Practice Test Geeks(CIMA) Certified Investment Management Analyst Practice Test
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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. The Capital Market Line (CML) differs from the Security Market Line (SML) in that the CML:

    Answer: Plots expected return against total risk for efficient portfolios

    The CML plots expected return versus total standard deviation for efficient (fully diversified) portfolios, while the SML uses beta for all assets.

  2. A portfolio's tracking error is best defined as:

    Answer: The standard deviation of the portfolio's returns minus the benchmark returns

    Tracking error is the standard deviation of active returns (portfolio return minus benchmark return) over a period.

  3. Under the Black-Litterman model, when an investor expresses no views, the optimal portfolio weights converge to:

    Answer: Market-capitalization weights implied by equilibrium

    With no investor views, the Black-Litterman model reverts to equilibrium (market-cap weighted) expected returns implied by reverse optimization.

  4. Which rebalancing strategy involves buying assets that have declined and selling those that have risen to restore target weights?

    Answer: Percentage-of-portfolio rebalancing

    Percentage-of-portfolio (or threshold) rebalancing triggers trades whenever an asset drifts beyond a set band from its target weight, inherently acting contra-trend.

  5. An investor's utility function is U = E(r) − 0.5 × A × σ². If A = 4 and two portfolios have the same expected return, the investor will prefer the one with:

    Answer: Lower standard deviation

    A positive risk-aversion coefficient A means higher variance reduces utility, so the investor prefers the lower-variance portfolio.

  6. Which of the following is a limitation of using historical covariances in mean-variance optimization?

    Answer: Estimation error in covariances can lead to concentrated or unstable portfolios

    Mean-variance optimizers can amplify estimation errors in covariance inputs, producing extreme, unstable portfolio weights.

  7. A portfolio constructed to maximize return for a given level of tracking error relative to a benchmark is called a(n):

    Answer: Information ratio-optimized portfolio

    Maximizing the information ratio (active return / tracking error) is the objective of active portfolio construction that constrains tracking error.