CFM Risk Assessment & Asset Allocation 3

Question 1

The Black-Litterman model improves upon traditional mean-variance optimization primarily by:

Accepted Answer

Combining market equilibrium returns with investor views

Answer

Black-Litterman blends implied equilibrium returns (from market cap weights) with manager-specific views, producing more stable and intuitive portfolio allocations.

Question 2

A fund manager uses a strategic asset allocation of 60% equity / 40% bonds. After a strong equity rally, the portfolio drifts to 70/30. Rebalancing back to 60/40 is an example of:

Accepted Answer

Disciplined risk management that sells winners and buys underperformers

Answer

Rebalancing restores target risk exposure by trimming outperforming assets and adding to underperforming ones, maintaining the intended risk profile.

Question 3

Which of the following best describes liquidity risk in asset allocation?

Accepted Answer

The risk of being unable to sell an asset quickly at fair value

Answer

Liquidity risk is the potential inability to exit a position without significantly impacting the asset's price or incurring excessive transaction costs.

Question 4

An investor's risk tolerance is best described as:

Accepted Answer

The level of portfolio volatility they can financially and emotionally sustain

Answer

Risk tolerance encompasses both the financial capacity to absorb losses and the psychological willingness to endure portfolio volatility without making panic decisions.

Question 5

Downside deviation differs from standard deviation in that it:

Accepted Answer

Penalizes only returns that fall below a minimum acceptable return

Answer

Downside deviation focuses only on negative deviations below a threshold (minimum acceptable return), making it more aligned with investor loss aversion.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Risk Assessment & Asset Allocation 3