CIMA Risk & Return Analysis 2

Question 1

An investor holds a portfolio with a beta of 1.4. If the expected market return is 10% and the risk-free rate is 3%, what is the required return according to CAPM?

Accepted Answer

12.8%

Answer

CAPM: 3% + 1.4 × (10% − 3%) = 3% + 9.8% = 12.8%.

Question 2

Which risk measure captures the possibility that actual returns will be worse than expected, focusing only on downside deviations?

Accepted Answer

Semi-variance

Answer

Semi-variance measures only the dispersion of returns below the mean, capturing downside risk exclusively.

Question 3

A portfolio has an expected return of 14% and a standard deviation of 20%. The risk-free rate is 4%. What is the Sharpe ratio?

Accepted Answer

0.50

Answer

Sharpe ratio = (14% − 4%) / 20% = 10% / 20% = 0.50.

Question 4

When comparing two portfolios with identical Sharpe ratios, an investor seeking to maximize risk-adjusted return per unit of systematic risk should use:

Accepted Answer

Treynor ratio

Answer

The Treynor ratio uses beta (systematic risk) in the denominator, making it appropriate for evaluating systematic risk-adjusted performance.

Question 5

The correlation coefficient between two assets is −0.3. If both assets have equal weight in a portfolio, which statement is most accurate?

Accepted Answer

Portfolio risk is reduced but not eliminated due to less-than-perfect negative correlation.

Answer

Negative correlation reduces portfolio variance, but only a correlation of −1 with appropriate weights eliminates risk entirely.

(CIMA) Certified Investment Management Analyst Practice Test

(CIMA) Certified Investment Management Analyst Practice Test

CIMA Risk & Return Analysis 2