Investment Management & Asset Allocation Flashcards

A client in her early 70s wants to hold 100% bonds for safety. Which concept BEST explains why this extreme conservative allocation could actually increase her retirement risk?

Answer: Inflation risk eroding the purchasing power of fixed income returns over a 20+ year horizon

A 100% bond portfolio is highly vulnerable to inflation risk, as fixed income returns may not keep pace with rising prices over a long retirement horizon.

The 'bucket strategy' for retirement income management typically divides assets into which groupings?

Answer: Short-term liquidity, intermediate growth, and long-term growth buckets

The bucket strategy separates assets into a near-term liquidity bucket, a medium-term buffer, and a long-term growth bucket aligned with different time horizons.

Which of the following BEST describes a 'liability-matching' approach to retirement portfolio construction?

Answer: Structuring assets to fund specific anticipated future cash flows

Liability-matching (or liability-driven investing) aligns portfolio assets with specific projected future liabilities, such as retirement income needs.

A client's portfolio has a beta of 1.3. During a year when the market returned -10%, what approximate return would the portfolio be expected to show based solely on beta?

Answer: -13.0%

Beta of 1.3 means the portfolio is expected to move 1.3 times the market; -10% × 1.3 = -13% expected portfolio return.

In the context of retirement asset allocation, 'human capital' is BEST defined as:

Answer: The present value of a client's future earned income from employment

Human capital represents the present value of future wages and is considered alongside financial capital when determining an appropriate overall asset allocation.

Which statement BEST describes the role of alternative investments (e.g., real assets, hedge funds) in a retirement portfolio?

Answer: They can potentially improve diversification by having low correlation to stocks and bonds

Alternatives can reduce overall portfolio volatility and improve risk-adjusted returns when they exhibit low or negative correlation with traditional asset classes.

A 72-year-old client asks about adding a 15% allocation to international emerging market equities. What is the PRIMARY concern an RMA adviser should raise?

Answer: The higher volatility and political risk may be inappropriate given the client's distribution timeline

For a retiree in distribution phase, the higher volatility and political/currency risks of emerging markets can amplify sequence-of-returns risk.