CFM Risk Assessment & Asset Allocation 5

Question 1

In the context of alternative investments, which risk is most unique to private equity compared to public equities?

Accepted Answer

Illiquidity risk due to lock-up periods and limited secondary market access

Answer

Private equity investments typically have multi-year lock-up periods with no liquid secondary market, creating illiquidity risk that is fundamentally different from publicly traded equities.

Question 2

An asset allocation model shows a portfolio has a maximum drawdown of -35%. This metric represents:

Accepted Answer

The peak-to-trough decline in portfolio value over a specified period

Answer

Maximum drawdown measures the largest peak-to-trough decline experienced, giving investors insight into the worst historical loss they would have endured.

Question 3

Which scenario best illustrates concentration risk in a portfolio?

Accepted Answer

Holding 30% of the portfolio in a single technology stock

Answer

Concentration risk arises when a disproportionately large allocation to a single position or sector exposes the portfolio to idiosyncratic events that affect that holding.

Question 4

The Capital Market Line (CML) in modern portfolio theory connects the risk-free rate to:

Accepted Answer

The tangency portfolio, which has the highest Sharpe ratio

Answer

The CML runs from the risk-free rate through the tangency portfolio (optimal risky portfolio), representing all efficient portfolios combining the risk-free asset and the market portfolio.

Question 5

In stress testing a fund's asset allocation, a manager should primarily focus on:

Accepted Answer

Portfolio behavior under extreme adverse scenarios, including correlations rising toward 1

Answer

Stress testing examines how a portfolio performs under severe conditions, particularly noting that diversification benefits erode when inter-asset correlations spike during crises.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Risk Assessment & Asset Allocation 5