CIM Asset Allocation & Risk Management 2 — Questions and Answers
Question 1: An investor holds two assets with correlation of -1.0. What is theoretically possible?
- Diversification provides no benefit
- A portfolio with return exceeding both assets
- A portfolio with zero standard deviation (Correct answer)
- A portfolio with negative variance
Correct answer: A portfolio with zero standard deviation
With perfect negative correlation, weights can be chosen so portfolio risk is eliminated entirely.
Question 2: Which allocation approach periodically rebalances back to fixed policy weights regardless of market conditions?
- Constant-mix strategy (Correct answer)
- Buy-and-hold strategy
- Constant proportion portfolio insurance
- Tactical asset allocation
Correct answer: Constant-mix strategy
A constant-mix strategy buys losers and sells winners to restore target weights.
Question 3: CPPI (constant proportion portfolio insurance) performs best in which market environment?
- Strongly trending markets (Correct answer)
- Flat, oscillating markets
- Markets with frequent sharp reversals
- Markets with high mean reversion
Correct answer: Strongly trending markets
CPPI buys as prices rise and sells as they fall, so it benefits from sustained trends.
Question 4: A 1-day 95% VaR of $2 million means:
- Losses exceed $2 million 95% of the time
- The expected loss is $2 million per day
- The maximum possible loss is $2 million
- There is a 5% chance of losing at least $2 million in one day (Correct answer)
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 5: Which risk measure satisfies subadditivity and captures the average loss beyond the VaR threshold?
- Conditional VaR (Expected Shortfall) (Correct answer)
- Standard deviation
- Parametric VaR
- Beta
Correct answer: Conditional VaR (Expected Shortfall)
Expected Shortfall averages tail losses beyond VaR and is a coherent risk measure.
Question 6: In a liability-relative (ALM) approach, the surplus is defined as:
- Liabilities minus contributions
- Expected return minus required return
- Assets minus liabilities (Correct answer)
- Assets divided by liabilities
Correct answer: Assets minus liabilities
Surplus is the market value of assets less the present value of liabilities.
Question 7: Using the square-root-of-time rule, a 1-day VaR of $1 million scales to roughly what 25-day VaR?
- $12.5 million
- $2.5 million
- $5 million (Correct answer)
- $25 million
Correct answer: $5 million
VaR scales with the square root of time: $1M × √25 = $5M.
CIM Asset Allocation & Risk Management 2
An investor holds two assets with correlation of -1.0.
What is theoretically possible?