Chartered Investment Manager (CIM®) — Portfolio Management Techniques (PMT®) — Questions and Answers

Question 1: The yield to maturity (YTM) of a bond assumes which of the following?

The bond will be sold at a premium before maturity
The issuer will call the bond at the first opportunity
All coupon payments are reinvested at the YTM rate until maturity (Correct answer)
Interest rates will rise throughout the bond's life

Correct answer: All coupon payments are reinvested at the YTM rate until maturity

YTM is calculated under the assumption that all coupon payments are reinvested at the same YTM rate, which may not hold in practice.

Question 2: The Black-Litterman model starts from which set of expected returns?

Equilibrium returns implied by market-capitalization weights (Correct answer)
Historical average returns
Analyst consensus price targets
Zero expected returns for all assets

Correct answer: Equilibrium returns implied by market-capitalization weights

Black-Litterman reverse-optimizes market weights to get implied returns, then blends in the investor's views.

Question 3: A 1-day 95% VaR of $2 million means:

There is a 5% chance of losing at least $2 million in one day (Correct answer)
Losses exceed $2 million 95% of the time
The maximum possible loss is $2 million
The expected loss is $2 million per day

Correct answer: There is a 5% chance of losing at least $2 million in one day

VaR gives a minimum loss threshold expected to be exceeded with the stated tail probability.

Question 4: When interest rates rise, the price of an existing fixed-rate bond will:

Fall, as new bonds offer higher yields making existing bonds less attractive (Correct answer)
Double in value due to compounding effects
Remain unchanged because the coupon is fixed
Rise proportionally to the rate increase

Correct answer: Fall, as new bonds offer higher yields making existing bonds less attractive

Bond prices and interest rates move inversely; when rates rise, existing bonds with lower coupons become less valuable relative to newly issued bonds.

Question 5: Which of the following is an example of a top-down equity analysis approach?

Analyzing a company's financial statements before considering the industry
Evaluating management quality as the first step
Starting with macroeconomic analysis before selecting sectors and individual stocks (Correct answer)
Screening stocks based on low P/E ratios first

Correct answer: Starting with macroeconomic analysis before selecting sectors and individual stocks

Top-down analysis begins with macroeconomic conditions, narrows to sector analysis, and then identifies individual securities within favorable sectors.

Question 6: Credit spread represents the difference between:

A bond's par value and its market value
The bid and ask price of a bond on the secondary market
The yield on a corporate bond and the yield on a comparable maturity Treasury bond (Correct answer)
A bond's coupon rate and its purchase price

Correct answer: The yield on a corporate bond and the yield on a comparable maturity Treasury bond

Credit spread is the additional yield an investor earns above the risk-free Treasury rate to compensate for the credit risk of a non-government issuer.

Question 7: A constant-mix strategy tends to outperform buy-and-hold in which type of market?

A strongly trending up market
An oscillating, mean-reverting market (Correct answer)
Any market, regardless of path
A strongly trending down market

Correct answer: An oscillating, mean-reverting market

Constant-mix buys after declines and sells after rises, which pays off when prices reverse.

Question 8: Which of the following best describes a fund of funds structure?

A closed-end fund that trades on a stock exchange
A single fund that invests directly in real estate properties
An ETF that tracks a commodity index
A fund that allocates capital across multiple underlying hedge funds or private equity funds (Correct answer)

Correct answer: A fund that allocates capital across multiple underlying hedge funds or private equity funds

A fund of funds invests in a diversified portfolio of other funds, providing broader exposure but adding an additional layer of fees.

Question 9: Longevity risk for a retirement portfolio refers to the risk that:

The portfolio has an excessively long duration
Interest rates stay low for a long period
The investor outlives their assets (Correct answer)
Bonds are held past maturity

Correct answer: The investor outlives their assets

Longevity risk is the chance that a person lives longer than their savings can support.

Question 10: Private equity buyout funds primarily create value by:

Acquiring companies, improving operations, and selling at a profit (Correct answer)
Providing short-term bridge loans to municipalities
Trading public equities on margin
Investing in government-backed mortgage securities

Correct answer: Acquiring companies, improving operations, and selling at a profit

Buyout funds acquire companies using leverage and operational improvements to increase value before exiting through a sale or IPO.

Question 11: Managed futures funds typically use which type of trading approach?

Arbitrage between spot and forward currency markets exclusively
Systematic trend-following strategies across multiple futures markets (Correct answer)
Buy-and-hold strategies focused on dividend income
Fundamental equity analysis of individual companies

Correct answer: Systematic trend-following strategies across multiple futures markets

Most managed futures programs use systematic, rules-based trend-following strategies applied across commodity, currency, equity, and interest rate futures.

Question 12: Which financial statement metric is most directly used to calculate Earnings Per Share (EPS)?

Operating income divided by total shares outstanding
Net income available to common shareholders divided by weighted average shares outstanding (Correct answer)
Revenue divided by shares outstanding
EBITDA divided by diluted shares

Correct answer: Net income available to common shareholders divided by weighted average shares outstanding

EPS is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding.

Question 13: Which account offers a 'triple tax advantage': deductible contributions, tax-free growth, and tax-free qualified withdrawals?

Health Savings Account (HSA) (Correct answer)
Traditional 401(k)
Coverdell ESA
Roth IRA

Correct answer: Health Savings Account (HSA)

HSAs combine deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

Question 14: A client with high willingness but low ability to take risk should generally be advised to:

Adopt a lower-risk allocation consistent with their ability (Correct answer)
Invest only in leveraged products
Adopt a high-risk allocation matching their willingness
Average the two and ignore constraints

Correct answer: Adopt a lower-risk allocation consistent with their ability

When the two conflict, the more conservative constraint, usually ability, should govern.

Question 15: Which metric is most commonly used to evaluate the performance of private equity funds?

Standard deviation of monthly returns
Sharpe ratio
Internal rate of return (IRR) and total value to paid-in capital (TVPI) (Correct answer)
Beta relative to the S&P 500

Correct answer: Internal rate of return (IRR) and total value to paid-in capital (TVPI)

Private equity performance is measured by IRR (time-weighted profitability) and TVPI (total value returned relative to capital invested), since NAV-based metrics are impractical.

Question 16: Under Rule 204-2, books and records generally must be kept for what minimum period?

Seven years, the first three in an off-site facility
Ten years, the first five in the principal office
Three years, all in the adviser's principal office
Five years, the first two years in an appropriate office of the adviser (Correct answer)

Correct answer: Five years, the first two years in an appropriate office of the adviser

Most required records must be kept for at least five years from the end of the fiscal year of the last entry, with the first two years in an appropriate office of the adviser.

Question 17: An elderly client suddenly asks to wire most of their assets to a new 'friend' met online. What should the manager do?

Process the wire immediately as instructed
Do nothing because the client has authority
Raise concerns with the client, contact the trusted contact person, and escalate per firm policy for possible exploitation (Correct answer)
Close the account

Correct answer: Raise concerns with the client, contact the trusted contact person, and escalate per firm policy for possible exploitation

FINRA Rules 4512 and 2165 allow firms to use trusted contacts and temporarily hold disbursements when financial exploitation is suspected.

Question 18: A portfolio has a one-day 95% Value at Risk (VaR) of $1 million. This means:

There is a 95% chance of losing exactly $1 million
Expected daily loss is $1 million
The maximum possible one-day loss is $1 million
There is a 5% chance the one-day loss will exceed $1 million (Correct answer)

Correct answer: There is a 5% chance the one-day loss will exceed $1 million

VaR gives a loss threshold that is exceeded only with the stated tail probability, here 5% of days.

Question 19: In a Discounted Cash Flow (DCF) analysis, which discount rate is most commonly used to value an entire firm?

Cost of equity
Risk-free rate
Dividend yield
Weighted Average Cost of Capital (WACC) (Correct answer)

Correct answer: Weighted Average Cost of Capital (WACC)

WACC reflects the blended cost of all capital sources (debt and equity) and is used to discount free cash flows to the firm in a DCF valuation.

Question 20: Which characteristic most distinguishes alternative investments from traditional asset classes?

Low correlation with public equities and bonds (Correct answer)
Regulated by the SEC as mutual funds
Daily liquidity and transparent pricing
Guaranteed principal protection

Correct answer: Low correlation with public equities and bonds

Alternative investments typically exhibit low correlation with traditional asset classes, making them valuable for portfolio diversification.

Question 21: Duration is a fixed income concept that measures:

A bond's price sensitivity to changes in interest rates (Correct answer)
The time until the next coupon payment
The spread between corporate and Treasury yields
The credit quality of the bond issuer

Correct answer: A bond's price sensitivity to changes in interest rates

Duration quantifies how much a bond's price will change for a given change in interest rates, with higher duration indicating greater sensitivity.

Question 22: Two assets with a correlation of −1.0 can be combined to:

Create a portfolio with zero volatility (Correct answer)
Double the portfolio's expected return
Increase total portfolio variance
Eliminate systematic market risk only

Correct answer: Create a portfolio with zero volatility

Perfectly negatively correlated assets can be weighted so their fluctuations fully offset each other.

Question 23: In equity analysis, what does a company's beta measure?

The company's dividend growth rate
The ratio of debt to equity on the balance sheet
The earnings yield compared to the risk-free rate
The volatility of the stock relative to the overall market (Correct answer)

Correct answer: The volatility of the stock relative to the overall market

Beta measures a stock's sensitivity to market movements; a beta above 1 means the stock is more volatile than the market, below 1 means less volatile.

Question 24: A callable bond typically offers a higher yield than an otherwise identical non-callable bond because:

Callable bonds have a lower credit rating by definition
Call provisions reduce the bond's liquidity on secondary markets
Callable bonds pay semiannual coupons while others pay quarterly
The issuer's right to redeem the bond early creates reinvestment risk for the investor (Correct answer)

Correct answer: The issuer's right to redeem the bond early creates reinvestment risk for the investor

Investors demand a higher yield (call premium) on callable bonds to compensate for the risk that the issuer will redeem the bond early, typically when rates fall.

Question 25: What does a high Price-to-Earnings (P/E) ratio typically indicate about investor expectations?

Investors expect low future earnings growth
The company has a high dividend payout ratio
The stock is undervalued relative to peers
Investors expect high future earnings growth (Correct answer)

Correct answer: Investors expect high future earnings growth

A high P/E ratio generally indicates that investors are willing to pay a premium, expecting strong future earnings growth from the company.

Question 26: Which feature distinguishes a charitable remainder annuity trust (CRAT) from a charitable remainder unitrust (CRUT)?

A CRAT pays a percentage of trust assets revalued annually
A CRAT pays a fixed dollar amount and cannot accept additional contributions (Correct answer)
A CRAT pays the charity first and the donor last
A CRAT has no minimum payout requirement

Correct answer: A CRAT pays a fixed dollar amount and cannot accept additional contributions

A CRAT pays a fixed annuity based on the initial value and prohibits additional contributions, while a CRUT pays a fixed percentage of annually revalued assets.

Question 27: Tactical asset allocation is best described as:

Setting long-term policy weights
Short-term deliberate deviations from strategic weights to exploit perceived opportunities (Correct answer)
Rebalancing automatically to fixed weights
Matching assets to liabilities

Correct answer: Short-term deliberate deviations from strategic weights to exploit perceived opportunities

TAA makes short-term tilts away from the strategic allocation based on market views.

Question 28: A portfolio returned 11% with a standard deviation of 16% while the risk-free rate was 3%. What is its Sharpe ratio?

0.69
2.00
0.50 (Correct answer)
0.19

Correct answer: 0.50

Sharpe = (11% − 3%) / 16% = 0.50.

Question 29: The J-curve effect in private equity refers to:

Rising management fees over the fund's life
Initial negative returns followed by positive returns as investments mature (Correct answer)
Exponential return growth in the fund's early years
A rapid decline in fund value due to early distributions

Correct answer: Initial negative returns followed by positive returns as investments mature

The J-curve describes the pattern where early fees and capital calls produce negative returns before investments mature and generate positive gains.

Question 30: Which ratio is calculated as Enterprise Value divided by EBITDA and is used to compare companies regardless of their capital structure?

EV/EBITDA multiple (Correct answer)
Price-to-Sales ratio
Dividend yield
P/E ratio

Correct answer: EV/EBITDA multiple

EV/EBITDA is a capital-structure-neutral valuation multiple that allows comparison of companies with different levels of debt.

Question 31: The term 'laddering' in fixed income portfolio management refers to:

Using leverage to amplify bond returns
Buying bonds with progressively lower credit quality
Constructing a portfolio with bonds maturing at regular intervals over time (Correct answer)
Shorting long-duration bonds while buying short-duration bonds

Correct answer: Constructing a portfolio with bonds maturing at regular intervals over time

A bond ladder staggers maturities so that a portion of the portfolio matures regularly, reducing reinvestment risk and providing consistent liquidity.

Chartered Investment Manager (CIM®) — Portfolio Management Techniques (PMT®)

The CIM® designation, awarded by the Canadian Securities Institute, certifies advanced portfolio management expertise. The capstone PMT® exam tests candidates on institutional portfolio management processes, equity and fixed income strategies, alternative investments, and client reporting.

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35 min

Time Limit

60%

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