CIMA Applied Finance & Economics 2

Question 1

A portfolio manager observes that a stock's beta is 1.4 and the market risk premium is 6%. If the risk-free rate is 3%, what is the expected return per the CAPM?

Accepted Answer

11.4%

Answer

CAPM: E(r) = 3% + 1.4 × 6% = 3% + 8.4% = 11.4%.

Question 2

Which yield curve shape historically has the strongest predictive power for an impending economic recession in the US?

Accepted Answer

Inverted yield curve

Answer

An inverted yield curve, where short-term yields exceed long-term yields, has historically preceded US recessions.

Question 3

The Treynor ratio differs from the Sharpe ratio primarily because it uses which denominator?

Accepted Answer

Portfolio beta

Answer

The Treynor ratio uses portfolio beta (systematic risk) as the denominator, while Sharpe uses total standard deviation.

Question 4

A bond with a duration of 7 years is expected to decrease in price by approximately how much if interest rates rise by 50 basis points?

Accepted Answer

3.5%

Answer

Approximate price change = –Duration × Δy = –7 × 0.005 = –3.5%.

Question 5

In a perfectly competitive market, a firm's long-run equilibrium price equals:

Accepted Answer

Minimum average total cost

Answer

In long-run perfectly competitive equilibrium, P = MC = minimum ATC, eliminating economic profit.

(CIMA) Certified Investment Management Analyst Practice Test

(CIMA) Certified Investment Management Analyst Practice Test

CIMA Applied Finance & Economics 2