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Fixed Income Analysis and Strategies
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Question 1 of 30
1. Question
Asset size is an important factor to take into consideration when choosing an optimal asset allocation. Which of the following statements concerning asset size is accurate?
I. Smaller funds often lack the expertise and governance structure to invest in complex strategies.
II. Larger portfolios can generally access greater management expertise in the governance capacity, allowing them to consider complex strategies that smaller funds cannot.
III. Smaller funds face a problem of how to achieve an adequate level of diversification.
IV. The small capital base of smaller funds enables investment in accounts with relatively high minimum investment requirements.Correct
Smaller funds often lack the expertise and governance structure to invest in complex strategies, and therefore, often face a problem of how to achieve an adequate level of diversification. Larger portfolios can generally access greater management expertise in the governance capacity, allowing them to consider complex strategies that smaller funds cannot. Their larger capital base also enables investment in accounts with relatively high minimum investment requirements. This allows large funds to achieve higher levels of diversification.
Incorrect
Smaller funds often lack the expertise and governance structure to invest in complex strategies, and therefore, often face a problem of how to achieve an adequate level of diversification. Larger portfolios can generally access greater management expertise in the governance capacity, allowing them to consider complex strategies that smaller funds cannot. Their larger capital base also enables investment in accounts with relatively high minimum investment requirements. This allows large funds to achieve higher levels of diversification.
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Question 2 of 30
2. Question
As the size of a fund increases, the per-participant cost of the internal governance infrastructure decreases. This gives the fund a competitive advantage in which of the following?
I. Intermitent banking
II. Private equity
III. Hedge fund
IV. Infrastructure investingCorrect
As the size of the fund increases, the per-participant cost of the internal governance infrastructure decreases, giving the fund a competitive advantage in private equity, hedge fund, and infrastructure investing.
Incorrect
As the size of the fund increases, the per-participant cost of the internal governance infrastructure decreases, giving the fund a competitive advantage in private equity, hedge fund, and infrastructure investing.
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Question 3 of 30
3. Question
Funds that are too large may not be able to take advantage of asset classes that lack the capacity to absorb large amounts of funds. A small-cap manager may suffer diseconomies of scale for which of the following reasons?
I. Larger trades have increased price impact.
II. The need for increased numbers of staff would speed up the decision-making process.
III. The inflow of capital may encourage managers to abandon their core strategies.
IV. The need for increased numbers of staff may slow the decision-making process.Correct
A small-cap manager may suffer diseconomies of scale because of the following:
– Larger trades have increased price impact.
– The inflow of capital may encourage managers to abandon their core strategies.
– The need for increased numbers of staff may slow the decision-making process.A potential solution is to split the allocation among several managers. However, identifying and monitoring suitable managers is an added burden and cost.
Incorrect
A small-cap manager may suffer diseconomies of scale because of the following:
– Larger trades have increased price impact.
– The inflow of capital may encourage managers to abandon their core strategies.
– The need for increased numbers of staff may slow the decision-making process.A potential solution is to split the allocation among several managers. However, identifying and monitoring suitable managers is an added burden and cost.
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Question 4 of 30
4. Question
Liquidity constraint is an imperfection in the capital market which forces a limit on the amount an individual can borrow or an alteration in the interest rate they pay. What is the key to successfully addressing the liquidity constraint for a portfolio?
Correct
The key to successfully addressing the liquidity constraint for a portfolio is to integrate the needs of the owner and the characteristics of the asset class. Some owners require extremely high levels of liquidity and hence typically invest in high-quality, short-term, liquid assets. Other owners with lower needs and much longer time horizons can take advantage of the illiquidity premium inherent in alternative investments, such as real estate and infrastructure.
Incorrect
The key to successfully addressing the liquidity constraint for a portfolio is to integrate the needs of the owner and the characteristics of the asset class. Some owners require extremely high levels of liquidity and hence typically invest in high-quality, short-term, liquid assets. Other owners with lower needs and much longer time horizons can take advantage of the illiquidity premium inherent in alternative investments, such as real estate and infrastructure.
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Question 5 of 30
5. Question
Time horizons are largely dictated by investment goals and strategies. Which of the following statements accurately defines a portfolio’s time horizon?
Correct
Time horizon is the duration of time that an investor plans to hold a security. A portfolio’s time horizon is defined by a liability to be paid or a goal to be funded at a future date. Asset allocations must consider the horizons defined by each liability and goal, as well as adapting to the changing mix of assets and liabilities as time progresses.
Incorrect
Time horizon is the duration of time that an investor plans to hold a security. A portfolio’s time horizon is defined by a liability to be paid or a goal to be funded at a future date. Asset allocations must consider the horizons defined by each liability and goal, as well as adapting to the changing mix of assets and liabilities as time progresses.
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Question 6 of 30
6. Question
High rates of growth in capital investment are associated with high rates of growth in the economy. Which of the following structural government policies can facilitate long-term growth?
I. Sound tax policies.
II. Sound fiscal policy.
III. Discourage competition in the private sector.
IV. Minimal government interference with free markets.Correct
Structural (consistent, as opposed to one-time) government policies that can facilitate long-term growth include the following:
– Minimal government interference with free markets.
– Development of infrastructure and human capital, including education and health care.
– Facilitate competition in the private sector.
– Sound fiscal policy.
– Sound tax policies.Incorrect
Structural (consistent, as opposed to one-time) government policies that can facilitate long-term growth include the following:
– Minimal government interference with free markets.
– Development of infrastructure and human capital, including education and health care.
– Facilitate competition in the private sector.
– Sound fiscal policy.
– Sound tax policies. -
Question 7 of 30
7. Question
The government deficit is often associated with a current account deficit (caused primarily when imports exceed exports). Which of the following terms refers to the association between the government budget and the current account deficit?
Correct
The association between the government budget and current account deficits is called the twin deficit problem. Economies that have both a government deficit and a current account deficit are often referred to as having “twin deficits.”
Incorrect
The association between the government budget and current account deficits is called the twin deficit problem. Economies that have both a government deficit and a current account deficit are often referred to as having “twin deficits.”
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Question 8 of 30
8. Question
The government deficit may be financed with excessive borrowing in foreign markets. For what reason is this borrowing in foreign markets rather than in domestic markets?
Correct
The government deficit may be financed with excessive borrowing in foreign markets. This borrowing in foreign (rather than domestic) markets helps to finance the ability to import more than is exported and, support higher but unsustainable economic growth.
Incorrect
The government deficit may be financed with excessive borrowing in foreign markets. This borrowing in foreign (rather than domestic) markets helps to finance the ability to import more than is exported and, support higher but unsustainable economic growth.
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Question 9 of 30
9. Question
This borrowing in foreign (rather than domestic) markets, finances the ability to import more than is exported and supports higher but unsustainable economic growth. Which of the following is a potential outcome of this?
I. The government deficit can be financed by printing money, which leads to high inflation.
II. The excessive borrowing can stop, leading to a substantial cutback in spending by the government and consumers.
III. The government deficit can be financed with excessive domestic lending by the government.
IV. The currency can devalue when foreign investors are no longer willing to hold the debt.Correct
There are several potential outcomes of unsustainable economic growth caused by borrowing in foreign (rather than domestic) markets to finance the ability to import more than is exported. These outcomes include the following:
– The government deficit can be financed by printing money, which leads to high inflation.
– The excessive borrowing can stop, leading to a substantial cutback in spending by the government and consumers.
– The government deficit can be financed with excessive domestic borrowing by the government, which crowds out businesses borrowing to finance business investment.
– The currency can devalue when foreign investors are no longer willing to hold the debt.Incorrect
There are several potential outcomes of unsustainable economic growth caused by borrowing in foreign (rather than domestic) markets to finance the ability to import more than is exported. These outcomes include the following:
– The government deficit can be financed by printing money, which leads to high inflation.
– The excessive borrowing can stop, leading to a substantial cutback in spending by the government and consumers.
– The government deficit can be financed with excessive domestic borrowing by the government, which crowds out businesses borrowing to finance business investment.
– The currency can devalue when foreign investors are no longer willing to hold the debt. -
Question 10 of 30
10. Question
In addition to being influenced by governmental policies, growth trends are still subject to unexpected surprises or shocks. Which of the following refers to unanticipated events that occur outside the normal course of an economy?
Correct
Unanticipated events that occur outside the normal course of an economy are referred to as exogenous shocks. Since the events are unanticipated, they are not already built into current market prices, whereas normal trends in an economy, which would be considered endogenous, are built into market prices.
Incorrect
Unanticipated events that occur outside the normal course of an economy are referred to as exogenous shocks. Since the events are unanticipated, they are not already built into current market prices, whereas normal trends in an economy, which would be considered endogenous, are built into market prices.
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Question 11 of 30
11. Question
Exogenous shocks are unanticipated events that occur outside the normal course of an economy. Exogenous shocks can be caused by different factors. Which of the following is/are factor(s) that can cause exogenous shocks?
I. Natural disasters
II. Political events
III. Changes in government policies
IV. Personal habitsCorrect
Exogenous shocks can be caused by different factors, such as natural disasters, political events, or changes in government policies. Although positive shocks are not unknown, exogenous shocks usually produce a negative impact on an economy and often times spread to other countries.
Incorrect
Exogenous shocks can be caused by different factors, such as natural disasters, political events, or changes in government policies. Although positive shocks are not unknown, exogenous shocks usually produce a negative impact on an economy and often times spread to other countries.
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Question 12 of 30
12. Question
Exogenous shocks can be positive or negative. Which of the following terms refers to the spread of the negative impact on an economy (usually produced by exogenous shocks) to other countries?
Correct
Contagion refers to the process of the spread of a negative impact on an economy to other countries. Exogenous shocks usually produce a negative impact on an economy and often times spread to other countries. Contagions are named as such for their potential to spread quickly and (seemingly) unexpectedly.
Incorrect
Contagion refers to the process of the spread of a negative impact on an economy to other countries. Exogenous shocks usually produce a negative impact on an economy and often times spread to other countries. Contagions are named as such for their potential to spread quickly and (seemingly) unexpectedly.
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Question 13 of 30
13. Question
Emerging markets offer the investor high returns at the expense of higher risk. Many emerging markets require a heavy investment in physical and human (e.g., education) infrastructure. Which of the following can result from financing this infrastructure with foreign borrowing?
I. Crisis situations in their economy.
II. Crisis situations in their currency.
III. Crisis situations in the financial market.
IV. Crisis situations in their personal beliefs.Correct
Many emerging markets require a heavy investment in physical and human (e.g., education) infrastructure. To finance this infrastructure, many emerging countries are dependent on foreign borrowing, which can later create crisis situations in their economy, currency, and financial markets.
Incorrect
Many emerging markets require a heavy investment in physical and human (e.g., education) infrastructure. To finance this infrastructure, many emerging countries are dependent on foreign borrowing, which can later create crisis situations in their economy, currency, and financial markets.
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Question 14 of 30
14. Question
An investor in emerging countries must carefully analyze the risk in these countries. Which of the following is a primary risk for a bond investor?
Correct
Emerging markets offer the investor high returns at the expense of higher risk. For the bond investor, the primary risk is credit risk. Credit risk questions if the country has the capacity and willingness to pay back its debt.
Incorrect
Emerging markets offer the investor high returns at the expense of higher risk. For the bond investor, the primary risk is credit risk. Credit risk questions if the country has the capacity and willingness to pay back its debt.
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Question 15 of 30
15. Question
An investor in emerging countries must carefully analyze the risk in these countries. For equity investors, the focus is on growth prospects and risk. Which of the following is a question that a potential investor should ask themselves before committing funds to these markets?
Correct
There are six questions potential investors should ask themselves before committing funds to these markets. These questions are as follows:
– Does the country have responsible fiscal and monetary policies?
– What is the expected growth?
– Can the country maintain a stable, appropriate currency value?
– Is the country too highly leveraged?
– What is the level of foreign exchange reserves relative to short-term debt?
– What is the government’s stance regarding structural reform?Incorrect
There are six questions potential investors should ask themselves before committing funds to these markets. These questions are as follows:
– Does the country have responsible fiscal and monetary policies?
– What is the expected growth?
– Can the country maintain a stable, appropriate currency value?
– Is the country too highly leveraged?
– What is the level of foreign exchange reserves relative to short-term debt?
– What is the government’s stance regarding structural reform? -
Question 16 of 30
16. Question
Which of the following is/are included in the traditional accounting balance sheet?
I. An organization’s financial assets.
II. An organization’s nonfinancial assets.
III. An organization’s financial liabilities.
IV. An organization’s nonfinancial liabilities.Correct
The traditional accounting balance sheet encompasses an organization’s assets, liabilities, and owner’s equity. It is used by accountants to illustrate the financial position of an organization. Nonfinancial assets and liabilities are not included in traditional balance sheets.
Incorrect
The traditional accounting balance sheet encompasses an organization’s assets, liabilities, and owner’s equity. It is used by accountants to illustrate the financial position of an organization. Nonfinancial assets and liabilities are not included in traditional balance sheets.
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Question 17 of 30
17. Question
Many bond indexes exist, providing varying exposures to duration, credit, and other risk factors. Which of the following does investing in a bond market index fund provide?
I. High cost diversification.
II. Low cost diversification.
III. Maximization of tracking error.
IV. An alternative to active fixed-income management.Correct
Investing in a bond market index fund provides low cost diversification and an alternative to active fixed-income management. Their goal is to minimize tracking error.
Incorrect
Investing in a bond market index fund provides low cost diversification and an alternative to active fixed-income management. Their goal is to minimize tracking error.
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Question 18 of 30
18. Question
Which of the following is reported as the standard deviation of the portfolio’s active return (portfolio return − benchmark return)?
Correct
Tracking error is the standard deviation of the portfolio’s active return (portfolio return − benchmark return). Tracking error is also known as tracking risk or active risk. Tracking error is the divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark. The tracking error can be viewed as an indicator of how actively a fund is managed and its corresponding risk level.
Incorrect
Tracking error is the standard deviation of the portfolio’s active return (portfolio return − benchmark return). Tracking error is also known as tracking risk or active risk. Tracking error is the divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark. The tracking error can be viewed as an indicator of how actively a fund is managed and its corresponding risk level.
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Question 19 of 30
19. Question
Both forward and futures contracts involve the agreement between two parties to buy and sell an asset at a specified price by a certain date. For which of the following reasons are forward contracts preferred over futures contracts for currency hedging?
I. Forwards can be customized, while futures contracts are standardized.
II. Futures can be customized, while forward contracts are standardized.
III. Forwards are available for almost any currency pair, while futures trade in size for only a limited number of currencies.
IV. The trading volume of FX forwards that of FX futures, providing better liquidity.Correct
Forward contracts are preferred for currency hedging because of the following reasons:
– Forwards can be customized, while futures contracts are standardized.
– Forwards are available for almost any currency pair, while futures trade in size for only a limited number of currencies.
– Futures contracts require margin which adds operational complexity and can require periodic cash flows.
– Trading volume of FX forwards and swaps dwarfs that of FX futures, providing better liquidity.Incorrect
Forward contracts are preferred for currency hedging because of the following reasons:
– Forwards can be customized, while futures contracts are standardized.
– Forwards are available for almost any currency pair, while futures trade in size for only a limited number of currencies.
– Futures contracts require margin which adds operational complexity and can require periodic cash flows.
– Trading volume of FX forwards and swaps dwarfs that of FX futures, providing better liquidity. -
Question 20 of 30
20. Question
A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. What is an accurate difference between a static hedge and a dynamic hedge?
Correct
A hedge can be a static hedge or dynamic. The main difference between a static and a dynamic hedge is that the static hedge is established and held until expiration, while a dynamic hedge is periodically rebalanced.
Incorrect
A hedge can be a static hedge or dynamic. The main difference between a static and a dynamic hedge is that the static hedge is established and held until expiration, while a dynamic hedge is periodically rebalanced.
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Question 21 of 30
21. Question
Which of the following refers to a return from the movement of the forward price over time toward the spot price of an asset?
Correct
Roll yield refers to a return from the movement of the forward price over time toward the spot price of an asset. It can be thought of as the profit or loss on a forward or futures contract if the spot price is unchanged at contract expiration Hedging exposes the portfolio to roll yield or roll return.
Incorrect
Roll yield refers to a return from the movement of the forward price over time toward the spot price of an asset. It can be thought of as the profit or loss on a forward or futures contract if the spot price is unchanged at contract expiration Hedging exposes the portfolio to roll yield or roll return.
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Question 22 of 30
22. Question
Which of the following is defined as a net payment made to keep money on deposit at a financial institution or payment of a net fee to invest in short-term instruments?
Correct
A negative rate is defined as a net payment made to keep money on deposit at a financial institution or payment of a net fee to invest in short-term instruments. Negative interest rates were generally considered a hypothetical curiosity before the 2007–2009 financial crises.
Incorrect
A negative rate is defined as a net payment made to keep money on deposit at a financial institution or payment of a net fee to invest in short-term instruments. Negative interest rates were generally considered a hypothetical curiosity before the 2007–2009 financial crises.
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Question 23 of 30
23. Question
Which of the following statements best defines the permanent income hypothesis?
Correct
The permanent income hypothesis asserts that consumer spending is mostly driven by long-run income expectations, not cyclical swings in wealth. This leads to countercyclical behavior, which dampens the business cycle. If income temporarily declines, consumers continue to spend (from savings) as longterm income expectations are more stable.
Incorrect
The permanent income hypothesis asserts that consumer spending is mostly driven by long-run income expectations, not cyclical swings in wealth. This leads to countercyclical behavior, which dampens the business cycle. If income temporarily declines, consumers continue to spend (from savings) as longterm income expectations are more stable.
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Question 24 of 30
24. Question
Which of the following does a basic model for forecasting trend economic growth focus on?
I. Growth in total expenditure.
II. Growth in labor input based on growth in the labor force and labor participation.
III. Growth in the capital.
IV. Growth in total factor productivity.Correct
A basic model for forecasting trend economic growth focuses on the following:
– Growth in labor input based on growth in the labor force and labor participation.
– Growth in the capital.
– Growth in total factor productivity.Incorrect
A basic model for forecasting trend economic growth focuses on the following:
– Growth in labor input based on growth in the labor force and labor participation.
– Growth in the capital.
– Growth in total factor productivity. -
Question 25 of 30
25. Question
The wealth effect is a behavioral economic theory. According to the wealth effect, which of the following statements is/are accurate?
I. Consumers spend more when wealth increases.
II. Consumers spend less when wealth decreases.
III. Consumers spend less when wealth increases.
IV. Consumers spend more when wealth decreases.Correct
The wealth effect suggests consumers spend more when wealth increases and less when it decreases. The idea is that consumers feel more financially secure and confident about their wealth when their homes or investment portfolios increase in value. The wealth effect would contribute to swings between higher and lower spending and would amplify swings in the business cycle.
Incorrect
The wealth effect suggests consumers spend more when wealth increases and less when it decreases. The idea is that consumers feel more financially secure and confident about their wealth when their homes or investment portfolios increase in value. The wealth effect would contribute to swings between higher and lower spending and would amplify swings in the business cycle.
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Question 26 of 30
26. Question
Investors select asset classes based on their desired exposure to common risk factors. Which of the following is one of those risk factors?
I. Saving potential
II. Volatility
III. Default risk
IV. Interest ratesCorrect
Investors select asset classes based on their desired exposure to common risk factors. Examples of risk factors include volatility, liquidity, inflation, interest rates, duration, foreign exchange, and default risk. Risk factor exposures may overlap across multiple asset classes.
Incorrect
Investors select asset classes based on their desired exposure to common risk factors. Examples of risk factors include volatility, liquidity, inflation, interest rates, duration, foreign exchange, and default risk. Risk factor exposures may overlap across multiple asset classes.
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Question 27 of 30
27. Question
Rebalancing an allocation to its precise target weight requires more or less constant trading. Which of the following refers to the rebalancing of a portfolio to its strategic allocation on a predetermined, regular basis (e.g., monthly or quarterly)?
Correct
Calendar rebalancing is the rebalancing of a portfolio to its strategic allocation on a predetermined, regular basis (e.g., monthly or quarterly). Generally, the frequency of rebalancing depends on the volatility of the portfolio, but sometimes rebalancing is scheduled to coincide with review dates.
Incorrect
Calendar rebalancing is the rebalancing of a portfolio to its strategic allocation on a predetermined, regular basis (e.g., monthly or quarterly). Generally, the frequency of rebalancing depends on the volatility of the portfolio, but sometimes rebalancing is scheduled to coincide with review dates.
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Question 28 of 30
28. Question
Range-based rebalancing provides the benefit of minimizing the degree to which asset classes can violate their allocation corridors. Which of the following questions need to be addressed when applying range-based rebalancing?
I. What is the size of the rebalancing corridors?
II. Who is ultimately responsible for rebalancing the portfolio?
III. How frequently should the portfolio be monitored for rebalancing decisions?
IV. What amount of funds should be set aside for the rebalancing process?Correct
With range-based balancing, rebalancing is triggered by changes in value rather than calendar dates. When applying range-based rebalancing, the following questions need to be addressed:
– Who is ultimately responsible for rebalancing the portfolio?
– How frequently should the portfolio be monitored for rebalancing decisions?
– What is the size of the rebalancing corridors?
– Should rebalancing to target weights be fully or only partially corrected?Incorrect
With range-based balancing, rebalancing is triggered by changes in value rather than calendar dates. When applying range-based rebalancing, the following questions need to be addressed:
– Who is ultimately responsible for rebalancing the portfolio?
– How frequently should the portfolio be monitored for rebalancing decisions?
– What is the size of the rebalancing corridors?
– Should rebalancing to target weights be fully or only partially corrected? -
Question 29 of 30
29. Question
Managing and monitoring the portfolio in terms of a client’s changing needs is an important element of portfolio management. Which of the following refers to a deviation from strategic asset allocation due to short-term capital market expectations?
Correct
Deviations from strategic asset allocation due to short-term capital market expectations is called TAA. Tactical asset allocation (TAA) is an active management strategy that deviates from the strategic asset allocation (SAA) to take advantage of perceived short-term opportunities in the market. The motives for TAA may include active management and adding alpha.
Incorrect
Deviations from strategic asset allocation due to short-term capital market expectations is called TAA. Tactical asset allocation (TAA) is an active management strategy that deviates from the strategic asset allocation (SAA) to take advantage of perceived short-term opportunities in the market. The motives for TAA may include active management and adding alpha.
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Question 30 of 30
30. Question
Asset allocation approaches attempt to match investors’ goals with their optimal level of risk. There are three types of asset allocation approaches. Which of the following is a type of asset allocation approach?
I. Asset-only approach
II. Goals-based approach
III. Liability-relative approach
IV. Risk-enabled approachCorrect
There are three types of asset allocation approaches. They are as follows:
– Asset-only approaches. They make asset allocation decisions based on the investor’s assets.
– Liability-relative approaches. They involve asset allocation decisions based on funding liabilities.
– Goals-based approaches. They are geared toward asset allocations for subportfolios, which help an individual achieve lifestyle and aspirational financial objectives.Incorrect
There are three types of asset allocation approaches. They are as follows:
– Asset-only approaches. They make asset allocation decisions based on the investor’s assets.
– Liability-relative approaches. They involve asset allocation decisions based on funding liabilities.
– Goals-based approaches. They are geared toward asset allocations for subportfolios, which help an individual achieve lifestyle and aspirational financial objectives.