CFM Investment Analysis & Portfolio Management 3 — Questions and Answers
Question 1: A fund manager wants to hedge a $10 million equity portfolio with a beta of 1.2 using S&P 500 futures contracts valued at $250,000 each. How many contracts should be sold?
- 40
- 48 (Correct answer)
- 50
- 60
Correct answer: 48
Contracts needed = (Portfolio Value × Beta) / Futures Value = ($10M × 1.2) / $250,000 = 48 contracts.
Question 2: Which risk measure captures the average loss in the worst 5% of scenarios?
- Value at Risk (VaR)
- Conditional Value at Risk (CVaR) (Correct answer)
- Maximum drawdown
- Standard deviation
Correct answer: Conditional Value at Risk (CVaR)
CVaR (also called Expected Shortfall) measures the average loss beyond the VaR threshold in the tail of the distribution.
Question 3: An analyst uses the Gordon Growth Model to value a stock. If dividends are $3, the required return is 10%, and growth is 4%, what is the intrinsic value?
- $30
- $42.86
- $50 (Correct answer)
- $75
Correct answer: $50
Gordon Growth Model: P = D1 / (r − g) = $3 / (0.10 − 0.04) = $3 / 0.06 = $50.
Question 4: What is the primary purpose of rebalancing a portfolio?
- Maximizing tax efficiency
- Restoring target asset allocation after market movements (Correct answer)
- Increasing exposure to outperforming assets
- Reducing the number of holdings
Correct answer: Restoring target asset allocation after market movements
Rebalancing realigns the portfolio to its target allocation after price changes cause drift from the intended risk profile.
Question 5: Which of the following is a characteristic of a passively managed index fund?
- Frequent trading to exploit market inefficiencies
- Low tracking error relative to the benchmark (Correct answer)
- Higher expense ratios than active funds
- Concentrated bets on specific sectors
Correct answer: Low tracking error relative to the benchmark
Passive index funds aim to replicate benchmark performance, resulting in low tracking error and minimal deviations from the index.
Question 6: In a rising interest rate environment, which bond portfolio strategy would best preserve value?
- Extending duration
- Increasing allocation to long-term bonds
- Reducing duration (shortening maturities) (Correct answer)
- Adding high-yield bonds
Correct answer: Reducing duration (shortening maturities)
Shorter duration portfolios are less sensitive to interest rate increases, limiting price declines when rates rise.
Question 7: The Treynor ratio differs from the Sharpe ratio in that it uses which risk measure?
- Standard deviation
- Beta (systematic risk) (Correct answer)
- Maximum drawdown
- Tracking error
Correct answer: Beta (systematic risk)
The Treynor ratio divides excess return by beta, measuring return per unit of systematic (market) risk rather than total risk.
CFM Investment Analysis & Portfolio Management 3
A fund manager wants to hedge a $10 million equity portfolio with a beta of 1.2 using S&P 500 futures contracts valued at $250,000 each.
How many contracts should be sold?