CFE Investment & Portfolio Management Flashcards

What is the Capital Asset Pricing Model (CAPM) primarily used to determine?

Answer: Expected return of an asset based on its systematic risk

CAPM calculates the expected return of an asset using its beta (market risk) relative to the risk-free rate and expected market return.

A portfolio manager holds long-term bonds when interest rates are expected to rise. Which risk is most elevated?

Answer: Interest rate risk

When interest rates rise, bond prices fall; long-term bonds are especially sensitive, making interest rate risk the primary concern.

Which regulatory framework governs the prudent management of investment assets held in trust by financial institutions in the US?

Answer: Uniform Prudent Investor Act (UPIA)

The Uniform Prudent Investor Act (UPIA) establishes the standard of care fiduciaries must follow when managing investment assets held in trust.

What does 'beta' represent in investment analysis?

Answer: A measure of a security's volatility relative to the market

Beta measures a security's price movement relative to the overall market; a beta above 1 indicates greater volatility than the market.

Which investment vehicle pools money from multiple investors to purchase a diversified portfolio of securities managed by professionals?

Answer: Mutual fund

A mutual fund pools investor capital to purchase a diversified portfolio, with a professional portfolio manager making investment decisions.

When examining a financial institution's securities portfolio, an examiner finds unrealized losses classified as 'available-for-sale.' How must these be reported?

Answer: Recognized in other comprehensive income (OCI) on the balance sheet

Under US GAAP, unrealized gains and losses on available-for-sale securities are recorded in other comprehensive income, a component of equity.