Chartered Financial Analyst (CFA) Level 3 Practice Exam 2025 - Free CFA Level 3 Practice Questions and Study Guide

The concept of "cushion" in portfolio management primarily refers to the idea of providing a buffer or safety margin against potential risks and uncertainties in the market. This means that it acts as a protective measure, allowing portfolio managers to weather market fluctuations without the immediate need to adjust their asset allocation strategies drastically.

The correct answer focuses on the notion of maintaining an appropriate balance in asset allocation to ensure that there is enough buffer against volatility. This "cushion" can be crucial for managing the risks associated with market downturns, ensuring that the portfolio remains resilient even in challenging economic conditions. It's not only about the current standing of assets but also the overall strategy to mitigate risk while achieving investment goals.

In contrast, the other options present different aspects of portfolio management that may not align with the specific definition of "cushion." For instance, the idea of extra funds available for new investments pertains more to liquidity management, while the proportional holding of an asset relates to the distribution of assets within the portfolio. Therefore, focusing on the protective aspect and market responsiveness underscores the importance of having a buffer when navigating market dynamics.