The SAA weights MPT adopted are best described as primarily reflecting which of the following?
A. The plan's short-term return forecasts for each asset class
B. The plan's long-term investment objectives, risk tolerance, and liability characteristics
C. Current market valuations and price momentum
D. The average allocation held by peer pension funds
Show answer and reasoning
Correct answer: B. The plan's long-term investment objectives, risk tolerance, and liability characteristics
- A: SAA is a long-horizon policy weight, not a short-term forecast; short-term views belong to TAA.
- C: Reacting to current valuations is the domain of tactical, not strategic, allocation.
- D: SAA is derived from the plan's own objectives and liabilities, not from peer benchmarking.
Source: CFA Program Curriculum, Level III, "Overview of Asset Allocation" -- Strategic asset allocation defined as policy portfolio weights reflecting the investor's objectives, constraints, and risk tolerance over the long run (https://www.cfainstitute.org/en/membership/professional-development/refresher-readings)
Patel's objection to permitting TAA is best supported by which of the following?
A. TAA is prohibited for pension plans subject to fiduciary oversight
B. SAA weights cannot legally be changed once adopted
C. TAA adds value only if the manager's forecasting skill exceeds the implementation and transaction costs incurred
D. TAA and SAA differ only in how frequently the portfolio is rebalanced
Show answer and reasoning
Correct answer: C. TAA adds value only if the manager's forecasting skill exceeds the implementation and transaction costs incurred
- A: No such prohibition exists; TAA is a legitimate, if debated, practice.
- B: SAA weights are periodically revisited and can be revised through governance, not frozen by law.
- D: TAA involves deliberate, information-driven deviations from SAA, not merely a different rebalancing schedule.
Source: CFA Program Curriculum, Level III, "Overview of Asset Allocation" -- Discussion of tactical asset allocation as a positive-alpha strategy requiring skill that exceeds implementation costs (https://www.cfainstitute.org/en/membership/professional-development/refresher-readings)
The plus or minus 5 percentage-point band with a mandatory 18-month unwind is best characterized as a:
A. Rebalancing corridor rather than a tactical allocation program
B. Constraint that effectively eliminates any tactical positioning
C. Formal risk-budgeting overlay separate from the SAA
D. Governance framework that bounds the magnitude and duration of tactical positions
Show answer and reasoning
Correct answer: D. Governance framework that bounds the magnitude and duration of tactical positions
- A: A rebalancing corridor governs drift back toward SAA weights; this policy instead authorizes active deviations triggered by a valuation signal.
- B: The band permits, rather than eliminates, deviations up to 5 percentage points.
- C: The policy sets limits on TAA itself; it is not a separate risk-budgeting system for active managers.
Source: CFA Program Curriculum, Level III, "Overview of Asset Allocation" -- TAA implementation typically bounded by explicit limits on deviation size and holding period to control governance and cost risk (https://www.cfainstitute.org/en/membership/professional-development/refresher-readings)
Eighteen months after a tactical equity overweight is initiated, the valuation signal that triggered it has not reversed. Under Farrow's proposed policy, the committee should:
A. Automatically extend the tactical position until the signal reverses
B. Close the tactical position and return equity exposure to the SAA weight regardless of the current signal
C. Increase the size of the tactical position
D. Convert the tactical position into a new strategic weight without conducting a new asset-liability study
Show answer and reasoning
Correct answer: B. Close the tactical position and return equity exposure to the SAA weight regardless of the current signal
- A: The policy specifies a firm 18-month unwind, not an open-ended extension.
- C: Nothing in the policy authorizes increasing position size after the holding period expires.
- D: Changing the SAA requires a deliberate asset-liability study, not an ad hoc conversion of a tactical bet.
Source: CFA Program Curriculum, Level III, "Overview of Asset Allocation" -- Time-bound TAA policies require unwinding positions at the stated horizon irrespective of whether the signal has reversed (https://www.cfainstitute.org/en/membership/professional-development/refresher-readings)
The corner solutions produced by Chen's unconstrained optimizer most likely arise because:
A. Mean-variance optimization always converges to single-asset portfolios
B. Unconstrained MVO output is highly sensitive to small estimation errors in the expected return inputs
C. The correlation between equities and bonds was entered with the wrong sign
D. Ten years of monthly data is an insufficient sample size to compute any statistic
Show answer and reasoning
Correct answer: B. Unconstrained MVO output is highly sensitive to small estimation errors in the expected return inputs
- A: MVO does not inherently converge to single-asset solutions; it does so here because of input sensitivity, not as a general property.
- C: A correlation of 0.15 is a plausible positive value and is not itself evidence of a sign error.
- D: Ten years of monthly data (120 observations) is a workable sample; the issue is input sensitivity, not sample size alone.
Source: CFA Program Curriculum, Level III, "Overview of Asset Allocation" -- Discussion of MVO's sensitivity to expected return estimates and the tendency to produce concentrated, unintuitive corner portfolios (https://www.cfainstitute.org/en/membership/professional-development/refresher-readings)
