Free CAIA Level II Asset Allocation Practice Questions

B is correct. OBPI combines a long position in the risky portfolio with a long put option (or a synthetic equivalent) that guarantees a minimum floor value at the horizon. The put provides the insurance payoff when the portfolio falls below the floor.
Choice A is incorrect because allocating between risky and cash in a fixed ratio describes buy-and-hold or constant-mix strategies, not OBPI.
Choice C is incorrect because buying calls while holding all assets in cash is a pure option speculation approach, not portfolio insurance, and it does not preserve the full risky-portfolio exposure.
Choice D is incorrect because selling covered calls caps upside and offers only limited downside protection; it is not the defining structure of OBPI.

D is correct. In TPA, a strategic overlay uses instruments such as derivatives or liquid proxies at the total-portfolio level to adjust factor exposures — adding or reducing equity beta, duration, or inflation sensitivity — without requiring changes to individual manager mandates. This preserves manager autonomy while giving the CIO control over aggregate risk.
Choice A is incorrect because a strategic overlay is not a fund-of-funds structure; it operates above individual manager portfolios as a risk-expression tool.
Choice B is incorrect because compliance with benchmark constraints is a governance function distinct from the strategic overlay's risk-management role.
Choice C is incorrect because a strategic overlay is broader than a fixed-income duration target; it can address any factor across the entire portfolio.

A is correct. TPA does not discard asset class labels — they remain useful for operational purposes (legal structures, custodian reporting, manager mandates) and as a familiar communication tool with boards. What TPA changes is the primacy of those labels: risk management, capital competition decisions, and factor exposure assessment are conducted through the factor lens, with asset class labels serving a secondary, operational role.
Choice D is incorrect because TPA explicitly de-emphasizes asset class labels as the primary basis for risk budgeting; that role shifts to factors.
Choice B is incorrect because replacing asset class labels with manager strategy labels would replicate the same siloed problem at a different level of granularity.
Choice C is incorrect because TPA is an internal governance philosophy; asset class and factor designations are not subject to regulatory approval.