Risk & Return Analysis 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 & Return Analysis flashcards as text
Which scenario best illustrates reinvestment risk for a fixed-income investor?
Answer: Interest rates fall after purchase, so coupon payments are reinvested at lower rates, reducing total return.
Reinvestment risk is the risk that coupon cash flows will be reinvested at rates lower than the bond's yield to maturity.
In a scenario where two assets are perfectly positively correlated (ρ = +1), the portfolio standard deviation equals:
Answer: The weighted average of the two assets' standard deviations
When ρ = +1, portfolio variance reduces to (w1σ1 + w2σ2)², so σp equals the weighted average — no diversification benefit.
The Sortino ratio differs from the Sharpe ratio in that it uses:
Answer: Downside deviation (semi-standard deviation) instead of total standard deviation in the denominator
The Sortino ratio penalizes only downside volatility, making it more useful for evaluating investments with asymmetric return distributions.
A portfolio manager claims to have beaten the market. Jensen's alpha is calculated as +2.5%. This means:
Answer: The portfolio earned 2.5% more than predicted by CAPM after adjusting for systematic risk.
Jensen's alpha = actual return − CAPM required return, so +2.5% indicates genuine risk-adjusted outperformance above the equilibrium expectation.
Which of the following is a key assumption of the Capital Asset Pricing Model (CAPM)?
Answer: All investors have homogeneous expectations about asset returns and risks.
CAPM assumes all investors share identical expectations (homogeneous expectations), enabling them to hold the same risky portfolio.
An asset's coefficient of variation (CV) is used to:
Answer: Compare risk per unit of return across assets with different expected returns
CV = standard deviation / expected return, standardizing risk so that assets with different return levels can be directly compared.
Which of the following statements correctly describes the relationship between risk and return in equilibrium under CAPM?
Answer: Only systematic risk is compensated; investors receive no premium for bearing diversifiable risk.
CAPM holds that in equilibrium, only non-diversifiable (systematic) risk, measured by beta, earns a risk premium.