CFA_L1_Assignment_147_Lesson 2: Portfolio Construction

______________ expectations refer to a portfolio manager's expectations regarding the risk and return prospects of various asset classes.

1. Capital market expectations

when defining asset classes, these three rules should be followed:

1. Each asset class should contain assets that carry a similar expected return and risk, and correlation among the assets within a class should be relatively high. 2. Each asset class should provide diversification benefits. The correlation of an asset class with other asset classes should be relatively low. 3. Asset classes should be mutually exclusive and should cover all investment alternatives.

____________ This is the process of subdividing the desired level of portfolio risk (which has been determined in the IPS) across the different sources of investment returns (i.e., the strategic asset allocation, tactical asset allocation, and security selection).

1. Risk budgeting:

____________ refers to an allocation where the manager deliberately deviates from the strategic asset allocation for the short term if she believes that another asset class will perform relatively better.

1. Tactical asset allocation

__________________ defines how the investor's funds are divided across different asset classes.

1. The strategic asset allocation

T/F Statement 1: A change in the investor's objectives or constraints would cause a movement in the efficient frontier.

F ****A change in capital market expectations would cause a movement in the efficient frontier.

T/F Statement 2: A shift in the investor's indifference curve would require the strategic asset allocation to be adjusted.

T

Which of the following is least likely a consideration when defining asset classes? Asset classes should cover all investment alternatives. The correlations among assets within a class should be relatively low. The correlations among different asset classes should be relatively low.

b. this one is least likely because

The primary determinant of portfolio returns is how the portfolio manager allocates funds across: Securities within an asset class. Different geographic regions. Various asset classes.

c. A portfolio's allocation across various asset classes is the primary determinant of portfolio returns.

Under the core‐satellite approach, investors invest most of their funds in: Active investments. Equity securities. Passive investments.

c. passive investments Under the core‐satellite approach, investors invest most of their funds in passive investments and trade a small proportion of assets actively.

SSA is...

strategic asset allocation