CFM Quantitative Methods & Statistics for Fund Management 2

Question 1

How does the Sortino ratio differ from the Sharpe ratio in risk measurement?

Accepted Answer

It uses downside deviation instead of total standard deviation

Answer

The Sortino ratio replaces total standard deviation with downside deviation (only negative return deviations), making it more appropriate for return distributions that are asymmetric.

Question 2

What does Value at Risk (VaR) at a 95% confidence level represent?

Accepted Answer

The loss not expected to be exceeded with 95% probability over a given time horizon

Answer

VaR at 95% confidence means there is only a 5% probability that the actual loss will exceed the VaR estimate over the specified time period.

Question 3

In the Capital Asset Pricing Model (CAPM), what does beta represent?

Accepted Answer

A measure of a security's sensitivity to market movements

Answer

Beta measures systematic risk relative to the market; a beta of 1.0 means the security moves in line with the market, while beta greater than 1 indicates higher sensitivity to market movements.

Question 4

In portfolio optimization, what does the efficient frontier represent?

Accepted Answer

The set of portfolios offering the maximum expected return for a given level of risk

Answer

The efficient frontier, derived from Modern Portfolio Theory, is the set of optimal portfolios that offer the highest expected return for each defined level of risk.

Question 5

What does positive skewness in a fund's return distribution indicate?

Accepted Answer

The distribution has a longer right tail, indicating occasional large positive returns

Answer

Positive skewness means the right tail is longer, indicating occasional extreme positive returns, with the mean typically exceeding the median.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Quantitative Methods & Statistics for Fund Management 2