Investment Management & Asset Allocation Flashcards

A client wants a guaranteed income stream she cannot outlive, regardless of market performance. Which product BEST addresses this goal within a retirement income plan?

Answer: A single premium immediate annuity (SPIA)

A SPIA converts a lump sum into guaranteed lifetime income payments, effectively transferring longevity risk to the insurance company.

In modern portfolio theory, the 'efficient frontier' represents portfolios that offer:

Answer: Both A and B — the set of portfolios with maximum return per unit of risk or minimum risk per unit of return

The efficient frontier is the set of optimal portfolios that provide the highest expected return for a given risk level OR the lowest risk for a given expected return.

Which rebalancing method triggers portfolio rebalancing only when an asset class drifts beyond a specified percentage band from its target allocation?

Answer: Threshold (tolerance-band) rebalancing

Threshold rebalancing triggers action only when allocations drift outside predefined bands (e.g., ±5%), potentially reducing trading costs versus calendar rebalancing.

A retired couple's portfolio generates $50,000 in annual dividends and interest. Their total annual expenses are $90,000. The 'income gap' they must fund from portfolio withdrawals or other sources is:

Answer: $40,000

The income gap equals total expenses minus portfolio income: $90,000 − $50,000 = $40,000 that must come from portfolio withdrawals or other sources.

Which statement about dollar-cost averaging (DCA) during the retirement accumulation phase is MOST accurate?

Answer: DCA reduces the average cost per share when prices fluctuate, and enforces investment discipline

DCA buys more shares when prices are low and fewer when prices are high, potentially lowering average cost per share while enforcing disciplined, systematic investing.

A 70-year-old client has a portfolio heavily concentrated in his former employer's stock, representing 45% of total assets. What is the adviser's PRIMARY concern?

Answer: Concentration risk — a single company's poor performance could devastate the retirement portfolio

A 45% concentration in a single stock exposes the client to idiosyncratic (company-specific) risk that diversification would eliminate, threatening retirement income security.

When constructing a retirement income portfolio using a total return approach, the adviser primarily relies on:

Answer: A systematic combination of income and capital appreciation to meet spending needs

The total return approach draws from both income (dividends, interest) and capital gains as needed, focusing on overall portfolio return rather than artificially separating income from principal.