CIC Client Portfolio Management 2 — Questions and Answers
Question 1: A client with a 70/30 equity/bond allocation experiences a market rally that shifts it to 80/20. What action should the counselor take?
- Rebalance back to 70/30 to restore the target allocation (Correct answer)
- Leave it unchanged since equities outperformed
- Shift entirely to equities to capture further gains
- Liquidate the portfolio and reinvest at year-end
Correct answer: Rebalance back to 70/30 to restore the target allocation
Rebalancing restores the portfolio to the client's target risk profile after drift caused by market movements.
Question 2: Which measure best evaluates a portfolio manager's risk-adjusted performance relative to a benchmark?
- Gross return
- Information ratio (Correct answer)
- Total assets under management
- Dividend yield
Correct answer: Information ratio
The information ratio measures excess return over a benchmark per unit of tracking error, evaluating active management skill.
Question 3: A client asks about the tax benefit of placing municipal bonds in a taxable account. What is the primary advantage?
- Higher coupon rates than Treasuries
- Interest income is generally exempt from federal income tax (Correct answer)
- Gains are tax-deferred until maturity
- They are FDIC insured
Correct answer: Interest income is generally exempt from federal income tax
Municipal bond interest is typically exempt from federal income tax, making them attractive in taxable accounts for high-bracket investors.
Question 4: An investor wants maximum diversification across U.S. stocks. Which portfolio construction approach is most efficient?
- Concentrated position in 5 blue-chip stocks
- Equal weighting of 10 sector ETFs
- Broad market-cap-weighted index fund (Correct answer)
- Active stock-picking in a single sector
Correct answer: Broad market-cap-weighted index fund
A broad market-cap-weighted index fund provides exposure to thousands of stocks, minimizing unsystematic risk most efficiently.
Question 5: Which risk is NOT reduced through portfolio diversification?
- Business risk
- Liquidity risk
- Systematic (market) risk (Correct answer)
- Company-specific risk
Correct answer: Systematic (market) risk
Systematic risk affects the entire market and cannot be eliminated through diversification, unlike unsystematic risks.
Question 6: A retired client needs monthly income. Which portfolio strategy best addresses this need?
- 100% growth equities
- Systematic withdrawal plan from a balanced portfolio (Correct answer)
- 100% speculative options positions
- Concentrated real estate investment
Correct answer: Systematic withdrawal plan from a balanced portfolio
A systematic withdrawal plan from a balanced portfolio provides regular income while maintaining growth potential and managing longevity risk.
Question 7: What does a negative Sharpe ratio indicate about a portfolio?
- The portfolio earned more than the risk-free rate
- The portfolio underperformed the risk-free rate on a risk-adjusted basis (Correct answer)
- Volatility was zero
- The benchmark outperformed the market
Correct answer: The portfolio underperformed the risk-free rate on a risk-adjusted basis
A negative Sharpe ratio means the portfolio's excess return over the risk-free rate was negative, indicating poor risk-adjusted performance.
CIC Client Portfolio Management 2
A client with a 70/30 equity/bond allocation experiences a market rally that shifts it to 80/20.
What action should the counselor take?