AAFM Investment Analysis and Portfolio Management 2 — Questions and Answers
Question 1: The Capital Market Line (CML) represents portfolios combining the risk-free asset with which other portfolio?
- Minimum variance portfolio
- Equally weighted portfolio
- Market portfolio (Correct answer)
- Optimal risky portfolio
Correct answer: Market portfolio
The CML connects the risk-free rate to the market portfolio, representing the best possible risk-return combinations for diversified investors.
Question 2: Which measure adjusts portfolio performance for systematic risk rather than total risk?
- Sharpe ratio
- Treynor ratio (Correct answer)
- Information ratio
- Sortino ratio
Correct answer: Treynor ratio
The Treynor ratio divides excess return by beta, making it appropriate for evaluating portfolios that are components of a larger diversified fund.
Question 3: An efficient frontier depicts portfolios that offer the highest expected return for each level of which factor?
- Return volatility (Correct answer)
- Liquidity
- Time horizon
- Tax efficiency
Correct answer: Return volatility
The efficient frontier plots the set of portfolios delivering maximum expected return for every given level of return volatility (standard deviation).
Question 4: Which bond immunization technique matches the duration of assets to the duration of liabilities?
- Bullet strategy
- Barbell strategy
- Duration matching (Correct answer)
- Cash flow matching
Correct answer: Duration matching
Duration matching (classical immunization) ensures that a portfolio's asset and liability durations are equal, protecting against parallel interest rate shifts.
Question 5: In factor investing, the value factor refers to buying stocks with which characteristic?
- High momentum
- High price-to-book ratios
- Low price-to-book ratios (Correct answer)
- Low beta
Correct answer: Low price-to-book ratios
The value factor targets stocks trading at low price-to-book (or price-to-earnings) ratios relative to the market, historically delivering a premium.
Question 6: Which risk metric measures the expected loss in a portfolio beyond a given confidence level threshold?
- Value at Risk
- Expected Shortfall (Correct answer)
- Maximum Drawdown
- Tracking Error
Correct answer: Expected Shortfall
Expected Shortfall (CVaR) measures the average loss in the worst-case tail scenarios beyond the VaR threshold, providing a more complete picture of tail risk.
AAFM Investment Analysis and Portfolio Management 2
The Capital Market Line (CML) represents portfolios combining the risk-free asset with which other portfolio?