What's tested on the Series 65 Portfolio Management Techniques section?

D is correct. A correlation of -0.8 (negative correlation) provides the greatest diversification benefit. When assets move in opposite directions, losses in one investment can be offset by gains in the other, reducing overall portfolio volatility. The closer the correlation is to -1, the greater the diversification benefit.

A (+1.0 correlation) is incorrect because perfect positive correlation means assets move together in lockstep, providing zero diversification benefit. B (+0.5) and C (0) are incorrect because while positive and zero correlations do provide some diversification benefit, they are less effective than negative correlations. Lower and negative correlations create superior risk reduction through diversification.

B is correct. Strategic asset allocation is a long-term approach that establishes target allocations for different asset classes based on the client's Investment Policy Statement (IPS), risk tolerance, time horizon, and financial goals. It follows a "buy and hold" philosophy with periodic rebalancing to maintain targets. Studies show that strategic asset allocation is the primary determinant of portfolio performance, accounting for over 90% of return variability.

A (short-term adjustments) describes tactical asset allocation, not strategic. C (selecting securities) refers to security selection within asset classes, which comes after the allocation decision. D (timing markets) describes market timing, which is not part of strategic asset allocation.

B is correct. Calendar-based rebalancing (also called time-based rebalancing) occurs at predetermined intervals such as monthly, quarterly, or annually, regardless of how much the portfolio has drifted from target allocations. This systematic approach provides discipline and forces the portfolio manager to "buy low, sell high" by selling appreciated assets and buying underperforming ones.

A (threshold deviation) describes percentage-based or threshold rebalancing, not calendar-based. C (market conditions) describes a tactical or discretionary approach rather than calendar-based. D (client transactions) describes event-driven rebalancing, not the systematic calendar-based method.

A is correct. Dollar-cost averaging (DCA) involves investing a fixed dollar amount at regular intervals regardless of the share price. This strategy results in purchasing more shares when prices are low and fewer shares when prices are high, thereby lowering the average cost per share over time. DCA reduces timing risk and is particularly effective during the accumulation phase.

B (value averaging) is incorrect. Value averaging adjusts the investment amount to achieve a predetermined portfolio value growth, which is different from investing fixed amounts. C (share averaging) is not a recognized investment strategy term. D (constant-ratio rebalancing) refers to maintaining fixed percentage allocations in a portfolio, not a systematic purchase strategy.

C is correct. Constant-proportion portfolio insurance (CPPI) is a dynamic strategy where risky asset allocation equals a multiplier times the cushion (portfolio value minus floor value). As the portfolio rises above the floor, CPPI increases equity exposure, following a "buy high, sell low" momentum approach. This protects downside by automatically reducing equity exposure when the portfolio approaches the floor value. CPPI was developed by Black and Jones in 1987.

A (constant-mix) is incorrect because this strategy maintains fixed percentage allocations and rebalances by buying assets that fell and selling those that rose (contrarian approach). B (buy and hold) involves no rebalancing and lets allocations drift with market performance. D (tactical asset allocation) involves active short-term adjustments based on market opportunities, not a formula-driven dynamic approach.

B is correct. A bond ladder with staggered maturities reduces reinvestment risk by spreading out maturity dates over time. This means only a portion of the portfolio matures in any given year, so the investor avoids the risk of having to reinvest a large sum when interest rates are unfavorable. Laddering provides regular liquidity, diversifies interest rate exposure, and smooths out returns over different rate environments.

A (credit risk) is incorrect because laddering doesn't address the risk of issuer default. C (liquidity risk) is partially addressed since bonds mature regularly, but reducing reinvestment risk is the primary benefit. D (default risk) is the same as credit risk and isn't reduced by spreading maturity dates. The main advantage of laddering is avoiding the scenario where all bonds mature at once during a low-rate environment.

A is correct. Constant-mix allocation (also called constant-ratio allocation) maintains fixed percentage allocations and forces a contrarian "buy low, sell high" discipline through periodic rebalancing. When stocks outperform and exceed the 60% target, the portfolio manager sells stocks and buys bonds to restore the 60/40 ratio. This strategy works best in oscillating or range-bound markets where mean reversion occurs.

B (buy and hold) is incorrect because it involves setting an initial allocation without rebalancing, allowing the portfolio to drift with market movements. C (portfolio insurance) refers to strategies like CPPI that protect downside, not maintaining fixed ratios. D (tactical asset allocation) involves actively changing allocations based on market conditions rather than maintaining constant percentages.

B is correct. Purchasing protective puts (also called married puts) provides downside protection while maintaining unlimited upside potential. The put acts as insurance, giving the holder the right to sell at the strike price if the stock falls, while the investor continues to benefit if the stock rises. The cost is the premium paid for the puts.

A (covered calls) is incorrect because while covered calls generate income, they cap the upside potential by obligating the investor to sell at the strike price if called. This doesn't provide the unlimited upside mentioned in the question. C (selling the stock) eliminates the position entirely rather than hedging it. D (short position) would create a hedge but is impractical and potentially problematic as it means betting against your own holding.

C is correct. Modern Portfolio Theory research shows that approximately 30 to 40 randomly selected securities are needed to diversify away most unsystematic (company-specific) risk. Beyond this point, additional diversification provides diminishing marginal benefits. However, no amount of diversification can eliminate systematic (market) risk, which affects all securities.

A (5 to 10) is incorrect because this level of diversification leaves substantial unsystematic risk remaining. B (15 to 20) is incorrect because while this provides meaningful diversification, it doesn't eliminate most unsystematic risk. D (100 or more) is incorrect because this exceeds what's necessary and may lead to over-diversification where the portfolio simply mirrors the market without providing additional risk reduction.

C is correct. Dollar-cost averaging does NOT guarantee positive returns. Like any investment strategy, DCA is subject to market risk, and if the investment declines in value and doesn't recover, the investor will still experience losses. DCA reduces timing risk and can lower average purchase costs, but it cannot eliminate market risk or guarantee profits.

A (reduces timing risk) is a true advantage because spreading purchases over time means you avoid the risk of investing all funds at a market peak. B (lower average cost) is correct because buying more shares when prices are low mathematically results in a lower average cost per share compared to buying a fixed number of shares. D (investment discipline) is correct because the systematic nature of DCA enforces consistent investing regardless of market sentiment or emotional reactions.