CIMA Risk & Return Analysis 3

Question 1

A manager's portfolio earned 11% while the benchmark returned 8%. If the portfolio's tracking error is 5%, what is the information ratio?

Accepted Answer

0.60

Answer

Information ratio = (11% − 8%) / 5% = 3% / 5% = 0.60.

Question 2

According to Modern Portfolio Theory, the efficient frontier represents portfolios that offer:

Accepted Answer

Maximum expected return for a given level of risk

Answer

The efficient frontier consists of portfolios dominating all others by providing the highest return for each risk level.

Question 3

Value at Risk (VaR) at the 95% confidence level over one day means:

Accepted Answer

There is a 5% probability that losses will exceed the VaR amount in a single day.

Answer

A 95% one-day VaR implies a 5% chance (1 in 20 trading days) of losses exceeding the stated amount.

Question 4

Which limitation of VaR is directly addressed by Conditional VaR (CVaR)?

Accepted Answer

VaR does not indicate the magnitude of losses beyond the threshold.

Answer

CVaR (Expected Shortfall) measures the average loss given that the loss exceeds the VaR threshold, addressing VaR's tail-blindness.

Question 5

A bond portfolio has a duration of 6 years. If interest rates rise by 50 basis points, the approximate percentage price change is:

Accepted Answer

−3.0%

Answer

Approximate price change = −Duration × Δy = −6 × 0.005 = −0.03 = −3.0%.

(CIMA) Certified Investment Management Analyst Practice Test