60 RELATE TO EXECUTION OF PORTFOLIO DECISIONS

Questions 55-60 relate to Execution of Portfolio Decisions: Monitoring and

Rebalancing.

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:

A) buy and hold.

B) constant mix.

C) constant proportion portfolio insurance.

Question #56 of 60

Determine the preferred dynamic rebalancing strategy if the market is expected to be highly

volatile, but more or less flat.

A) Buy and hold.

B) Constant mix.

C) Constant proportion portfolio insurance.

Question #57 of 60

Which of the following statements about CPPI strategies is probably least correct?

A) CPPI strategies represent the purchase of portfolio insurance because they buy stocks as they rise

and sell them as they fall.

B) CPPI strategies offer good upside potential because they increase exposure to risky assets as the

market rises.

C) Due to the concave nature of CPPI strategies, they offer good downside protection.

Question #58 of 60

Mascarella has instructed Tucker to rebalance annually to maintain a corridor of ± 5% for

equity. Given the constraint, Tucker should:

A) reallocate approximately $70,000 of the increase in equity to debt and cash.

B) reallocate the entire $120,000 increase in equity to debt and cash.

C) make no adjustments.

Question #59 of 60

Tucker has tried to make Mascarella understand the benefits of percentage-of-portfolio

rebalancing relative to calendar rebalancing. Which of the following statements made by

Tucker is probably least correct?

A) Calendar rebalancing provides discipline while requiring less monitoring.

B) Percentage-of-portfolio rebalancing minimizes the amount by which the allocations stray from

their strategic levels.

C) Combining calendar and percentage of portfolio rebalancing would be the most costly.

Question #60 of 60

Which of the following would generally suggest a narrower tolerance band?

A) Assets in the portfolio tend to be illiquid.

B) Highly volatile assets.

C) Correlated portfolio assets.