CFM Risk Assessment & Asset Allocation 2

Question 1

A fund manager observes that two assets have a correlation coefficient of -1.0. What does this imply for portfolio construction?

Accepted Answer

Perfect diversification is achievable, potentially eliminating all portfolio risk

Answer

A correlation of -1.0 means assets move in perfectly opposite directions, allowing a portfolio to be constructed that eliminates all unsystematic and systematic risk.

Question 2

Which risk measure captures the probability that portfolio losses will exceed a specified threshold over a given time horizon?

Accepted Answer

Value at Risk (VaR)

Answer

Value at Risk (VaR) quantifies the maximum expected loss at a given confidence level over a specified time period.

Question 3

In mean-variance optimization, the efficient frontier represents portfolios that:

Accepted Answer

Maximize return for every level of risk

Answer

The efficient frontier consists of portfolios that maximize expected return for each level of risk (standard deviation), with no other portfolio offering a better risk-return tradeoff.

Question 4

A portfolio has a beta of 1.4. If the market rises 10%, the portfolio is expected to:

Accepted Answer

Rise 14%

Answer

Beta measures systematic risk; a beta of 1.4 means the portfolio is expected to move 1.4 times the market movement, so a 10% market gain implies a 14% portfolio gain.

Question 5

Which asset class has historically exhibited the lowest correlation with US equities, making it most useful for diversification?

Accepted Answer

Commodities

Answer

Commodities have historically exhibited low or negative correlation with US equities, providing meaningful diversification benefits in a multi-asset portfolio.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Risk Assessment & Asset Allocation 2