AAMS MODULE 3 COMPREHENSIVE EXAMINATION
ASSET CLASSES, PERFORMANCE, AND PORTFOLIO
MANAGEMENT QUESTIONS WITH VERIFIED ANSWERS
Question 1
One implication of the Brinson study is that investors should:
A) Ignore asset allocation and focus only on market timing
B) Ignore market timing and securities selection entirely
C) Concentrate on asset allocation with less attention given to securities selection
and market timing
D) Focus exclusively on individual stock picking
Correct Answer: C
Explanation: The Brinson study found that asset allocation explains over 90% of
portfolio return variability. Securities selection and market timing contribute very
little relative to asset allocation.
Question 2
A U.S. dollar-denominated instrument that is a CD issued by foreign branches of
major American and foreign commercial banks is a:
A) Negotiable certificate of deposit
B) Yankee certificate of deposit
C) Eurodollar certificate of deposit
D) Banker's acceptance
Correct Answer: C
,Explanation: Eurodollar CDs are issued by foreign branches of banks (both
American and foreign) outside the U.S. but denominated in U.S. dollars. Yankee
CDs are issued by foreign banks from their U.S. branches.
Question 3
Based on historical performance data, which class of assets would be likely to
provide the greatest pretax total return over the long term?
A) Small company stocks
B) Long-term corporate bonds
C) Large company stocks
D) Long-term government bonds
Correct Answer: A
Explanation: According to Ibbotson and other major tracking data, small company
stocks have generally outperformed all other asset classes over the long term,
though with higher volatility.
Question 4
According to Ibbotson data, which one of the following had the smallest standard
deviation since 1926?
A) Long-term corporate bonds
B) Intermediate-term government bonds
C) Treasury bills
D) Large company stocks
Correct Answer: C
Explanation: Treasury bills have the smallest standard deviation because their
returns are stable and virtually risk-free in nominal terms.
,Question 5
Investment professional Bill Winters received the latest long-term total return
data. Common stocks returned 8% compounded with a standard deviation of
19.0; T-bills had a 1.25% return with a standard deviation of 3.4. What is the
expected return of a portfolio of 60% stocks and 40% T-bills?
A) 3.95%
B) 4.63%
C) 5.30%
D) 7.33%
Correct Answer: C
Explanation: Expected return = (0.60 × 8%) + (0.40 × 1.25%) = 4.8% + 0.5% = 5.3%.
Standard deviation is not simply weighted.
Question 6
Tactical asset allocation attempts to:
A) Optimize the risk/return balance on long-term portfolios
B) Create efficient portfolios that provide the best balance of risk and return over
the long term
C) Move assets from those that appear overvalued to those that appear
undervalued
D) Utilize index funds for core positions and actively managed funds for satellites
Correct Answer: C
Explanation: Tactical asset allocation uses security selection and market timing
techniques to shift assets from those perceived to be overvalued to those
perceived to be undervalued.
Question 7
Which one of the following is a unique risk associated with international bonds?
, A) Interest rate risk
B) Currency risk
C) Call risk
D) Purchasing power risk
Correct Answer: B
Explanation: Currency (exchange rate) risk is unique to international bonds
because of the possibility of loss when converting foreign currency back to U.S.
dollars.
Question 8
Money market mutual funds invest in all of the following EXCEPT:
A) Commercial paper
B) Corporate bonds
C) Repurchase agreements
D) Treasury bills
Correct Answer: B
Explanation: Corporate bonds have maturities longer than one year and higher
risk, making them unsuitable for money market funds, which invest in short-term,
high-quality instruments.
Question 9
A mutual fund sales load that is assessed on a descending scale if the fund is sold
within the first five or six years of purchase is called a:
A) Redemption fee
B) Front-end load
C) Contingent deferred sales charge (CDSC)
D) Level load
Correct Answer: C
ASSET CLASSES, PERFORMANCE, AND PORTFOLIO
MANAGEMENT QUESTIONS WITH VERIFIED ANSWERS
Question 1
One implication of the Brinson study is that investors should:
A) Ignore asset allocation and focus only on market timing
B) Ignore market timing and securities selection entirely
C) Concentrate on asset allocation with less attention given to securities selection
and market timing
D) Focus exclusively on individual stock picking
Correct Answer: C
Explanation: The Brinson study found that asset allocation explains over 90% of
portfolio return variability. Securities selection and market timing contribute very
little relative to asset allocation.
Question 2
A U.S. dollar-denominated instrument that is a CD issued by foreign branches of
major American and foreign commercial banks is a:
A) Negotiable certificate of deposit
B) Yankee certificate of deposit
C) Eurodollar certificate of deposit
D) Banker's acceptance
Correct Answer: C
,Explanation: Eurodollar CDs are issued by foreign branches of banks (both
American and foreign) outside the U.S. but denominated in U.S. dollars. Yankee
CDs are issued by foreign banks from their U.S. branches.
Question 3
Based on historical performance data, which class of assets would be likely to
provide the greatest pretax total return over the long term?
A) Small company stocks
B) Long-term corporate bonds
C) Large company stocks
D) Long-term government bonds
Correct Answer: A
Explanation: According to Ibbotson and other major tracking data, small company
stocks have generally outperformed all other asset classes over the long term,
though with higher volatility.
Question 4
According to Ibbotson data, which one of the following had the smallest standard
deviation since 1926?
A) Long-term corporate bonds
B) Intermediate-term government bonds
C) Treasury bills
D) Large company stocks
Correct Answer: C
Explanation: Treasury bills have the smallest standard deviation because their
returns are stable and virtually risk-free in nominal terms.
,Question 5
Investment professional Bill Winters received the latest long-term total return
data. Common stocks returned 8% compounded with a standard deviation of
19.0; T-bills had a 1.25% return with a standard deviation of 3.4. What is the
expected return of a portfolio of 60% stocks and 40% T-bills?
A) 3.95%
B) 4.63%
C) 5.30%
D) 7.33%
Correct Answer: C
Explanation: Expected return = (0.60 × 8%) + (0.40 × 1.25%) = 4.8% + 0.5% = 5.3%.
Standard deviation is not simply weighted.
Question 6
Tactical asset allocation attempts to:
A) Optimize the risk/return balance on long-term portfolios
B) Create efficient portfolios that provide the best balance of risk and return over
the long term
C) Move assets from those that appear overvalued to those that appear
undervalued
D) Utilize index funds for core positions and actively managed funds for satellites
Correct Answer: C
Explanation: Tactical asset allocation uses security selection and market timing
techniques to shift assets from those perceived to be overvalued to those
perceived to be undervalued.
Question 7
Which one of the following is a unique risk associated with international bonds?
, A) Interest rate risk
B) Currency risk
C) Call risk
D) Purchasing power risk
Correct Answer: B
Explanation: Currency (exchange rate) risk is unique to international bonds
because of the possibility of loss when converting foreign currency back to U.S.
dollars.
Question 8
Money market mutual funds invest in all of the following EXCEPT:
A) Commercial paper
B) Corporate bonds
C) Repurchase agreements
D) Treasury bills
Correct Answer: B
Explanation: Corporate bonds have maturities longer than one year and higher
risk, making them unsuitable for money market funds, which invest in short-term,
high-quality instruments.
Question 9
A mutual fund sales load that is assessed on a descending scale if the fund is sold
within the first five or six years of purchase is called a:
A) Redemption fee
B) Front-end load
C) Contingent deferred sales charge (CDSC)
D) Level load
Correct Answer: C
