CFE CFE Investment & Portfolio Management 2 — Questions and Answers
Question 1: What is the Capital Asset Pricing Model (CAPM) primarily used to determine?
- A company's book value
- Expected return of an asset based on its systematic risk (Correct answer)
- A bond's credit rating
- A firm's dividend payout ratio
Correct 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.
Question 2: A portfolio manager holds long-term bonds when interest rates are expected to rise. Which risk is most elevated?
- Credit risk
- Liquidity risk
- Interest rate risk (Correct answer)
- Currency risk
Correct answer: Interest rate risk
When interest rates rise, bond prices fall; long-term bonds are especially sensitive, making interest rate risk the primary concern.
Question 3: Which regulatory framework governs the prudent management of investment assets held in trust by financial institutions in the US?
- Gramm-Leach-Bliley Act
- Uniform Prudent Investor Act (UPIA) (Correct answer)
- Bank Secrecy Act
- Dodd-Frank Act
Correct 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.
Question 4: What does 'beta' represent in investment analysis?
- The risk-free rate of return
- A measure of a security's volatility relative to the market (Correct answer)
- The portfolio's dividend yield
- The bond's credit quality score
Correct 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.
Question 5: Which investment vehicle pools money from multiple investors to purchase a diversified portfolio of securities managed by professionals?
- Hedge fund
- Mutual fund (Correct answer)
- Certificate of deposit
- Treasury bill
Correct answer: Mutual fund
A mutual fund pools investor capital to purchase a diversified portfolio, with a professional portfolio manager making investment decisions.
Question 6: When examining a financial institution's securities portfolio, an examiner finds unrealized losses classified as 'available-for-sale.' How must these be reported?
- Excluded from all financial statements
- Recognized in other comprehensive income (OCI) on the balance sheet (Correct answer)
- Immediately expensed on the income statement
- Deferred until securities are sold
Correct 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.
CFE CFE Investment & Portfolio Management 2
What is the Capital Asset Pricing Model (CAPM) primarily used to determine?