silver Wolf Asset Management. The firm believes that rebalancing a portfolio is important for maintaining an investor’s exposure to systematic risk factors and follows a percentage-of-portfolio approach to rebalancing. Riley and Gray each recently brought a new client to the firm and are starting to establish guidelines for investing their portfolios. Riley states, “My client has a low tolerance for risk, so I am setting wide tolerance corridors for rebalancing. If the market takes a downturn, the client will not want his fixed income assets sold to purchase more equities.” Discussing his client, Gray says, “My client’s portfolio consists largely of small-cap domestic equities, emerging market equities, and high yield bonds. Since the asset classes in his portfolio are relatively volatile, I am also setting wide tolerance corridors, or else I would be rebalancing his portfolio practically all the time.”

With regard to their statements about the effects of factors on the width of the tolerance corridors:
A)
Riley’s statement is incorrect; Gray’s statement is correct.
B)
Riley’s statement is incorrect; Gray’s statement is incorrect.
C)
Riley’s statement is correct; Gray’s statement is correct.


Both Riley’s statement and Gray’s statement are incorrect. Based on the criteria they have stated – they should be setting tight tolerance corridors for rebalancing purposes. Riley said that her client has a low risk tolerance. With a low risk tolerance, tolerance corridors should be smaller in order to detect corridor violations and take action to avoid an even worse violation. If the portfolio is allowed to drift, riskier assets in the portfolio will tend to take over. With volatile asset classes, Gray’s client should also have small tolerance corridors. When an asset class is volatile and/or the rest of the assets are volatile, the tolerance corridor should be small to give the portfolio manager the ability to detect any violation in the allocation and react quickly to avoid an even worse violation.
作者: clearlycanadian    时间: 2012-3-24 13:12

Stuart Steinberg, a portfolio manager for Weber Capital Advisors, uses a percentage-of-portfolio rebalancing approach when rebalancing his client portfolios, but is unsure how to set the optimal corridor width for each asset class. Steinberg is evaluating the following factors for a particular asset class.
Factor 1:The asset class has a tendency to be extremely volatile.
Factor 2: The asset class has a low trading volume and a high bid-ask spread.
Factor 3: When comparing the asset class to the rest of the portfolio, the volatility for the rest of the portfolio is high.

Which of the factors would lead Steinberg to set a large corridor for the asset class?
A)
Factors 1 and 2 only.
B)
Factors 2 and 3 only.
C)
Factor 2 only.


When an asset class is volatile and/or the rest of the assets are volatile, the tolerance corridor should be small to give the portfolio manager the ability to detect any violation in the allocation in the asset class and react quickly enough to avoid an even worse violation. However, in this example the low trading volume and high bid-ask spread implies a large corridor. When an asset class is illiquid and transactions costs are high, the corridor should be wider to try to avoid frequent trading.
作者: clearlycanadian    时间: 2012-3-24 13:12

Which of the following statements best characterizes the difference between rebalancing to consistently maintain an asset class’s target portfolio weight versus rebalancing to within an allowed range? Rebalancing to consistently maintain an asset class’s target portfolio weight:
A)
will always have lower tracking error.
B)
require more monitoring of the portfolio than rebalancing within an allowed range.
C)
will result in higher trading costs.


The key issue here is trading costs. Rebalancing a portfolio to consistently maintain an asset class’s target portfolio weight requires more or less constant trading and the inability for the manager to time the trades. Both of these factors mean that rebalancing to a target portfolio weight results in higher trading costs. Note that the higher trading costs could increase the tracking error of the portfolio versus one that has allowable trading bands. Also, even though trading costs would be reduced by having an allowable range for each asset class, the manager would still need to constantly monitor the portfolio to see if the asset classes are still within the allowable bands, so there is no discernable difference in the amount of monitoring on the part of the portfolio manager.
作者: clearlycanadian    时间: 2012-3-24 13:12

Anita Malley and James Upshaw are portfolio managers for Washington Square Asset Management. Malley and Upshaw are debating the merits of rebalancing an asset within a portfolio to its target portfolio weight versus creating a tolerance band for each asset. Malley states, “Rebalancing a portfolio so that target weights are maintained may force the manager to provide liquidity to the market, resulting in poorly timed trades and higher trading costs.” Upshaw states, “It does not matter if we rebalance to maintain target portfolio weights or create tolerance bands; if we use either method, the portfolio will require constant monitoring.”

With regard to their statements:
A)
Malley is correct; Upshaw is incorrect.
B)
Malley is incorrect; Upshaw is correct.
C)
Malley is correct; Upshaw is correct.


Malley’s statement is incorrect. Rebalancing the portfolio so that target weights are maintained (constant mix strategy) requires more or less constant trading and is likely to force the manager to provide liquidity which could result in poorly timed trades but generally supplying liquidity results in lower trading costs. Note that requiring liquidity is selling when others in the market are also selling or buying when others are buying (resulting in higher bid-ask spreads) while providing liquidity is selling when others are buying or buying when others are selling, which may minimize trading costs. Upshaw’s statement is correct – both rebalancing to maintain target portfolio weights or creating tolerance bands would require constant monitoring of the portfolio, although the tolerance band method is likely to result in less frequent trading
作者: clearlycanadian    时间: 2012-3-24 13:13

In a flat but oscillating market, which asset allocation strategy outperforms?
A)
Buy and hold.
B)
Constant proportion portfolio insurance (CPPI).
C)
Constant mix.


In a flat but oscillating market, constant mix outperforms a comparable buy and hold strategy, which, in turn, outperforms a CPPI strategy.
作者: clearlycanadian    时间: 2012-3-24 13:13

In a trending market, which asset allocation strategy outperforms?
A)
Constant proportion portfolio insurance (CPPI).
B)
Constant mix.
C)
Buy and hold.


In a trending market, CPPI outperforms a comparable buy and hold, which, in turn, outperforms a constant mix strategy.
作者: clearlycanadian    时间: 2012-3-24 13:13

Which of the following statements about asset allocation strategies is CORRECT? Constant mix:
A)
outperforms buy and hold when stock market reversals do not occur.
B)
is a convex strategy.
C)
outperforms buy and hold when stock market reversals occur.


Constant mix is a concave strategy.
作者: clearlycanadian    时间: 2012-3-24 13:14

Which of the following statements regarding the risk consequences of asset allocation strategies is least accurate?
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.


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.
作者: clearlycanadian    时间: 2012-3-24 13:14

Which of the following strategies is also referred to as insured asset allocation?
A)
Constant mix.
B)
Constant proportion portfolio insurance (CPPI).
C)
Concave strategy.


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.
作者: clearlycanadian    时间: 2012-3-24 13:16

Which of the following statements regarding a constant mix portfolio strategy is least accurate?
A)
The slope of the exposure diagram (y-axis = desired stock position, x-axis = asset value) for a constant mix strategy is between zero and one.
B)
Under a constant mix strategy, stocks are purchased as the stock market falls.
C)
Under a constant mix strategy, stocks are purchased as the stock market rises.


With a constant mix strategy, stocks must be sold as the market rises in order to maintain the ratio of stock to total assets.
作者: clearlycanadian    时间: 2012-3-24 13:16

Assume that $10 million of stocks and cash is being managed according to a constant mix strategy. Assume further that the desired stock-to-total portfolio value ratio for the strategy is 0.75. Which of the following is closest to the amount of stock that must be bought or sold if the value of the stock component of the portfolio increases by $500,000?
A)
$125,000 must be sold.
B)
$500,000 must purchased.
C)
$500,000 must be sold.


The initial portfolio consists of $2.5 million in cash plus $7.5 million in stock. The initial stock-to-total value ratio can be expressed as 7.5/(2.5 + 7.5) = 0.75. After the increase in the value of the stock component of the portfolio, the stock-to-total value ratio is 8.0/(2.5 + 8.0) = 0.7619. The amount of stock that must be sold to lower this ratio to 0.75 is determined as follows:
(8.0 − X)/(10.5) = 0.75, or X = $125,000
作者: clearlycanadian    时间: 2012-3-24 13:16

Which of the following statements about constant mix rebalancing is least accurate?
A)
As stock prices fall, the stock to total assets ratio decreases, so stocks must be purchased.
B)
As stock prices rise, the stock to total assets ratio increases, so stocks should be purchased.
C)
As stock prices rise, the stock to total assets ratio increases, so stocks should be sold.


To maintain the constant mix, when stock prices rise, stocks must be sold.
作者: clearlycanadian    时间: 2012-3-24 13:16

Which of the following statements about constant proportion rebalancing strategies is least accurate?
A)
The strategy does well in a bull market.
B)
The strategy is protected on the downside.
C)
It is a concave strategy.


Constant proportion is a convex strategy.
作者: clearlycanadian    时间: 2012-3-24 13:17

A constant mix strategy will outperform a buy and hold strategy in a(n):
A)
upward oscillating market.
B)
flat but oscillating market.
C)
downward oscillating market.


Constant mix strategies underperform when there are no reversals and outperform when there are up-down oscillations.
作者: clearlycanadian    时间: 2012-3-24 13:17

Which of the following statements about convex and concave strategies is least accurate?
A)
For constant proportion portfolio insurance (CPPI) strategies, the payoff curve is concave.
B)
The constant mix payoff curve is concave.
C)
No downside protection exists for constant mix strategies.


For CPPI strategies, the payoff curve is convex. The other statements are true.
作者: clearlycanadian    时间: 2012-3-24 13:18

Which of the following statements concerning dynamic strategies for asset allocation is least accurate?
A)
Constant mix sells stocks as they fall and buys stocks as they rise.
B)
Constant proportion portfolio insurance sells stocks as they fall and buys stocks as they rise.
C)
A constant mix strategy is a concave strategy.


A constant mix asset allocation strategy buys stocks as they fall and sells stocks as they rise. Both of the other statements given are true.
作者: clearlycanadian    时间: 2012-3-24 13:18

Which of the following statements regarding asset allocation decisions is least accurate?
A)
A strategic asset allocation needs to be rebalanced periodically to maintain the constant asset proportions.
B)
A contrarian investment strategy is one where expected returns tend to fall when prices rise.
C)
Insured asset allocation is similar to a constant mix-type asset allocation strategy.


An insured asset allocation is similar to a constant proportion portfolio insurance strategy.
作者: clearlycanadian    时间: 2012-3-24 13:18

A constant mix strategy:
A)
performs much like a covered call position.
B)
performs poorly in flat, oscillating markets.
C)
exhibits good upside potential.


Constant mix performs best in flat, oscillating markets, much like a covered call strategy. Constant mix has weak upside potential in that the strategy reduces exposure to risky assets in an increasing market.
作者: optiix    时间: 2012-3-24 13:20

Which of the following statements about asset allocation strategies is least accurate?
A)
The constant proportion portfolio insurance (CPPI) strategy has a payoff diagram similar to that of a protective put.
B)
Strategies for which the slope of the exposure diagram is greater than one give rise to concave payoff diagrams.
C)
The constant proportion portfolio insurance (CPPI) strategy is a convex strategy.


An exposure diagram for an asset allocation strategy plots the desired stock position (y-axis) against the value of the portfolio (x-axis). Strategies with concave payoff diagrams (y-axis = portfolio value, x-axis = stock market value), such as the constant mix strategy, have exposure diagrams with slopes between zero and one.
作者: optiix    时间: 2012-3-24 13:20

A constant proportion portfolio insurance (CPPI) strategy:
A)
performs well in flat, oscillating markets.
B)
represents the purchase of portfolio insurance.
C)
represents the sale of portfolio insurance.


CPPI represents the purchase of portfolio insurance. Constant mix performs best in flat, oscillating markets.
作者: optiix    时间: 2012-3-24 13:21

Carl Allen, CFA, has been assigned the task of documenting some of his company’s asset allocation techniques. After the firm receives accolades in a recent trade magazine article highlighting firms with innovative trading strategies, Allen’s supervisor decides it is time the firm began formally documenting how properly timed allocation shifts can add value to assets under management. Allen decides he will not only document the firm’s specific allocation adjustment strategies, but will also compile a document listing various allocation techniques. Allen decides to begin with input factors such as investor risk tolerance and market conditions and work his way to specific techniques designed to take advantage of various opportunities. His overall plan is to work from theoretical concepts to specific applications. One of the first concepts Allen has to explain is the idea of holding an “optimal” portfolio. In his mind, Allen decides he has to adequately explain the two main factors that will allow an investor the ability to hold an optimal portfolio. Which of the following will dictate the selection of an investor’s optimal portfolio?
A)
The tangential intersection between an investor's indifference curve and the efficient frontier.
B)
The global minimum variance portfolio.
C)
Any intersection between an investor's indifference curve and the investment opportunity set.


An optimal portfolio is any set of assets that maximizes an investor’s utility, which is dictated by his indifference curve, with those assets yielding the highest returns at given risk levels, which are dictated by the efficient frontier. The tangential intersection of indifference curves with the efficient frontier dictates an investor’s optimal portfolio.
Allen has determined there are differential postures an asset manager can take, depending upon whether market conditions are trending up, trending down, or staying relatively level with significant volatility. Which rebalancing strategy provides the greatest benefit when markets are trending up or down with little oscillation?
A)
Constant mix strategy.
B)
Buy and hold strategy.
C)
Constant proportion portfolio insurance strategy.


When a market is either trending up or down with few oscillations, a constant proportion portfolio insurance (CPPI) strategy will outperform other strategies. A CPPI strategy will provide increasing exposure to risky assets when asset values are increasing. An investor will essentially hold an increasing amount of risky assets when their value is increasing. On the other hand, in markets with a declining trend, investors following a CPPI strategy will be selling risky assets faster than others when markets are declining.
While conducting his research, Allen determines that some dynamic strategies can use a mathematical formula that can easily determine the amount of assets one invests in equities. Specifically, one formula Allen discovers is:
$ Invested in stock = m x (assets – floor)
where:

m

=
stock investment multiplier

assets

=
total assets held in the portfolio (TA)

floor

=
the minimum allowable portfolio value (F) (zero risk level)

assets - floor

=
cushion or funds that can be put at risk

Realizing that his firm’s trading strategies were highlighted in the recent edition of a trade magazine due in part to some timely exposure increases in trending markets, Allen begins to document how his firm applies this particular mathematical formula. Since Allen’s firm’s performance seems exemplary in a trending market, which value of “m” was probably chosen?
A)
Equal to 1.
B)
Less than 1.
C)
Greater than 1.


The implication is that Allen’s firm made some important choices in a trending market. This indicates a constant proportion portfolio insurance (CPPI) allocation strategy, which requires that an “m” greater than 1 be chosen. Apparently, Allen’s firm was able to increase exposure to equities quickly enough to take advantage of a trending market and probably was able to decrease exposures quickly enough before markets may have trended downward.
作者: optiix    时间: 2012-3-24 13:21

Concave strategies:
A)
include constant proportion portfolio insurance strategies (CPPI).
B)
buy stocks as they fall in price.
C)
sell stocks as they fall in price.


Concave strategies buy stocks as they fall in price and do not have much downside protection. Constant mix strategies, not CPPI, are examples of concave strategies.
作者: optiix    时间: 2012-3-24 13:21

Which of the following statements regarding rebalancing strategies that have convex payoff diagrams (y-axis = portfolio value, x-axis = stock market value) is CORRECT? Convex rebalancing strategies:
A)
include the constant mix strategy.
B)
sell stocks as prices fall and buy stocks as prices rise.
C)
do well in flat, but oscillating, markets.


The constant mix strategy has a concave payoff diagram. Because convex strategies sell stocks as prices fall and buy as prices rise, they perform poorly in flat, oscillating markets—selling on weakness only to see the market rebound, and buying on strength only to see the market fall.
作者: optiix    时间: 2012-3-24 13:22

Constant mix strategy:
A)
requires purchase of a stock as the stock value rises.
B)
is preferable to a buy and hold strategy when the market reverses direction.
C)
requires purchase of bonds as stocks fall in value.


In a constant mix strategy an investor will hold stocks at all wealth levels. A constant mix strategy requires the purchase of stocks as they fall and the selling of stocks as they rise, capitalizing on market reversals. A constant mix strategy will generally underperform a comparable buy-and-hold strategy when there are no market reversals.
作者: optiix    时间: 2012-3-24 13:22

Which of the following asset allocation strategies takes a contrarian view of investing?
A)
Constant mix.
B)
Constant proportion portfolio insurance (CPPI).
C)
Buy and hold.


The constant mix strategy takes a contrarian view of investing in order to maintain a constant asset allocation regardless of wealth levels. Buy and hold strategies passively assume that risk tolerance is directly related to wealth levels. The CPPI is a momentum-based strategy that aggressively increases exposure to risky assets in a rising market.
作者: optiix    时间: 2012-3-24 13:22

Which of the following strategies is most appropriate for an investor whose risk tolerance drops to zero when the value of the portfolio drops below a floor value?
A)
Constant proportion portfolio insurance.
B)
Buy and hold.
C)
Both of these responses are correct.


In each of these strategies, risk tolerance is zero when the value of assets drops below the floor. Under buy and hold, the floor value is the original amount invested in T-bills.
作者: optiix    时间: 2012-3-24 13:22

Which of the following strategies is most likely to outperform if a stock market reversal is NOT expected to occur?
A)
Buy and hold.
B)
Constant proportion.
C)
Constant mix.


Constant proportion strategies (CPPI) outperform when stock market reversals are not expected because as the market increases in value the CPPI investor will invest in a higher proportion of stocks in their portfolio. The buy and hold investor will do nothing and the proportion of stocks in their portfolio will increase but not as high as the actively managed CPPI portfolio. The constant mix investor will have to shift out of stocks as the market increases to maintain a constant proportion of stocks as the market fluctuates. If the market trends downward without reversing the CPPI investor will be the first one out of stocks as the market continues its downward slide.
作者: optiix    时间: 2012-3-24 13:23

Which of the following strategies is most likely to outperform if stock market reversals are expected to occur?
A)
Buy and hold.
B)
Constant proportion.
C)
Constant mix.


Constant mix strategies outperform during stock market reversals.
作者: optiix    时间: 2012-3-24 13:23

Which of the following asset allocation strategies passively assumes that risk tolerance is directly related to wealth levels?
A)
Constant mix.
B)
Constant proportion portfolio insurance (CPPI).
C)
Buy and hold.


This is the definition of a buy and hold strategy. Constant mix strategies take a contrarian view of investing in order to maintain a constant asset allocation regardless of wealth levels. CPPI is a momentum-based strategy that aggressively increases exposure to risky assets in a rising market.



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