CFA LEVEL-III, PRACTICE QUESTIONS (LOS # 31) Reading 31: (Monitoring and Rebalancing) | Questions Question - #92369 Which of the following strategies is most likely to outperform if a stock market reversal is NOT expected to occur? A) Constant proportion B) Buy and hold C) Constant mix Question - #92659 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 Question - #92396 Constance Frye, a portfolio manager for the money-management unit of Freedom, a broker-dealer, is concerned about the positioning of her managed accounts Economic indicators are mixed, and stock valuations are all over the map Frye is not confident about the direction the market will take over the next year, but she is very confident that volatility will increase Overall, Frye is satisfied with her asset allocations, but she is less certain about her rebalancing strategies Freedom is a large shop, and she is responsible for several hundred portfolios The company generally uses automated trading programs for rebalancing, and Frye’s chief concern is that the wrong program will be used, and some portfolios will not adjust well Frye decides to stress-test her rebalancing strategies to see how they would respond to a range of market movements She starts with a basic portfolio containing just stocks and cash Here is what she learns: Stress Rebalancing Strategy A Rebalancing Strategy B Sustained upward market Portfolio value rises but lags Portfolio rises strongly Strategy B Sustained downward Portfolio value falls and lags Portfolio falls to a certain level, then market Strategy B holds steady Volatile, directionless Portfolio value rises Portfolio value declines market Stanley Montone trades stocks for Freedom Montone is busy today, making trades to rebalance portfolios managed by Freedom’s money-management unit He makes the following buys: Security Bid Price Ask Price Trading Price No of Shares Flanders Fudge $45.78 $45.96 $45.90 1,400 Grossman Golf $8.45 $8.52 $8.53 600 Hedger Health Care $115.67 $115.81 $115.79 150 When Montone trades, he transacts through an intermediary Normally, he buys shares controlled by the intermediary, who in turn purchased them from someone else Part 1) Montone trades in: A) a quote-driven market B) a brokered market C) an electronic crossing network Part 2) Assuming a portfolio begins at a mix of 50% stocks and 50% cash, which of the following rebalancing strategies could allow the portfolio balance to fall to $0? A) Only buy and hold B) Only constant proportion C) Only constant mix Part 3) Which statement regarding Montone’s trades is least accurate? A) He is trading in a highly liquid market B) He provided liquidity in two of the trades C) He did not get best execution Part 4) The portfolio-rebalancing strategies Frye is testing are most likely: Strategy A Strategy B A) constant mix constant proportion B) buy and hold constant proportion C) constant proportion constant mix Part 5) Which rebalancing strategy does NOT connect risk tolerance to wealth? A) Buy and hold B) Constant proportion C) Constant mix Part 6) The weighted average effective spread for Montone’s three stock trades is closest to: A) $0.1056 B) $0.0712 C) $0.0833 Question - #93182 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 Question - #93074 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 B) incorrect with respect to Responsibility 1, but correct with respect to Responsibility C) correct with respect to Responsibility 1, and correct with respect to Responsibility Question - #92037 Allen and Hanes joined Tacticon five years ago, fresh out of college They are now both convinced that properly timed allocation shifts can add value to the investment process The equity market trended upward for the first three years of their tenure, but has been slowly declining ever since In spite of the lackluster performance of the markets in general, the firm has produced exceptional annual and 5-year trailing returns Both analysts are certain that Tacticon’s ability to generate positive alpha is the result of a superior investment system 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 While conducting his research, Allen notes that certain dynamic strategies can use a mathematical formula to determine the amount of equities that should be held Specifically, one formula Allen finds is: Allen decides to organize his thoughts about asset allocation by constructing a matrix that compares some of the different strategies His first draft is detailed in Exhibit A below Exhibit A – Dynamic Asset Allocation Strategies Strategy Shape of Payoff Diagram Performs Well In Buy and Hold Straight line Upward trending markets Constant Mix Concave Constant Proportion Portfolio Insurance (CPPI) Part 1) Hanes is having difficulty completing Exhibit A as he is unsure of the shape of the payoff diagram for CPPI The correct shape for the CPPI payoff diagram is: A) straight-line B) concave C) convex Part 2) Which strategy in Exhibit A provides the greatest benefit when markets are trending up or down with little oscillation? A) Buy and hold strategy B) Constant proportion portfolio insurance C) Constant mix strategy Part 3) Allen realizes that his firm’s trading success might have been due to use of the mathematical formula he found Since Tacticon’s performance was exemplary over the past five years, which value of “m” was probably chosen? A) Greater than B) Equal to C) Less than Part 4) Constant mix rebalancing involves: A) holding either all cash or all equities B) buying the asset whose price rises; selling the asset whose price falls C) buying the asset whose price falls; selling the asset whose price rises Question - #93107 A constant mix strategy will outperform a buy and hold strategy in a(n): A) flat but oscillating market B) upward oscillating market C) downward oscillating market Question - #91594 Dillard Decker is 72, and he doesn’t seem to be getting any older, just more ornery Decker started his career as a busboy and clawed his way up the industry ladder until he owned a chain of restaurants and a variety of other real-estate holdings After a heart attack at age 57, Decker retired for health reasons For the last 15 years, Decker has trained three hours a day He lost 50 pounds and started running in marathons When he turned 70, Decker cut back to five marathons a year Now it’s the 15th of the month, and Decker has just arrived for his monthly meeting with Derek Hass, a partner at Conwell Consulting and Investments As usual, Decker started the meeting with an acerbic complaint about Hass’s conservative approach Hass has discretionary authority over Decker’s assets, though sometimes it does not feel that way Hass has invested Decker’s money using the following target allocation: 40% in large-cap stocks 10% in small-cap stocks 10% in foreign stocks 10% in a long-short equity hedge fund 20% in long-term corporate bonds 10% in short-term bonds Decker lives comfortably on the dividends from his stock investments and would prefer to have no fixed-income securities at all Hass sighs, knowing that after Decker leaves, he’ll have to meet with his boss to justify why he keeps so little of Decker’s assets in bonds Normally Decker and Hass snipe at each other for an hour before the retiree stomps off Today, however, Decker gets right down to business and tells Hass that he wants to invest about 10% of his assets in his nephew’s restaurant business Decker regales Hass with stories about how smart and ambitious his nephew has become The nephew attended a cooking school after high school, then went to college and just recently earned his MBA Decker is very impressed with the man’s marketing plan and agreed to fund the restaurant concept In addition, Decker wants to diversify his holdings by investing in real estate A former colleague of Decker’s is seeking backers for a resort on the Caribbean island of Lizan Decker is interested in buying a 25% stake, which would require another 10% of his assets Hass knows a little about the man building the resort, but has not heard any details about the development As a real-estate investor himself, he knows that real-estate prices on Lizan and other nearby islands are likely to soar over the next 10 years on the strength of an improved regulatory and tax climate as well as rising demand for tourism Decker wants to sell the bond holdings to fund these investments, while Hass would like to pare down the stock holdings They compromise at a 50/50 split, agreeing to sell half of the long-term bonds and raise the rest of the funds from the sale of large-cap stocks, reducing the target weightings accordingly After Decker leaves, Hass assesses the portfolio and sells the stocks and bonds he believes are overvalued, then submits a memo to the accounting department requesting checks for Decker’s nephew and the real-estate developer He then calls the developer to get a prospectus on the real-estate venture After reviewing the details, he purchases a 2% interest for himself After the flurry of activity, Hass reviews Decker’s portfolio and considers that today is a good day to rebalance Here are Decker’s current allocations: Asset Class Portfolio Weighting Large-cap stocks 35% Small-cap stocks 10% Foreign stocks 6% Hedge fund 13% Long-term bonds 6% Short-term bonds 10% Cash * 20% * Slated for outside investment Hass decides to sell some large-cap stocks and use the funds to purchase foreign stocks and longterm bonds As he is putting the trades through, Hass wonders whether there is a better strategy for rebalancing Part 1) With regard to Decker’s account, Hass is: A) an information-motivated trader B) a liquidity-motivated trader C) a value-motivated trader Part 2) If Hass’s rebalancing consists only of selling large-cap stocks and buying long-term bonds and foreign stocks, he: A) is using a convex strategy B) has not set optimal corridor widths C) is using a tolerance band of more than 3% Part 3) Hass expects the market to trend sharply lower Assuming he wants to maximize account value but is not willing to simply get out of stocks altogether, which rebalancing scheme should he use? A) Buy and hold B) Constant mix C) Constant proportion Part 4) Which of the following reasons best justifies Hass’s asset allocation for Decker? Decker’s: A) health B) wealth C) complaints about the allocation Part 5) What rebalancing strategy does Hass use? A) Constant mix B) Calendar rebalancing C) Constant proportion Part 6) Hass’s actions regarding the real-estate development represent: A) no violation of Hass’s fiduciary duties a violation of Hass’s fiduciary duties because he failed to assess the details of the realB) estate investment a violation of Hass’s fiduciary duties because he failed to assess the details of both the C) real-estate investment and the restaurant investment Question - #92357 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) Both of these responses are correct B) Constant proportion portfolio insurance C) Buy and hold Question 10 - #92824 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 Question 11 - #92399 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 Question 12 - #92323 Which of the following statements regarding a constant mix portfolio strategy is least accurate? The slope of the exposure diagram (y-axis = desired stock position, x-axis = asset value) A) for a constant mix strategy is between zero and one B) Under a constant mix strategy, stocks are purchased as the stock market rises C) Under a constant mix strategy, stocks are purchased as the stock market falls Question 13 - #92476 A constant mix strategy: A) performs much like a covered call position B) performs poorly in flat, oscillating markets C) exhibits good upside potential Question 14 - #92613 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) eliminates periodic departures from the policy mix C) prevents substantial gains from market timing Question 15 - #92453 In a flat but oscillating market, which asset allocation strategy outperforms? A) Buy and hold B) Constant proportion portfolio insurance (CPPI) C) Constant mix Question 16 - #92875 Which of the following statements about asset allocation strategies is least accurate? The constant proportion portfolio insurance (CPPI) strategy has a payoff diagram similar A) to that of a protective put B) The constant proportion portfolio insurance (CPPI) strategy is a convex strategy Strategies for which the slope of the exposure diagram is greater than one give rise to C) concave payoff diagrams Question 17 - #92741 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) $500,000 must purchased B) $500,000 must be sold C) $125,000 must be sold Question 18 - #92787 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." Disciplined rebalancing strategies tend to beat momentum-based strategies over the long B) term C) Market timing strategies tend to perform poorly relative to a constant mix strategy Question 19 - #92143 Annabelle Sellier, CFA, manages the fixed-income portfolio of a large research endowment fund Sellier’s 2002 allocation among fixed-income assets, the returns she realized from these investments, and benchmark returns for each of the asset classes are presented in the table below Fixed-income allocation and returns Asset Class Allocation Realized Returns (%) Benchmark Returns (%) U.S Treasury 0.35 10.28 9.78 U.S Corporate 0.40 9.57 8.37 U.S Agency 0.25 10.05 10.20 What is Sellier’s alpha for 2002? A) 9.3210% B) 0.6175% C) 9.9385% Question 20 - #92512 All of the following are costs associated with rebalancing a portfolio EXCEPT: A) brokerage commissions B) deferral costs C) tax costs Question 21 - #92234 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 Question 22 - #92020 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 Question 23 - #93063 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 Question 24 - #92160 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) well in flat, but oscillating, markets C) sell stocks as prices fall and buy stocks as prices rise Question 25 - #93084 Which of the following choices best describes the reason(s) why a fiduciary must monitor a portfolio? The risk tolerance of the investor may change over time Economic conditions are likely to change over time The investor’s liquidity requirements may change over time The client portfolio may need to respond to legal or regulatory changes A) I only B) I, II, III and IV C) II only Question 26 - #92558 Which of the following would NOT be a condition for rebalancing a portfolio? A) Impact of trades on security prices B) Changing time horizons C) Availability of new asset classes Question 27 - #92311 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 incorrect; Upshaw is correct B) Malley is correct; Upshaw is incorrect C) Malley is correct; Upshaw is correct Question 28 - #93283 Consider two identical $10,000 portfolios, each with a 75% allocation to stock and a 25% cash allocation One portfolio is being managed to a buy and hold strategy with an initial stock/total value ratio of 0.75 The other is being managed to a constant mix strategy with a desired stock/total value ratio of 0.75 Beta for the stock component of both portfolios is equal to one Now, assume that the stock market instantly decreased from an index value of 1,000 to 900 and, a short while later, jumped back to the 1,000 level The difference between the final value of the two portfolios is closest to which of the following? A) The constant mix portfolio will be worth $187.50 more than the buy-and-hold portfolio There is no difference between the final value of the buy-and-hold portfolio and the B) constant mix portfolio C) The constant mix portfolio will be worth $20.83 more than the buy-and-hold portfolio Question 29 - #92935 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 When comparing the asset class to the rest of the portfolio, the volatility for the rest of the Factor 3: portfolio is high Which of the factors would lead Steinberg to set a large corridor for the asset class? A) Factors and only B) Factor only C) Factors and only Question 30 - #92368 Which of the following client portfolios is most likely to generate the highest trading costs? Rebalancing Discipline Employed Portfolio Allocation 40% Corporate Bonds; 30% MortgageRebalanced on the last day of each calendar A Backed Bonds; 30% Government quarter Bonds 25% Domestic Equity; 25% Real Rebalanced within an allowable range of 5% for B Estate; 25% International Equity; 25% each asset class Corporate Bonds 40% Domestic Equity; 30% Rebalanced to precise target weights if allocation C International Equity; 30% Government strays from target Bonds A) B) C) Portfolio A Portfolio B Portfolio C Question 31 - #92268 Michelle Nack has a problem She just took over for a portfolio manager who bolted unceremoniously from money manager Masters and Ickes, leaving his accounts in disarray Nack has been tasked with sorting out the mess She has connected most of the investment policy statements with the appropriate accounts, but three accounts, each valued at $100,000, are not named The accounts contain the following assets: Portfolio A Portfolio B Portfolio C Large-Cap Stocks $55,000 $45,000 $70,000 Small-Cap Stocks $10,000 $10,000 Private Equity $15,000 Commodities $10,000 Real Estate $5,000 Long-Term Corporate Bonds $20,000 $25,000 Short-Term Corporate Bonds $10,000 $5,000 $5,000 Cash $5,000 $5,000 $5,000 Nack is trying to match the accounts with clients for whom no other accounts have been found Johnson is a 55-year-old executive who was recently promoted to a senior-management position at a pharmaceutical company Kent is a 26-year-old assistant manager of a restaurant Lerner is a 70-year-old owner of a copper mine who retired from the business 20 years ago After Nack has been on the job for six months, she is still not sure who owns Portfolio A However, substantial moves of the market suggest that it is time to rebalance the portfolio The portfolio notes infer that a CPPI strategy should be used, with a coefficient of and a $70,000 floor Here are the portfolio weights after six months: Portfolio A Large-Cap Stocks $47,600 Small-Cap Stocks $9,750 Long-Term Corporate Bonds $20,500 Short-Term Corporate Bonds $10,150 Cash $5,000 Another six months has passed since Nack rebalanced Portfolio A The market has been quite volatile, and Nack wants to rebalance again Because she still does not know to whom the portfolio belongs, she decides to reconsider the rebalancing strategy in an effort to maximize portfolio return The current allocation is as follows: Portfolio A Large-Cap Stocks $58,950 Small-Cap Stocks $12,500 Long-Term Corporate Bonds $18,400 Short-Term Corporate Bonds $10,050 Cash $5,000 Nack decides to rebalance using a constant-mix strategy this time, reasoning that the original asset mix was what the first portfolio manager considered best for the unnamed client Going forward, Nack isn’t sure about the market’s direction The research department at Masters and Ickes has produced divergent forecasts, with some analysts projecting a flat market with lots of volatility and some projecting a sustained upward trend When Nack submits her trades to the Masters and Ickes trading desk, they are handled by Wilbur Wallace, a 30-year veteran trader Wallace handles most of the company’s rebalancing trades, and he is almost always more concerned about the price of trades than the timing For that reason, he generally uses limit orders Part 1) Which investors appear to be the best fit for: Portfolio B? Portfolio C? A) Lerner Johnson B) Johnson Lerner C) Johnson Kent Part 2) 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 Part 3) Wallace is a: A) liquidity-motivated trader B) passive trader C) value-motivated trader Part 4) The owner of Portfolio B appears least concerned about: A) liquidity B) income C) volatility Part 5) 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) buy and hold B) constant mix C) constant proportion Part 6) 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% Question 32 - #92051 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 Part 1) 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 global minimum variance portfolio Any intersection between an investor's indifference curve and the investment opportunity B) set The tangential intersection between an investor's indifference curve and the efficient C) frontier Part 2) 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 proportion portfolio insurance strategy B) Constant mix strategy C) Buy and hold strategy Part 3) 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) Greater than B) Equal to C) Less than Question 33 - #92254 Which of the following statements about convex and concave strategies is least accurate? A) The constant mix payoff curve is concave B) No downside protection exists for constant mix strategies C) For constant proportion portfolio insurance (CPPI) strategies, the payoff curve is concave Question 34 - #92258 Which of the following statements concerning dynamic strategies for asset allocation is least accurate? Constant proportion portfolio insurance sells stocks as they fall and buys stocks as they A) rise B) A constant mix strategy is a concave strategy C) Constant mix sells stocks as they fall and buys stocks as they rise Question 35 - #92306 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 Rebalancing Method for Ortiz Wilkins A) Calendar Percentage-of-Portfolio B) Percentage-of-Portfolio Monte Carlo Portfolio C) Percentage-of-Portfolio Calendar Question 36 - #92079 Concave strategies: A) include constant proportion portfolio insurance strategies (CPPI) B) sell stocks as they fall in price C) buy stocks as they fall in price Question 37 - #92915 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 incorrect B) Riley’s statement is incorrect; Gray’s statement is correct C) Riley’s statement is correct; Gray’s statement is correct Question 38 - #92745 Which of the following statements regarding rebalancing and correlation is CORRECT? Negatively correlated asset classes need rebalancing more frequently than positively A) correlated asset classes Perfect positive correlation between asset classes implies the greatest need for B) rebalancing The need to rebalance is independent of the correlation between the securities or the asset C) classes Question 39 - #91595 Which of the following statements regarding rebalancing strategies is least accurate? A) Using futures contracts can significantly enhance the benefits of tactical asset allocation Drifting mix strategies tend to perform poorly compared to disciplined rebalancing B) strategies C) Market timing strategies will tend to outperform constant mix strategies Question 40 - #92954 Which of the following statements about constant mix rebalancing is least accurate? As stock prices rise, the stock to total assets ratio increases, so stocks should be A) purchased B) As stock prices fall, the stock to total assets ratio decreases, so stocks must be purchased C) As stock prices rise, the stock to total assets ratio increases, so stocks should be sold Question 41 - #93031 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? Only Items and address Beekley’s question, while Items and are a fiduciary duties A) not related to monitoring Only Items 1, 3, and address Beekley’s question, while Item is a fiduciary duty not B) related to monitoring Only Item addresses Beekley’s question, while Items and would be part of a client’s C) investment policy statement Question 42 - #92749 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: Sell stock index futures and buy bond index futures to synthetically create a 20% stock / A) 80% bond allocation and save on transaction costs Reduce her allocation to stocks significantly and buy low quality bonds for her portfolio B) with the proceeds because Jill faces the need for inflation protection in this stage of her lifecycle C) Not rebalance her portfolio at this time Question 43 - #92497 Which of the following costs are NOT considered component costs of trading prompted by portfolio revisions? A) Opportunity costs B) Brokerage fees C) Interest expense Question 44 - #91596 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: Not rebalance his portfolio because his children should all pay their own way through A) school Rebalance his portfolio toward high quality, intermediate-term debt instruments to service B) the expected liquidity needs of his portfolio Rebalance his portfolio toward large-cap common stocks and international securities C) because education costs are highly correlated with the returns to these securities Question 45 - #92290 Kim and Darren Jones are both 55 years old and want to retire within the next 12 - 18 months They currently have the following portfolio: Asset Class % Small cap growth 35 Large cap value 30 High yield bonds 30 T-bills Corporate bonds 100 Part 1) What can be said about the current allocations? A) Properly diversified B) Too aggressive C) Not aggressive enough Part 2) Which sector should be increased? A) Corporate bonds B) Small cap growth stocks C) Large cap value stocks Part 3) Two years have passed and the Jones are in retirement They now realize the asset allocation problems with their portfolio They enlist the aid of Snipes & Son, an investment advisory firm Snipes proposes the following four portfolios: Asset Class A B C D Small cap growth 5% 0% 15% 5% Large cap value 5% 0% 25% 10% High yield bonds 5% 0% 20% 10% T-bills 35% 0% 10% 5% Corporate bonds 50% 100% 30% 70% Based solely on the information provided, which portfolio would serve the Jones best? A) Portfolio D B) Portfolio A C) Portfolio C Part 4) Which of the portfolios would yield the lowest expected return? A) Portfolio D B) Portfolio B C) Portfolio A Question 46 - #92471 In a trending market, which asset allocation strategy outperforms? A) Constant mix B) Constant proportion portfolio insurance (CPPI) C) Buy and hold Question 47 - #92383 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 Question 48 - #92942 The model portfolio for Yazbeck Capital Management consists of the following allocation: Asset Class Allocation Intermediate U.S Government bonds 45% Intermediate U.S Corporate bonds 45% Large Cap U.S equities 10% One of the primary tenets of Yazbeck’s Investment Process is to rebalance portfolios based on a percentage-of-portfolio approach with tolerance corridors for each asset class Two of Yazbeck’s portfolio managers, Justin Croniser and Kevin Hopkins are discussing the size of the corridor width for each asset class Croniser states, “The high correlation between U.S Government bonds and U.S Corporate bonds implies that both asset classes should stay within acceptable limits even if we decide to set relatively small corridors.” Hopkins replies, “Even if that were true, the high liquidity of U.S Government bonds implies that the corridor for that asset class should be relatively wide.” The founder of Yazbeck Capital Management, Shadya Yazbeck is listening to their conversation Yazbeck should: A) disagree with Croniser’s statement and disagree with Hopkins’ statement B) agree with Croniser’s statement and agree with Hopkins’ statement C) agree with Croniser’s statement, but disagree with Hopkins’ statement Question 49 - #92014 Which of the following statements regarding the risk consequences of asset allocation strategies is least accurate? A) Constant mix assumes relative risk tolerance is directly related to wealth With a buy and hold strategy, the investor's tolerance for risk is zero if the value of the B) investor's assets falls below the floor value Constant proportion portfolio insurance (CPPI) actively assumes risk tolerance is directly C) related to wealth Question 50 - #92243 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 incorrect; Chalmers is incorrect C) Severino is correct; Chalmers is correct Question 51 - #93037 Which of the following statements about constant proportion rebalancing strategies is least accurate? A) The strategy does well in a bull market B) It is a concave strategy C) The strategy is protected on the downside Question 52 - #92692 Which of the following statements about trading strategies is CORRECT? A) A disciplined rebalancing strategy typically underperforms a buy and hold strategy A buy and hold strategy is best with respect to asset allocation because it has the lowest B) trading costs C) A buy and hold strategy may not satisfy the current asset allocation needs of a client Question 53 - #92430 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 Question 54 - #92267 Which of the following statements regarding asset allocation decisions is least accurate? A) Insured asset allocation is similar to a constant mix-type asset allocation strategy A strategic asset allocation needs to be rebalanced periodically to maintain the constant B) asset proportions A contrarian investment strategy is one where expected returns tend to fall when prices C) rise Question 55 - #92244 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 Question 56 - #93274 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) Momentum-based rebalancing strategies outperform disciplined rebalancing strategies Under a buy and hold strategy, asset allocation changes occur solely in response to B) changes in relative market values C) Disciplined rebalancing strategies are superior to a buy and hold strategy Question 57 - #92704 Which of the following statements about asset allocation strategies is CORRECT? Constant mix: A) outperforms buy and hold when stock market reversals occur B) outperforms buy and hold when stock market reversals not occur C) is a convex strategy Question 58 - #92991 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? Consistency of Time Spent on Process Expense of Trading Allocation A) Calendar rebalancing Percentage-ofportfolio Calendar rebalancing B) Unknown Calendar rebalancing Percentage-ofportfolio C) Calendar rebalancing Unknown Percentage-ofportfolio ... likely to fall by: A) 3. 33% B) 3. 11% C) 6.45% Question 32 - #92051 Carl Allen, CFA, has been assigned the task of documenting some of his company’s asset allocation techniques After the firm receives... Returns (%) U.S Treasury 0 .35 10.28 9.78 U.S Corporate 0.40 9.57 8 .37 U.S Agency 0.25 10.05 10.20 What is Sellier’s alpha for 2002? A) 9 .32 10% B) 0.6175% C) 9. 938 5% Question 20 - #92512 All of... A Question 46 - #92471 In a trending market, which asset allocation strategy outperforms? A) Constant mix B) Constant proportion portfolio insurance (CPPI) C) Buy and hold Question 47 - #9 238 3