AAFM Investment Analysis and Portfolio Management 3

Question 1

The information ratio evaluates a portfolio manager's skill by dividing active return by which metric?

Accepted Answer

Tracking error

Answer

The information ratio divides the portfolio's active return (return minus benchmark return) by its tracking error, measuring consistency of outperformance.

Question 2

Which concept explains that professional fund managers rarely outperform the market on a risk-adjusted basis consistently?

Accepted Answer

Efficient Market Hypothesis

Answer

The Efficient Market Hypothesis states that asset prices fully reflect all available information, making consistent risk-adjusted outperformance extremely difficult.

Question 3

Convexity adjusts a bond's price estimate for which limitation of duration?

Accepted Answer

Non-linear price-yield relationship

Answer

Convexity corrects for the curvature in the price-yield relationship that duration, a linear approximation, fails to capture for large rate changes.

Question 4

Which performance attribution method breaks excess return into allocation, selection, and interaction effects?

Accepted Answer

Brinson-Hood-Beebower model

Answer

The Brinson-Hood-Beebower model decomposes a portfolio's active return into asset allocation, security selection, and an interaction effect versus the benchmark.

Question 5

Dollar-cost averaging reduces which specific investment risk over time?

Accepted Answer

Timing risk

Answer

Dollar-cost averaging mitigates timing risk by spreading purchases over time, reducing the danger of investing a lump sum at a market peak.

American Academy of Financial Management (AAFM) Practice Test

American Academy of Financial Management (AAFM) Practice Test

AAFM Investment Analysis and Portfolio Management 3