CIC CIC - Certified Investment Counselor Risk Management and Analysis Questions and Answers 2 — Questions and Answers
Question 1: Duration measures a bond's sensitivity to changes in:
- Credit spreads only
- Interest rates (Correct answer)
- Equity market volatility
- Currency exchange rates
Correct answer: Interest rates
Duration quantifies how much a bond's price will change for a given change in interest rates, expressed in years.
Question 2: Which risk management technique involves purchasing a put option on a portfolio to limit downside losses?
- Immunization
- Portfolio insurance (Correct answer)
- Asset-liability matching
- Dollar-cost averaging
Correct answer: Portfolio insurance
Portfolio insurance uses put options or dynamic hedging strategies to cap the maximum downside loss of a portfolio.
Question 3: A client's portfolio has a Treynor Ratio of 0.12. This means the portfolio earned $0.12 of excess return for every:
- Dollar invested
- Unit of total risk (standard deviation)
- Unit of systematic risk (beta) (Correct answer)
- Percentage point of inflation
Correct answer: Unit of systematic risk (beta)
The Treynor Ratio measures excess return per unit of systematic (beta) risk, making it suitable for comparing portfolios in a diversified context.
Question 4: Reinvestment risk is MOST relevant for which type of fixed-income security?
- Zero-coupon bonds
- Callable bonds paying high coupons (Correct answer)
- Treasury STRIPS
- Inflation-linked bonds
Correct answer: Callable bonds paying high coupons
Callable bonds with high coupon payments expose investors to reinvestment risk because they are often called when rates fall, forcing reinvestment at lower yields.
Question 5: Which of the following BEST describes liquidity risk in a client's investment portfolio?
- The risk that interest rates will rise
- The risk that a position cannot be sold quickly at a fair price (Correct answer)
- The risk of default by the bond issuer
- The risk that inflation will erode purchasing power
Correct answer: The risk that a position cannot be sold quickly at a fair price
Liquidity risk is the danger that an investor cannot convert a position to cash promptly without accepting a significant price concession.
Question 6: In the context of the CIC exam, 'tracking error' refers to:
- Errors made in recording client trades
- The standard deviation of the difference between portfolio returns and benchmark returns (Correct answer)
- The difference between stated and actual management fees
- A compliance violation in client reporting
Correct answer: The standard deviation of the difference between portfolio returns and benchmark returns
Tracking error is the volatility of excess returns (portfolio minus benchmark), indicating how consistently a portfolio follows its benchmark.
CIC CIC - Certified Investment Counselor Risk Management and Analysis Questions and Answers 2
Duration measures a bond's sensitivity to changes in: