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

Which measure expresses the risk-adjusted return of a portfolio relative to the total risk taken?

Answer: Sharpe Ratio

The Sharpe Ratio divides excess return over the risk-free rate by total portfolio standard deviation, measuring reward per unit of total risk.

A portfolio's beta of 1.4 indicates that for every 1% move in the market, the portfolio is expected to move:

Answer: 1.4%

Beta measures systematic risk; a beta of 1.4 means the portfolio is expected to move 1.4% for each 1% market move.

Value at Risk (VaR) at the 95% confidence level over one day means that losses will exceed the VaR estimate on approximately:

Answer: 1 out of 20 days

A 95% confidence VaR implies there is a 5% probability of exceeding the loss threshold, which occurs roughly 1 in 20 trading days.

Which type of risk CANNOT be eliminated through diversification?

Answer: Systematic risk

Systematic (market) risk affects all securities and cannot be diversified away, unlike unsystematic or idiosyncratic risk.

The standard deviation of a portfolio that holds two perfectly positively correlated assets compared to holding each asset alone is:

Answer: Equal to the weighted average of the individual standard deviations

When two assets are perfectly positively correlated (ρ = +1), there is no diversification benefit and portfolio standard deviation equals the weighted average of the individual standard deviations.

An investment counselor uses a Monte Carlo simulation primarily to:

Answer: Model a range of possible outcomes by running thousands of random scenarios

Monte Carlo simulation runs many randomized trials to produce a probability distribution of potential portfolio outcomes.