CIC CIC - Certified Investment Counselor Risk Management and Analysis Questions and Answers 1 — Questions and Answers
Question 1: Which measure expresses the risk-adjusted return of a portfolio relative to the total risk taken?
- Sharpe Ratio (Correct answer)
- Treynor Ratio
- Jensen's Alpha
- Information Ratio
Correct 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.
Question 2: A portfolio's beta of 1.4 indicates that for every 1% move in the market, the portfolio is expected to move:
- 0.7%
- 1.0%
- 1.4% (Correct answer)
- 2.0%
Correct 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.
Question 3: Value at Risk (VaR) at the 95% confidence level over one day means that losses will exceed the VaR estimate on approximately:
- 1 out of 5 days
- 1 out of 20 days (Correct answer)
- 1 out of 100 days
- 5 out of 100 days
Correct 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.
Question 4: Which type of risk CANNOT be eliminated through diversification?
- Unsystematic risk
- Idiosyncratic risk
- Systematic risk (Correct answer)
- Company-specific risk
Correct answer: Systematic risk
Systematic (market) risk affects all securities and cannot be diversified away, unlike unsystematic or idiosyncratic risk.
Question 5: The standard deviation of a portfolio that holds two perfectly positively correlated assets compared to holding each asset alone is:
- Lower than either asset alone
- Equal to the weighted average of the individual standard deviations (Correct answer)
- Zero
- Higher than either asset alone
Correct 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.
Question 6: An investment counselor uses a Monte Carlo simulation primarily to:
- Calculate the exact future value of a portfolio
- Model a range of possible outcomes by running thousands of random scenarios (Correct answer)
- Determine the current market beta of a security
- Compute the Sharpe Ratio of a benchmark
Correct 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.
CIC CIC - Certified Investment Counselor Risk Management and Analysis Questions and Answers 1
Which measure expresses the risk-adjusted return of a portfolio relative to the total risk taken?