Investment Management & Asset Allocation Flashcards

A retiree's portfolio is 60% equities and 40% bonds. After a strong equity rally, the mix drifts to 75/25. What is the PRIMARY reason an RMA adviser would rebalance?

Answer: To restore the risk profile aligned with the client's investment policy statement

Rebalancing restores the portfolio to its target allocation, maintaining the risk level documented in the investment policy statement.

Which risk measure quantifies the potential loss in a portfolio over a given time period at a specific confidence level?

Answer: Value at Risk (VaR)

Value at Risk (VaR) expresses the maximum expected loss over a defined period at a given confidence level (e.g., 95% or 99%).

In a Monte Carlo simulation for retirement income planning, increasing the number of simulations primarily improves which aspect of the analysis?

Answer: The statistical reliability and convergence of probability estimates

More simulation paths reduce sampling error and produce more stable probability-of-success estimates.

A 68-year-old client holds a large-cap growth fund with an expense ratio of 1.45% and a comparable ETF with an expense ratio of 0.05%. Over 20 years at a 7% gross return, this 1.40% difference most directly affects:

Answer: The net compound return available to the client

Expense ratios directly reduce net compound returns; a 1.40% annual drag compounded over 20 years can consume a significant portion of terminal wealth.

The concept of 'sequence of returns risk' is MOST relevant when:

Answer: A client begins taking systematic withdrawals from a portfolio experiencing early poor returns

Sequence risk is most damaging when withdrawals are taken during a period of poor early returns, permanently reducing the portfolio's recovery capacity.

Which asset allocation approach dynamically reduces equity exposure as a target date approaches, following a predetermined 'glide path'?

Answer: Life-cycle (target-date) fund strategy

Target-date fund strategies follow a glide path that systematically shifts from growth-oriented equities toward income-oriented assets as the target date nears.

An adviser calculates the Sharpe ratio for two retirement portfolios: Portfolio A = 0.85, Portfolio B = 0.62. What does this indicate?

Answer: Portfolio A generates more return per unit of total risk than Portfolio B

The Sharpe ratio measures excess return per unit of standard deviation, so a higher ratio indicates better risk-adjusted performance.