Canadian Securities Course (CSC) Level 2 Practice Exam

What is emphasized during the asset allocation phase to improve investment returns according to the portfolio management process?

1. Market timing

2. Security selection

3. Behavioral finance principles

4. Asset class switching

The correct answer is: Asset class switching

During the asset allocation phase, the focus is primarily on diversifying investments among various asset classes to enhance overall portfolio returns and mitigate risk. This phase involves determining how much to invest in equities, fixed income, commodities, cash, and other asset categories based on factors such as risk tolerance, investment goals, and market conditions. The correct emphasis on asset class switching reflects the strategy of redistributing investments among different asset classes to capitalize on anticipated market movements or changes in economic conditions. This approach stems from the understanding that different asset classes perform differently over various market cycles, and adjusting the allocations can lead to improved investment returns. Factors such as market timing, security selection, and behavioral finance principles pertain to specific strategies or psychological influences but are not the primary focus during the asset allocation phase itself. For instance, market timing involves predicting future market movements, which can be challenging and risky, while security selection concentrates on choosing specific investments within an asset class. Behavioral finance principles relate to investor psychology and decision-making processes but do not directly impact the structural foundation of how an asset allocation is determined.