Risk, Return & Investment Performance Flashcards
7 cards from real AAMS practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk, Return & Investment Performance flashcards as text
Which of the following is true about the security market line (SML) in the CAPM framework?
Answer: It represents the relationship between beta and expected return for any asset
The SML plots expected return against beta (systematic risk) for individual securities and portfolios, while the CML uses standard deviation for efficient portfolios only.
A risk-averse investor would prefer which of the following investments, all else equal?
Answer: Higher expected return with lower variance
A risk-averse investor prefers the highest expected return for the least amount of variance (risk), so higher return combined with lower variance is always preferred.
If an asset's return has negative skewness, what does this imply for investors?
Answer: The distribution has a long left tail, indicating higher probability of extreme losses
Negative skewness means the distribution has a long left tail, making extreme negative outcomes more likely than a symmetric (normal) distribution would suggest.
An investor's portfolio has a Jensen's alpha of −1.5%. This means the portfolio:
Answer: Underperformed what CAPM predicted given its beta
A negative Jensen's alpha indicates the portfolio earned less than what CAPM predicts for its level of systematic (beta) risk.
Which of the following statements about kurtosis is correct in an investment context?
Answer: Leptokurtic distributions have fat tails, increasing the probability of extreme returns
Leptokurtic (high kurtosis) distributions have fat tails and a sharp peak, meaning extreme returns occur more often than normal distribution models predict.
Global Investment Performance Standards (GIPS) require that composites be constructed based on:
Answer: Similar investment mandates, objectives, or strategies
GIPS requires firms to group portfolios with similar investment mandates, objectives, or strategies into composites for fair and consistent performance presentation.
An equity portfolio returned 14% with a beta of 1.3. The risk-free rate is 3% and the market returned 10%. Using CAPM, the expected return is:
Answer: 16.3%
CAPM: E(R) = 3% + 1.3 × (10% − 3%) = 3% + 9.1% = 12.1%, making the actual portfolio alpha positive at 14% − 12.1% = 1.9%; the expected return per CAPM is approximately 12.1%, closest to 13.0%.