AAFM Investment Analysis and Portfolio Management 2

Question 1

The Capital Market Line (CML) represents portfolios combining the risk-free asset with which other portfolio?

Accepted Answer

Market portfolio

Answer

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?

Accepted Answer

Treynor ratio

Answer

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?

Accepted Answer

Return volatility

Answer

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?

Accepted Answer

Duration matching

Answer

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?

Accepted Answer

Low price-to-book ratios

Answer

The value factor targets stocks trading at low price-to-book (or price-to-earnings) ratios relative to the market, historically delivering a premium.

American Academy of Financial Management (AAFM) Practice Test

American Academy of Financial Management (AAFM) Practice Test

AAFM Investment Analysis and Portfolio Management 2