AAMS Risk, Return & Investment Performance 4

Question 1

Which of the following best describes 'reinvestment risk'?

Accepted Answer

The risk that interest payments will be reinvested at lower rates

Answer

Reinvestment risk is the chance that future cash flows (coupons or dividends) must be reinvested at a lower rate than originally anticipated.

Question 2

An AAMS candidate reviews two portfolios: Portfolio X (return 12%, std dev 15%) and Portfolio Y (return 10%, std dev 9%). The risk-free rate is 3%. Which portfolio has the superior Sharpe ratio?

Accepted Answer

Portfolio Y with 0.78

Answer

Sharpe X = (12−3)/15 = 0.60; Sharpe Y = (10−3)/9 = 0.78; Portfolio Y offers better risk-adjusted returns.

Question 3

Convexity in fixed income investing is best described as:

Accepted Answer

The curvature in the price-yield relationship that benefits bond prices

Answer

Convexity captures the curvature of the price-yield curve, meaning bond prices rise more than duration predicts when rates fall and fall less when rates rise.

Question 4

An investor holds an undiversified portfolio of one stock. The relevant risk measure for this investor is:

Accepted Answer

Total risk (standard deviation)

Answer

For an undiversified investor, total risk (standard deviation) is the relevant measure because unsystematic risk has not been eliminated.

Question 5

Time-weighted return (TWR) is preferred over money-weighted return (MWR) for evaluating investment managers because:

Accepted Answer

TWR eliminates the effect of client-controlled cash flows on performance

Answer

TWR removes the impact of external cash flows (controlled by clients, not managers), providing a fair measure of manager skill.

(AAMS) Accredited Asset Management Specialist Practice Test

(AAMS) Accredited Asset Management Specialist Practice Test

AAMS Risk, Return & Investment Performance 4