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Portfolio Theory and Construction Flashcards

7 cards from real CIMA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Portfolio Theory and Construction flashcards as text

  1. In mean-variance optimization, what does the global minimum variance portfolio represent?

    Answer: The portfolio with the lowest attainable risk regardless of return

    The global minimum variance portfolio is the point on the minimum variance frontier with the lowest possible standard deviation, regardless of expected return.

  2. Which of the following best describes the separation theorem in portfolio theory?

    Answer: All investors hold the same risky portfolio (the market portfolio) and differ only in their allocation to the risk-free asset

    Tobin's separation theorem states that the optimal risky portfolio is the same for all investors; risk tolerance only affects the split between the risk-free asset and that risky portfolio.

  3. A portfolio has an expected return of 12% and a standard deviation of 18%. The risk-free rate is 3%. What is the Sharpe ratio?

    Answer: 0.50

    The Sharpe ratio = (12% − 3%) / 18% = 9% / 18% = 0.50.

  4. When two assets have a correlation coefficient of +1.0, combining them in a portfolio:

    Answer: Eliminates all diversification benefit

    Perfect positive correlation means the assets move in lockstep, so diversification provides no variance reduction benefit.

  5. Which risk measure captures only downside deviations from a target return and is preferred by some practitioners over standard deviation?

    Answer: Semi-variance

    Semi-variance (or semi-deviation) measures dispersion of returns below a target, focusing exclusively on downside risk.

  6. In the context of factor models, what is the intercept term (alpha) in a single-factor regression of a portfolio's excess returns?

    Answer: The average excess return unexplained by the factor

    Alpha is the regression intercept representing average excess return not explained by exposure to the risk factor.

  7. A portfolio manager adds a new security to a well-diversified portfolio. The primary risk consideration is the security's:

    Answer: Covariance with the existing portfolio

    In a well-diversified portfolio, idiosyncratic risk is diversified away, so a new security's contribution to portfolio risk is driven by its covariance with the portfolio.