Portfolio Management & Strategy Flashcards
7 cards from real CES practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Portfolio Management & Strategy flashcards as text
A testamentary trust for a minor beneficiary has a 15-year time horizon. How does this long horizon affect appropriate asset allocation?
Answer: It supports a higher equity allocation as short-term volatility is less critical
A long time horizon allows the portfolio to recover from short-term market downturns, supporting higher equity allocations that historically produce superior long-term returns.
What is 'tax alpha' in the context of trust portfolio management?
Answer: Additional after-tax return created through active tax management strategies
Tax alpha refers to the incremental after-tax return achieved through strategies like tax-loss harvesting, asset location, and gain deferral relative to a tax-unaware approach.
A charitable remainder trust (CRT) trustee must invest to satisfy both the unitrust payout and the charitable remainder interest. Which investment approach best serves this dual mandate?
Answer: A total return portfolio targeting returns that exceed the payout rate plus inflation
A total return approach targeting returns above the CRT payout rate plus inflation preserves purchasing power for the income beneficiary while growing the charitable remainder.
Which concept describes the risk that a trust portfolio fails to generate sufficient returns to maintain the real value of distributions over time?
Answer: Purchasing power risk (inflation risk)
Purchasing power risk (inflation risk) describes the erosion of real portfolio value and distribution adequacy when investment returns fail to keep pace with inflation.
A trustee wants to implement a passive core with active satellite strategy. What does the 'core' component typically consist of?
Answer: Low-cost index funds tracking broad market benchmarks
The core component uses low-cost, tax-efficient index funds for broad market exposure, while satellites use active managers in less efficient market segments where alpha is more achievable.
In trust portfolio management, 'asset location' refers to which practice?
Answer: Placing tax-inefficient assets in tax-advantaged accounts and tax-efficient assets in taxable accounts
Asset location optimizes after-tax returns by holding tax-inefficient assets (e.g., bonds, REITs) in tax-deferred accounts and tax-efficient assets (e.g., index funds) in taxable trust accounts.
A trust is subject to the 3.8% net investment income tax (NIIT). At what income threshold does this tax apply to trust income?
Answer: $13,450 (2024 threshold for trusts)
The NIIT applies to trusts at a much lower threshold than individuals; for 2024, undistributed net investment income above approximately $13,450 is subject to the 3.8% surtax.