CFA ESG - Chapter 8Exam Questions &
Answers 100% Correct!
What is seen as one of the most exciting yet least developed areas of ESG integration?
- ANSWERSESG integration into informing and shaping strategic asset allocation.
Why might ESG integration at the asset allocation level be redundant? - ANSWERSDue
to the misalignment between investors' traditional efforts with asset allocators believing
that ESG risk resides at the underlying security level, not at the asset allocation level.
Dynamic Asset Allocation - ANSWERSestablishes initial asset allocation under much
shorter intervals; long-term asset allocation but employing short-term, tactical trading to
maintain investment allocation targets.
strategic asset allocation models - ANSWERS
How has ESG integration into asset allocation changed in recent years? -
ANSWERSGreat coverage beyond equities and corporate fixed income has now made
ESG integration at the strategic asset allocation level more relevant- i.e., increased
coverage of other asset classes such as real estate and private equity. Must remember
that asset allocation is all about diversification, so the more asset classes that are
covered, the better it is for ESG integration.
Mean-variance optimization (MVO) - ANSWERSmix of assets that produces the
minimum standard deviation (as a proxy for risk) for the maximum level of expected
return
Factor risk allocation - ANSWERSdiversified portfolio based on sources of risk. They
typically include such factors as fundamental risks (gross domestic product [GDP],
interest rates, and inflation) as well as market risks (equity risk premium, illiquidity, and
volatility).
Total portfolio analysis (TPA) - ANSWERScloser review and interplay between the
strategy setting process and alignment of investment goals. asset allocations are made
on expected risk exposures and are less constrained by asset class 'buckets' than are
traditional MVO approaches
Dynamic asset allocation (DAA) - ANSWERSriven by changes in risk tolerance, typically
induced by cumulative performance relative to investment goals or an approaching
investment horizon
Liability driven asset allocation - ANSWERSseeks to find the most efficient asset class
mix driven by a fund's liabilities. It is simultaneously concerned with the return of the
, assets, the change in value of the liabilities, and how assets and liabilities interact to
determine the overall portfolio value.
Regime switching models - ANSWERSmodel abrupt and persistent changes in financial
variables due to shifts in regulations, policies, and other secular changes. They capture
fat tails, skewness, and time-varying correlations
What is the most promising traditional asset allocation approach for the growth in ESG
integration? - ANSWERSThe Black-Litterman asset allocation model (BLM). Anchored
by the global equilibrium market and not requiring return estimates for each asset class,
it can arguably better accommodate areas like pricing climate risk.
Which of the 3 ESG pillars is strategic asset allocation usually the most skewed
towards? What is this seen as? - ANSWERSEnvironmental, specifically climate issues -
which are seen as the most material ESG factor for institutional investors to address
within their strategic asset allocations.
portfolio risk - ANSWERS1. isolated risk of individual asset
2. correlation risk from combo of assets
What will integrating ESG methodology do to an asset allocation? - ANSWERSIt will
introduce some diversification effect or skewness - e.g., a skew as the result of a
screen.
What is seen as the most material ESG factor for institutional investors to address
within their asset allocation strategies? How must asset allocation look at this? What
about the two types of risks involves? - ANSWERSClimate change. Asset allocation
must see how climate change represents different risks across asset classes
(materiality), recognising different asset class sensitivities alongside systemic and
company-specific risks. Portfolios will also have differing levels of physical and
transitional risks, therefore different weightings.
climate scenario analysis - ANSWERSimportant in asset allocation process and
micro/macro understanding of ESG in a portfolio
1. phys risk
2. transition risk
Who is the IPR and what do they state? - ANSWERSInevitable Policy Response - they
assume that governments may potentially respond to increasing climate-borne damage
in a sudden reflex reaction - i.e., quick, sharp regulation or taxes which can seriously hit
companies if they're not prepared.
What is the Paris Aligned Investment Initiative (PAII)? - ANSWERSA European asset
owner-coordinated and led initiative working to develop methodologies and assessment
tools related to aligning investment portfolios to the Paris Agreement. A lot of the work is
around net zero.
Answers 100% Correct!
What is seen as one of the most exciting yet least developed areas of ESG integration?
- ANSWERSESG integration into informing and shaping strategic asset allocation.
Why might ESG integration at the asset allocation level be redundant? - ANSWERSDue
to the misalignment between investors' traditional efforts with asset allocators believing
that ESG risk resides at the underlying security level, not at the asset allocation level.
Dynamic Asset Allocation - ANSWERSestablishes initial asset allocation under much
shorter intervals; long-term asset allocation but employing short-term, tactical trading to
maintain investment allocation targets.
strategic asset allocation models - ANSWERS
How has ESG integration into asset allocation changed in recent years? -
ANSWERSGreat coverage beyond equities and corporate fixed income has now made
ESG integration at the strategic asset allocation level more relevant- i.e., increased
coverage of other asset classes such as real estate and private equity. Must remember
that asset allocation is all about diversification, so the more asset classes that are
covered, the better it is for ESG integration.
Mean-variance optimization (MVO) - ANSWERSmix of assets that produces the
minimum standard deviation (as a proxy for risk) for the maximum level of expected
return
Factor risk allocation - ANSWERSdiversified portfolio based on sources of risk. They
typically include such factors as fundamental risks (gross domestic product [GDP],
interest rates, and inflation) as well as market risks (equity risk premium, illiquidity, and
volatility).
Total portfolio analysis (TPA) - ANSWERScloser review and interplay between the
strategy setting process and alignment of investment goals. asset allocations are made
on expected risk exposures and are less constrained by asset class 'buckets' than are
traditional MVO approaches
Dynamic asset allocation (DAA) - ANSWERSriven by changes in risk tolerance, typically
induced by cumulative performance relative to investment goals or an approaching
investment horizon
Liability driven asset allocation - ANSWERSseeks to find the most efficient asset class
mix driven by a fund's liabilities. It is simultaneously concerned with the return of the
, assets, the change in value of the liabilities, and how assets and liabilities interact to
determine the overall portfolio value.
Regime switching models - ANSWERSmodel abrupt and persistent changes in financial
variables due to shifts in regulations, policies, and other secular changes. They capture
fat tails, skewness, and time-varying correlations
What is the most promising traditional asset allocation approach for the growth in ESG
integration? - ANSWERSThe Black-Litterman asset allocation model (BLM). Anchored
by the global equilibrium market and not requiring return estimates for each asset class,
it can arguably better accommodate areas like pricing climate risk.
Which of the 3 ESG pillars is strategic asset allocation usually the most skewed
towards? What is this seen as? - ANSWERSEnvironmental, specifically climate issues -
which are seen as the most material ESG factor for institutional investors to address
within their strategic asset allocations.
portfolio risk - ANSWERS1. isolated risk of individual asset
2. correlation risk from combo of assets
What will integrating ESG methodology do to an asset allocation? - ANSWERSIt will
introduce some diversification effect or skewness - e.g., a skew as the result of a
screen.
What is seen as the most material ESG factor for institutional investors to address
within their asset allocation strategies? How must asset allocation look at this? What
about the two types of risks involves? - ANSWERSClimate change. Asset allocation
must see how climate change represents different risks across asset classes
(materiality), recognising different asset class sensitivities alongside systemic and
company-specific risks. Portfolios will also have differing levels of physical and
transitional risks, therefore different weightings.
climate scenario analysis - ANSWERSimportant in asset allocation process and
micro/macro understanding of ESG in a portfolio
1. phys risk
2. transition risk
Who is the IPR and what do they state? - ANSWERSInevitable Policy Response - they
assume that governments may potentially respond to increasing climate-borne damage
in a sudden reflex reaction - i.e., quick, sharp regulation or taxes which can seriously hit
companies if they're not prepared.
What is the Paris Aligned Investment Initiative (PAII)? - ANSWERSA European asset
owner-coordinated and led initiative working to develop methodologies and assessment
tools related to aligning investment portfolios to the Paris Agreement. A lot of the work is
around net zero.
