AAMS Investment Strategies 4 — Questions and Answers
Question 1: A 'barbell' fixed-income strategy concentrates holdings at which maturities?
- Only intermediate maturities (5–10 years)
- Both short-term and long-term maturities, avoiding the middle (Correct answer)
- All maturities in equal proportion
- Solely long-term maturities above 20 years
Correct answer: Both short-term and long-term maturities, avoiding the middle
The barbell strategy holds securities at the short and long ends of the yield curve while avoiding intermediate maturities.
Question 2: Which strategy explicitly tilts a portfolio toward low-volatility stocks, exploiting the empirical finding that lower-risk stocks often produce higher risk-adjusted returns?
- High-beta momentum strategy
- Low-volatility or minimum-variance factor strategy (Correct answer)
- Value-growth rotation strategy
- Equal-weighted index strategy
Correct answer: Low-volatility or minimum-variance factor strategy
Low-volatility factor strategies overweight stocks with historically lower price fluctuations, which research shows can outperform on a risk-adjusted basis.
Question 3: Dollar-cost averaging (DCA) reduces which specific investment risk compared to lump-sum investing?
- Credit risk on bond holdings
- Timing risk of investing a large sum at a market peak (Correct answer)
- Currency risk on international positions
- Liquidity risk from illiquid alternative assets
Correct answer: Timing risk of investing a large sum at a market peak
DCA spreads purchases over time, reducing the danger of deploying a large sum right before a market decline.
Question 4: What distinguishes a 'growth at a reasonable price' (GARP) strategy from pure growth investing?
- GARP ignores earnings growth and focuses solely on dividends
- GARP combines growth criteria with valuation constraints to avoid overpaying (Correct answer)
- GARP concentrates exclusively in value stocks with low P/E ratios
- GARP only invests in dividend-paying large-cap companies
Correct answer: GARP combines growth criteria with valuation constraints to avoid overpaying
GARP seeks companies with strong growth prospects but also screens for reasonable valuation, blending growth and value disciplines.
Question 5: A risk parity portfolio weights asset classes by:
- Market capitalization of each asset class
- Equal contribution to overall portfolio risk rather than equal dollar weight (Correct answer)
- Historical return ranking from highest to lowest
- The inverse of each asset class's Sharpe ratio
Correct answer: Equal contribution to overall portfolio risk rather than equal dollar weight
Risk parity allocates so that each asset class contributes equally to total portfolio volatility, often resulting in larger allocations to bonds than equities.
Question 6: Which of the following best describes 'tactical asset allocation' (TAA) compared to 'strategic asset allocation' (SAA)?
- TAA sets a fixed long-term target and never deviates; SAA adjusts quarterly
- TAA makes short-term deviations from the long-term SAA target based on market views (Correct answer)
- TAA and SAA are identical in methodology but differ only by investment horizon
- TAA focuses solely on fixed income while SAA covers equities
Correct answer: TAA makes short-term deviations from the long-term SAA target based on market views
TAA involves deliberate short-term deviations from the strategic benchmark to exploit perceived market mispricings or economic conditions.
Question 7: An investor concerned about inflation eroding real purchasing power would most likely add which asset class to a traditional stock-bond portfolio?
- Long-term nominal Treasuries
- Treasury Inflation-Protected Securities (TIPS) or real assets like commodities (Correct answer)
- High-yield corporate bonds
- Short-duration money market funds
Correct answer: Treasury Inflation-Protected Securities (TIPS) or real assets like commodities
TIPS and real assets like commodities and real estate historically provide returns that move with inflation, protecting real purchasing power.
AAMS Investment Strategies 4
A 'barbell' fixed-income strategy concentrates holdings at which maturities?