QUESTION: 85 Exam Topic: Portfolio Management and Wealth Planning

Wealth Management's top economist, Frederick Milton, is an economic cycle forecaster- Milton's economic forecasts indicate an economic upswing that will impact all goods and services sectors. Milton presents his economic findings to the rest of Wealth Management's professionals at their monthly meeting. All are excited about Milton's forecast of an improving economic condition that should translate into a steadily rising stock market.
Nathaniel Norton and Timothy Tucker have confidence in Milton's capabilities and decide to meet with their clients. Their first meeting is with Elizabeth Mascarella to whom Norton recommends a dynamic asset allocation strategy to take advantage of Milton's forecast. However, Mascarella is concerned because the somewhat persistent back-and-forth of economic activity has translated into an oscillating stock market. Mascarella questions Norton's recommendation and asks Tucker which strategy should be followed if the market continues as it has, instead of making such "wonderful" strides.
It is one year later and Frederick Milton's economic forecast has been correct, and the market has trended upward as expected. Mascarella's strategic allocation to equity, which was $600,000 of a total portfolio of
$1,000,000, has increased 20%. Her overall portfolio, which contains equity, debt, and some cash, is now valued at $1,150,000. Tucker meets with Mascarella and indicates it may be time to rebalance her portfolio.

Assuming a steadily rising market, the best strategy for Mascarella is:

buy and hold.
constant mix.
constant proportion portfolio insurance.

Answer(s): C

Explanation:

In a market expected to increase in relatively constant fashion, constant proportion portfolio insurance will outperform the other strategies. In a constant proportion strategy, a fixed proportion (m) of the cushion (= assets - floor value) is invested in stocks. CPPI refers to a constant proportion strategy with m > 1. Buy and hold is equivalent to the constant proportion strategy with m - 1, so its performance would be good, but not as good. (Study Session 16, LOS 46.h)

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QUESTION: 86 Exam Topic: Portfolio Management and Wealth Planning

Wealth Management's top economist, Frederick Milton, is an economic cycle forecaster- Milton's economic forecasts indicate an economic upswing that will impact all goods and services sectors. Milton presents his economic findings to the rest of Wealth Management's professionals at their monthly meeting. All are excited about Milton's forecast of an improving economic condition that should translate into a steadily rising stock market.
Nathaniel Norton and Timothy Tucker have confidence in Milton's capabilities and decide to meet with their clients. Their first meeting is with Elizabeth Mascarella to whom Norton recommends a dynamic asset allocation strategy to take advantage of Milton's forecast. However, Mascarella is concerned because the somewhat persistent back-and-forth of economic activity has translated into an oscillating stock market.
Mascarella questions Norton's recommendation and asks Tucker which strategy should be followed if the market continues as it has, instead of making such "wonderful" strides.
It is one year later and Frederick Milton's economic forecast has been correct, and the market has trended upward as expected. Mascarella's strategic allocation to equity, which was $600,000 of a total portfolio of
$1,000,000, has increased 20%. Her overall portfolio, which contains equity, debt, and some cash, is now valued at $1,150,000. Tucker meets with Mascarella and indicates it may be time to rebalance her portfolio.

Determine the preferred dynamic rebalancing strategy if the market is expected to be highly volatile, but more or less flat.

Buy and hold.
Constant mix.
Constant proportion portfolio insurance.

Answer(s): B

Explanation:

In a market expected to oscillate, constant mix strategies (fixed percentage allocation to stocks) outperform the others, since they involve buying/selling stocks when prices fall/ rise. (Study Session 16, LOS 46.h)

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QUESTION: 87 Exam Topic: Portfolio Management and Wealth Planning

Wealth Management's top economist, Frederick Milton, is an economic cycle forecaster- Milton's economic forecasts indicate an economic upswing that will impact all goods and services sectors. Milton presents his economic findings to the rest of Wealth Management's professionals at their monthly meeting. All are excited about Milton's forecast of an improving economic condition that should translate into a steadily rising stock market.
Nathaniel Norton and Timothy Tucker have confidence in Milton's capabilities and decide to meet with their clients. Their first meeting is with Elizabeth Mascarella to whom Norton recommends a dynamic asset allocation strategy to take advantage of Milton's forecast. However, Mascarella is concerned because the somewhat persistent back-and-forth of economic activity has translated into an oscillating stock market.
Mascarella questions Norton's recommendation and asks Tucker which strategy should be followed if the market continues as it has, instead of making such "wonderful" strides.
It is one year later and Frederick Milton's economic forecast has been correct, and the market has trended upward as expected. Mascarella's strategic allocation to equity, which was $600,000 of a total portfolio of
$1,000,000, has increased 20%. Her overall portfolio, which contains equity, debt, and some cash, is now valued at $1,150,000. Tucker meets with Mascarella and indicates it may be time to rebalance her portfolio.

Which of the following statements about CPPI strategies is not correct?

CPPI strategies represent the purchase of portfolio insurance because they will buy stocks a3 they rise and sell them as they fall.
CPPI strategies offer good upside potential because they increase exposure to risky assets as the market rises.
Due to the concave nature of CPPI strategies, they offer good downside protection.

Answer(s): C

Explanation:

Although CPPI strategies offer downside protection, it is their convex nature chat provides it. Statements A and B are correct. (Study Session 16, LOS 46.h)

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QUESTION: 88 Exam Topic: Portfolio Management and Wealth Planning

Wealth Management's top economist, Frederick Milton, is an economic cycle forecaster- Milton's economic forecasts indicate an economic upswing that will impact all goods and services sectors. Milton presents his economic findings to the rest of Wealth Management's professionals at their monthly meeting. All are excited about Milton's forecast of an improving economic condition that should translate into a steadily rising stock market.
Nathaniel Norton and Timothy Tucker have confidence in Milton's capabilities and decide to meet with their clients. Their first meeting is with Elizabeth Mascarella to whom Norton recommends a dynamic asset allocation strategy to take advantage of Milton's forecast. However, Mascarella is concerned because the somewhat persistent back-and-forth of economic activity has translated into an oscillating stock market.
Mascarella questions Norton's recommendation and asks Tucker which strategy should be followed if the market continues as it has, instead of making such "wonderful" strides.
It is one year later and Frederick Milton's economic forecast has been correct, and the market has trended upward as expected. Mascarella's strategic allocation to equity, which was $600,000 of a total portfolio of
$1,000,000, has increased 20%. Her overall portfolio, which contains equity, debt, and some cash, is now valued at $1,150,000. Tucker meets with Mascarella and indicates it may be time to rebalance her portfolio.

Mascarella has instructed Tucker to rebalance annually to maintain a corridor of ± 5% for equity. Given the constraint, Tucker should:

reallocate an additional $50,000 to equity.
reallocate the entire $120,000 to debt and cash.
make no adjustments.

Answer(s): C

Explanation:

The portfolio has increased from $1,000,000 to $1,150,000, representing a 20% increase ($120,000) in equities and a $30,000 increase in debt and cash ($1,150,000 — $720,000 = $430,000). Since equities now represent 62.6% (= 720,000 / 1,150,000) of the portfolio and their strategic allocation is 60%, Tracman should take no action. (Study Session 16, LOS 46.f)

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QUESTION: 85 Exam Topic: Portfolio Management and Wealth Planning

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