CFM Risk Assessment & Asset Allocation 4

Question 1

Tail risk hedging strategies are typically implemented using:

Accepted Answer

Out-of-the-money put options on broad market indices

Answer

Out-of-the-money put options provide payoffs during large market downturns, making them a cost-effective tool for hedging against tail risk events.

Question 2

Factor-based asset allocation (smart beta) differs from traditional cap-weighted indexing by:

Accepted Answer

Systematically overweighting stocks with targeted risk/return characteristics

Answer

Smart beta strategies tilt portfolios toward factors such as value, momentum, quality, or low volatility, seeking to capture systematic risk premia beyond market beta.

Question 3

A portfolio manager wants to reduce duration risk without selling bonds. The most efficient instrument to achieve this is:

Accepted Answer

Interest rate swaps (pay fixed, receive floating)

Answer

An interest rate swap where the manager pays fixed and receives floating converts fixed-rate bond exposure to floating-rate, effectively reducing interest rate duration.

Question 4

Which of the following is an example of systematic (market) risk that cannot be diversified away?

Accepted Answer

A Federal Reserve rate hike affects all bond prices

Answer

Systematic risk affects all market participants simultaneously; a Federal Reserve rate hike impacts all bonds and equities, and no amount of diversification eliminates this exposure.

Question 5

The risk budgeting approach to asset allocation assigns capital based on:

Accepted Answer

The contribution of each asset to total portfolio risk

Answer

Risk budgeting allocates portfolio weights so that each asset class contributes a pre-specified share of total portfolio risk, rather than allocating equal capital.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Risk Assessment & Asset Allocation 4