Asset Allocation & Selection Flashcards
7 cards from real AAMS practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Asset Allocation & Selection flashcards as text
Which concept describes the tendency of asset class returns to move together during market crises, reducing diversification benefits?
Answer: Contagion
Contagion refers to the spread of financial distress across markets, causing correlations to spike toward 1.0 during crises.
A tactical asset allocation shift increasing equity exposure based on a perceived market undervaluation is best described as:
Answer: A short-term deviation from strategic allocation
Tactical asset allocation involves short-term, deliberate deviations from the strategic benchmark to exploit market inefficiencies.
Which metric would an advisor use to evaluate whether additional portfolio diversification is still beneficial?
Answer: Marginal contribution to risk
Marginal contribution to risk measures how much each additional holding adds to total portfolio risk, indicating when diversification benefits diminish.
In mean-variance optimization, which input has historically been the MOST difficult to estimate accurately?
Answer: Expected returns
Expected returns are notoriously difficult to forecast accurately, making them the most problematic input in mean-variance optimization.
A 75-year-old retiree asks about increasing equity allocation for inflation protection. Which consideration should the advisor prioritize FIRST?
Answer: The client's remaining investment horizon and sequence-of-returns risk
Sequence-of-returns risk is critical for retirees, as early large losses can permanently impair a portfolio's ability to sustain withdrawals.
Which type of real asset provides both inflation-linkage and income through lease payments?
Answer: Real estate investment trusts (REITs)
REITs provide inflation-linked income through rents and offer portfolio diversification as a real asset class.
What does 'alpha' represent in the context of active asset selection?
Answer: Return in excess of a benchmark after adjusting for risk
Alpha is the risk-adjusted excess return generated by active investment decisions beyond what market exposure (beta) would explain.