CFM Investment Analysis & Portfolio Management 2

Question 1

A portfolio manager notices that a stock has a beta of 1.5. If the market returns 8% and the risk-free rate is 2%, what is the expected return according to CAPM?

Accepted Answer

14%

Answer

CAPM: Expected return = 2% + 1.5 × (8% − 2%) = 2% + 9% = 11%... wait, 2 + 1.5×6 = 2 + 9 = 11%. The correct answer is 11%.

Question 2

Which of the following best describes the Sharpe ratio?

Accepted Answer

Excess return per unit of total risk

Answer

The Sharpe ratio measures excess return (above the risk-free rate) per unit of total risk (standard deviation).

Question 3

An investor holds a portfolio with a correlation of 0.3 between two assets. Compared to a correlation of 1.0, what is the primary benefit?

Accepted Answer

Greater diversification and lower portfolio variance

Answer

Lower correlation between assets reduces portfolio variance, providing greater diversification benefits.

Question 4

A bond with a duration of 6 years experiences a 50 basis point increase in yield. Approximately what is the percentage change in price?

Accepted Answer

-3%

Answer

Approximate price change = −Duration × Δyield = −6 × 0.005 = −3%.

Question 5

Which valuation approach compares a company's metrics to those of similar publicly traded firms?

Accepted Answer

Comparable company analysis

Answer

Comparable company analysis (comps) values a firm by benchmarking its multiples against peers in the same industry.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Investment Analysis & Portfolio Management 2