CFA Level III — Asset Allocation and Private Wealth flashcards
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The investment policy statement, private wealth (risk tolerance, human capital, goals-based investing, estate planning), institutional investors, liability-driven investing and immunization, and rebalancing policy.
Learn deck · part of CFA Program Level III · written against: CFA Program Level III curriculum (2026 and 2027 topic outlines): the core, plus Portfolio Management and Private Wealth pathway topics. Updated 2026-10-10.
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Which roles does an investment policy statement play in the relationship between a client and a manager?It records the objectives, constraints and strategic allocation (or ranges), assigns responsibilities and review procedures, and gives a standard for judging the manager.Investment Policy Statement › Return and Risk Objectives
Why: a written policy keeps decisions disciplined when markets turn and the client is tempted to abandon the plan. -
How does an absolute return objective differ from a relative return objective?An absolute objective names a target level, such as 6% a year or inflation plus 4%; a relative objective is set against a benchmark, such as an index, a peer group or the growth of liabilities.Investment Policy Statement › Return and Risk Objectives
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Which factors determine a private client's ability to take risk?Her time horizon, the size of her wealth relative to her needs, the stability of her income and how flexible or essential her goals are.Private Wealth Management › Risk Tolerance
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Why is willingness to take risk harder to assess than ability?Willingness is psychological: it is measured with questionnaires, interviews and past behaviour, and answers shift with framing and recent market experience, while ability rests on measurable facts such as wealth, income and horizon.Private Wealth Management › Risk Tolerance
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Which features raise a defined benefit plan's ability to take investment risk?A healthy funded status, a financially strong sponsor whose earnings are weakly correlated with plan assets, a young workforce with few retirees, and a plan that is small relative to the sponsor.Institutional Investors › Pension Plans
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Why is a high correlation between a sponsor's business results and its pension assets a concern?The plan would tend to become underfunded just when the sponsor can least afford to make extra contributions, so a high correlation lowers the plan's ability to take risk.Institutional Investors › Pension Plans
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How do calendar rebalancing and percentage-of-portfolio rebalancing differ?Calendar rebalancing restores the target mix at fixed intervals whatever has happened; percentage-of-portfolio (corridor) rebalancing trades only when a weight breaches its corridor, which requires closer monitoring.Asset Allocation › Rebalancing
Watch out: a hybrid approach checks the corridors only at set calendar dates. -
An asset class has a 60% target and a corridor of plus or minus 10% of its target. Within which range is no rebalancing needed?54% to 66% — 60% × 0.9 to 60% × 1.1.Asset Allocation › Rebalancing
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Which conditions immunize a single future liability with a bond portfolio?The portfolio's market value must at least equal the liability's present value, its Macaulay duration must match the liability's horizon, and its convexity should be as low as possible to limit risk from non-parallel shifts.Fixed-Income Portfolio Management › Liability-Driven Investing
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For a stream of multiple liabilities, which conditions does duration-matching immunization require?Asset market value at least equal to the present value of the liabilities, asset money duration (BPV) matched to the liabilities', and asset convexity above the liabilities' but as low as possible.Fixed-Income Portfolio Management › Liability-Driven Investing
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About these cards
Review status: Second-reader reviewed, with corrections applied.
Checked against:
- CFA Program 2026 and 2027 Level III topic outlines, core and Portfolio Management and Private Wealth pathways (topic outline only; no text copied)
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