CIC - Certified Investment Counselor Risk Management and Analysis Questions and Answers Flashcards

Which portfolio construction approach seeks to minimize tracking error relative to a benchmark?

Answer: Enhanced indexing

Enhanced indexing aims to slightly outperform an index while keeping tracking error low by closely replicating benchmark characteristics.

An investment counselor concerned about sequence-of-returns risk is MOST likely advising a client who is:

Answer: Recently retired and beginning portfolio withdrawals

Sequence-of-returns risk is most harmful when large early losses occur at the start of the withdrawal phase, permanently reducing the capital base.

Convexity in bond analysis is used to improve upon duration because duration alone:

Answer: Assumes a linear price-yield relationship

Duration provides a linear approximation of price changes, while convexity accounts for the curvature in the price-yield relationship for more accurate estimates.

A portfolio manager uses a collar strategy, which involves:

Answer: Buying a put option and selling a call option on an existing long position

A collar limits downside loss by buying a put while capping upside gain by selling a call against an existing long equity position.

Counterparty risk in over-the-counter (OTC) derivatives is BEST mitigated by:

Answer: Using centrally cleared exchanges or requiring collateral agreements

Central clearing and collateral (margin) agreements reduce counterparty risk by interposing a clearinghouse or requiring collateral posting.

Which metric is MOST appropriate for evaluating a hedge fund manager who uses significant leverage?

Answer: Sortino Ratio

The Sortino Ratio focuses on downside deviation rather than total volatility, making it more appropriate for leveraged strategies where downside risk is the key concern.