AAMS Risk, Return & Investment Performance 3

Question 1

Which type of risk is eliminated through diversification across many asset classes?

Accepted Answer

Unsystematic risk

Answer

Unsystematic (idiosyncratic) risk is company- or industry-specific and can be diversified away, unlike systematic risk.

Question 2

An investment has an arithmetic mean return of 10% and a geometric mean return of 9.5%. What explains the difference?

Accepted Answer

Compounding effect of volatility

Answer

Volatility causes the geometric mean to be lower than the arithmetic mean; higher variance widens the gap.

Question 3

A client wants to maximize return for a given level of risk. According to Modern Portfolio Theory, the client should select a portfolio on which boundary?

Accepted Answer

Efficient frontier

Answer

The efficient frontier represents portfolios offering the highest expected return for each level of portfolio risk.

Question 4

Which risk measure expresses the maximum expected loss over a given time period at a specified confidence level?

Accepted Answer

Value at Risk (VaR)

Answer

VaR quantifies the maximum potential loss over a defined period at a given confidence level (e.g., 95% or 99%).

Question 5

The Capital Asset Pricing Model (CAPM) assumes which of the following?

Accepted Answer

All investors can borrow and lend at the risk-free rate

Answer

CAPM assumes investors can borrow and lend unlimited amounts at the risk-free rate, among other simplifying assumptions.

(AAMS) Accredited Asset Management Specialist Practice Test

(AAMS) Accredited Asset Management Specialist Practice Test

AAMS Risk, Return & Investment Performance 3