CFC Investment Planning 1 — Questions and Answers
Question 1: Which investment metric measures the percentage of a portfolio's return attributable to the manager's active decisions rather than market movements?
- Alpha (Correct answer)
- Beta
- Standard deviation
- Sharpe ratio
Correct answer: Alpha
Alpha measures the excess return generated by a portfolio manager above the benchmark, reflecting active management skill.
Question 2: A CFC recommends a bond with a duration of 8 years when interest rates are expected to rise 1%. Approximately how much will the bond's price change?
- -8% (Correct answer)
- 8%
- -1%
- 1%
Correct answer: -8%
Duration predicts that for each 1% rise in interest rates, the bond price will fall approximately by the duration percentage.
Question 3: Which asset allocation strategy automatically rebalances by selling outperforming assets and buying underperforming ones?
- Constant-mix strategy (Correct answer)
- Buy-and-hold strategy
- Constant-proportion portfolio insurance
- Dynamic hedging
Correct answer: Constant-mix strategy
The constant-mix strategy maintains fixed target weights by selling winners and buying losers as markets move.
Question 4: Under Modern Portfolio Theory, the efficient frontier represents portfolios that offer:
- Maximum expected return for a given level of risk
- Minimum risk for a given expected return or maximum return for a given risk (Correct answer)
- Zero correlation between assets
- 100% allocation to risk-free assets
Correct answer: Minimum risk for a given expected return or maximum return for a given risk
The efficient frontier plots portfolios that are optimal — delivering the highest return for each level of risk or the lowest risk for each return target.
Question 5: A client's portfolio has a Sharpe ratio of 1.2. This indicates:
- The portfolio earned 1.2% above the risk-free rate
- The portfolio earned 1.2 units of excess return per unit of total risk (Correct answer)
- The portfolio's beta is 1.2
- The portfolio lost 1.2% last year
Correct answer: The portfolio earned 1.2 units of excess return per unit of total risk
The Sharpe ratio measures risk-adjusted return as excess return over the risk-free rate divided by standard deviation.
Question 6: Which type of risk cannot be eliminated through diversification in a well-constructed portfolio?
- Unsystematic risk
- Systematic (market) risk (Correct answer)
- Company-specific risk
- Default risk
Correct answer: Systematic (market) risk
Systematic risk, driven by macroeconomic factors affecting all assets, cannot be diversified away unlike unsystematic, company-specific risk.
CFC Investment Planning 1
Which investment metric measures the percentage of a portfolio's return attributable to the manager's active decisions rather than market movements?