CPS Investment Strategies and Asset Allocation 2 — Questions and Answers
Question 1: What is 'liability-driven investing' (LDI)?
- Investing in highly leveraged companies
- Structuring a portfolio to meet specific future liabilities (Correct answer)
- Investing only in government bonds
- Avoiding all fixed-income investments
Correct answer: Structuring a portfolio to meet specific future liabilities
LDI structures a portfolio specifically to match and fund known future liabilities such as pension payments.
Question 2: What is 'dynamic asset allocation'?
- Keeping asset allocation fixed permanently
- Adjusting asset mix based on changing market conditions or economic outlook (Correct answer)
- Investing only in dynamic growth sectors
- Using leverage at all times
Correct answer: Adjusting asset mix based on changing market conditions or economic outlook
Dynamic asset allocation involves actively adjusting the portfolio's asset mix in response to changing market conditions, valuations, or economic forecasts.
Question 3: What characterizes an 'absolute return' investment strategy?
- Always matching benchmark returns
- Seeking positive returns regardless of market direction (Correct answer)
- Maximizing returns relative to a market index
- Only holding fixed income
Correct answer: Seeking positive returns regardless of market direction
Absolute return strategies aim to generate positive returns in all market conditions, unlike relative return strategies that are judged against a benchmark.
Question 4: What is a 'barbell strategy' in fixed income portfolio management?
- Investing equally across all maturities
- Concentrating holdings in short-term and long-term bonds while avoiding intermediate maturities (Correct answer)
- Only holding bonds at one maturity
- Mixing bonds with only large-cap equities
Correct answer: Concentrating holdings in short-term and long-term bonds while avoiding intermediate maturities
A barbell strategy concentrates bond holdings at two extremes — very short and very long maturities — while avoiding intermediate-term bonds.
Question 5: What does 'international diversification' add to a US-focused portfolio?
- Eliminates currency risk
- Exposure to different economic cycles and growth opportunities beyond the US (Correct answer)
- Guarantees higher returns than domestic-only portfolios
- Only increases volatility with no benefit
Correct answer: Exposure to different economic cycles and growth opportunities beyond the US
International diversification provides exposure to different economic cycles, growth rates, and opportunities that may not correlate strongly with US markets.
Question 6: What is 'alternative investment' allocation used for in portfolios?
- Replacing all traditional assets
- Providing diversification and potential returns uncorrelated with stocks and bonds (Correct answer)
- Only reducing returns for lower risk
- Meeting regulatory requirements only
Correct answer: Providing diversification and potential returns uncorrelated with stocks and bonds
Alternatives such as real estate, private equity, and hedge funds can provide diversification benefits due to their lower correlation with traditional asset classes.
CPS Investment Strategies and Asset Allocation 2
What is 'liability-driven investing' (LDI)?