AAMS Asset Allocation & Selection 2 — Questions and Answers
Question 1: Which asset allocation approach adjusts portfolio weights back to target percentages after market movements?
- Tactical allocation
- Rebalancing (Correct answer)
- Dollar-cost averaging
- Factor tilting
Correct answer: Rebalancing
Rebalancing restores a portfolio to its target asset allocation after drift caused by differing asset class returns.
Question 2: A client has a 10-year investment horizon and moderate risk tolerance. Which allocation would typically be MOST appropriate?
- 100% money market funds
- 60% equities / 40% bonds (Correct answer)
- 100% long-term Treasury bonds
- 90% commodities / 10% cash
Correct answer: 60% equities / 40% bonds
A 60/40 equity-to-bond split is a classic moderate-risk allocation suitable for intermediate-to-long horizons.
Question 3: Which risk measure captures only downside deviations from a target return?
- Standard deviation
- Beta
- Semi-variance (Correct answer)
- Sharpe ratio
Correct answer: Semi-variance
Semi-variance measures volatility only for returns that fall below a specified target, focusing on downside risk.
Question 4: In the context of asset selection, which factor style focuses on stocks trading below their intrinsic value?
- Momentum
- Growth
- Value (Correct answer)
- Quality
Correct answer: Value
Value investing targets stocks with low price-to-earnings or price-to-book ratios relative to fundamentals.
Question 5: What is the primary purpose of using a liability-relative allocation strategy?
- To maximize absolute return regardless of obligations
- To match assets with specific future liabilities (Correct answer)
- To minimize portfolio turnover costs
- To concentrate assets in a single high-yield sector
Correct answer: To match assets with specific future liabilities
Liability-relative (or liability-driven) investing structures assets so they can fund specific future obligations, reducing funding risk.
Question 6: Which of the following best describes the 'core-satellite' portfolio construction strategy?
- Investing only in index funds across all asset classes
- Holding a passive index core with active specialist satellite positions (Correct answer)
- Rotating entirely between bonds and equities each quarter
- Concentrating 100% in a single high-conviction thematic strategy
Correct answer: Holding a passive index core with active specialist satellite positions
Core-satellite combines a diversified passive core for market exposure with smaller active satellite positions seeking alpha.
Question 7: When building a globally diversified portfolio, which risk cannot be eliminated through international diversification?
- Currency risk
- Political risk
- Systematic global market risk (Correct answer)
- Company-specific risk
Correct answer: Systematic global market risk
Systematic global market risk affects all markets simultaneously and cannot be diversified away even with international holdings.
AAMS Asset Allocation & Selection 2
Which asset allocation approach adjusts portfolio weights back to target percentages after market movements?