CIMA Portfolio Theory and Construction 2

Question 1

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

Accepted Answer

The portfolio with the lowest attainable risk regardless of return

Answer

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

Question 2

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

Accepted Answer

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

Answer

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.

Question 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?

Accepted Answer

0.50

Answer

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

Question 4

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

Accepted Answer

Eliminates all diversification benefit

Answer

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

Question 5

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

Accepted Answer

Semi-variance

Answer

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

(CIMA) Certified Investment Management Analyst Practice Test

(CIMA) Certified Investment Management Analyst Practice Test

CIMA Portfolio Theory and Construction 2