CFM Investment Analysis & Portfolio Management 5

Question 1

In a scenario where an investor expects equity markets to decline significantly, which portfolio adjustment is most appropriate?

Accepted Answer

Shift allocation toward defensive sectors and increase cash holdings

Answer

Moving to defensive sectors (utilities, consumer staples) and cash reduces downside exposure during anticipated market declines.

Question 2

What is the primary limitation of using historical standard deviation as a risk measure for a portfolio?

Accepted Answer

It assumes returns are normally distributed and may underestimate tail risks

Answer

Standard deviation assumes normally distributed returns, which may understate the probability of extreme losses (fat tails) observed in real markets.

Question 3

A company's free cash flow to equity (FCFE) is $5 per share, shares grow at 3%, and investors require a 9% return. What is the estimated stock value?

Accepted Answer

$83.33

Answer

FCFE model: V = FCFE / (r − g) = $5 / (0.09 − 0.03) = $5 / 0.06 = $83.33.

Question 4

Which factor best explains why small-cap stocks historically earn a premium return according to the Fama-French three-factor model?

Accepted Answer

Small-cap stocks carry greater risk (SMB factor) that commands a return premium

Answer

The Fama-French model includes the SMB (Small Minus Big) factor, which captures the return premium associated with the higher risk of small-cap stocks.

Question 5

A CFM manager is constructing a liability-driven investment (LDI) strategy for a pension fund. What is the primary objective?

Accepted Answer

Matching or exceeding the growth of the fund's liabilities

Answer

LDI strategies align asset characteristics (especially duration) with the pension fund's liabilities to reduce surplus risk.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Investment Analysis & Portfolio Management 5