Practice Test Geeks(CIMA) Certified Investment Management Analyst Practice Test
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Risk and Performance Measurement 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 Risk and Performance Measurement flashcards as text

  1. Which of the following is a limitation of using historical VaR as a risk measure?

    Answer: It assumes future returns will follow historical patterns

    Historical VaR assumes that past return distributions are representative of future risk, which may not hold during regime changes or market crises.

  2. What does a negative Jensen's alpha indicate?

    Answer: The portfolio underperformed relative to its CAPM-expected return

    Negative Jensen's alpha means the portfolio earned less than what the CAPM predicted given its level of systematic risk, indicating underperformance.

  3. When using Monte Carlo simulation for VaR, which of the following is a key advantage over historical simulation?

    Answer: It can model complex instruments and generate scenarios not seen historically

    Monte Carlo simulation can generate a vast range of hypothetical scenarios based on specified distributions, including events not present in historical data.

  4. Tracking error is best described as:

    Answer: The standard deviation of the portfolio's active returns relative to the benchmark

    Tracking error measures the volatility of the difference between the portfolio's returns and the benchmark's returns, quantifying active risk.

  5. Which of the following correctly describes the Information Ratio?

    Answer: Active return divided by tracking error

    The Information Ratio equals active return (portfolio return minus benchmark return) divided by tracking error, measuring risk-adjusted active performance.

  6. A manager wants to stress test a portfolio for a potential 25% equity market decline. This is an example of:

    Answer: Scenario analysis

    Scenario analysis involves defining specific hypothetical adverse events (like a 25% equity decline) to evaluate portfolio sensitivity to extreme conditions.

  7. Which concept explains why adding a low-correlation asset to a portfolio can reduce total portfolio volatility?

    Answer: Diversification benefit

    Diversification reduces portfolio volatility when assets are not perfectly correlated, as losses in one asset may be offset by gains in another.