AAMS Risk, Return & Investment Performance 5

Question 1

Which of the following is true about the security market line (SML) in the CAPM framework?

Accepted Answer

It represents the relationship between beta and expected return for any asset

Answer

The SML plots expected return against beta (systematic risk) for individual securities and portfolios, while the CML uses standard deviation for efficient portfolios only.

Question 2

A risk-averse investor would prefer which of the following investments, all else equal?

Accepted Answer

Higher expected return with lower variance

Answer

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.

Question 3

If an asset's return has negative skewness, what does this imply for investors?

Accepted Answer

The distribution has a long left tail, indicating higher probability of extreme losses

Answer

Negative skewness means the distribution has a long left tail, making extreme negative outcomes more likely than a symmetric (normal) distribution would suggest.

Question 4

An investor's portfolio has a Jensen's alpha of −1.5%. This means the portfolio:

Accepted Answer

Underperformed what CAPM predicted given its beta

Answer

A negative Jensen's alpha indicates the portfolio earned less than what CAPM predicts for its level of systematic (beta) risk.

Question 5

Which of the following statements about kurtosis is correct in an investment context?

Accepted Answer

Leptokurtic distributions have fat tails, increasing the probability of extreme returns

Answer

Leptokurtic (high kurtosis) distributions have fat tails and a sharp peak, meaning extreme returns occur more often than normal distribution models predict.

(AAMS) Accredited Asset Management Specialist Practice Test

(AAMS) Accredited Asset Management Specialist Practice Test

AAMS Risk, Return & Investment Performance 5