CIMA Risk & Return Analysis 4

Question 1

An investment has cash flows of $1,000 invested today and returns $1,210 after two years. What is the holding period return?

Accepted Answer

21%

Answer

HPR = ($1,210 − $1,000) / $1,000 = $210 / $1,000 = 21%.

Question 2

Which of the following is the most appropriate risk measure for a well-diversified investor evaluating an individual security's contribution to portfolio risk?

Accepted Answer

Beta

Answer

Beta measures systematic risk, which is the only risk that matters for a fully diversified investor since unsystematic risk is eliminated.

Question 3

The risk-adjusted return measure that is most appropriate when comparing managers with different investment mandates (e.g., a bond fund vs. an equity fund) is:

Accepted Answer

Sharpe ratio

Answer

The Sharpe ratio uses total standard deviation, making it comparable across asset classes with different risk profiles.

Question 4

A negatively skewed return distribution means that:

Accepted Answer

The left tail is longer, with more extreme negative returns than a normal distribution predicts

Answer

Negative skewness indicates the tail extends to the left, meaning large negative returns occur more frequently than under a normal distribution.

Question 5

When computing the time-weighted rate of return (TWR), the purpose is to:

Accepted Answer

Eliminate the distorting effect of external cash flows on portfolio return measurement

Answer

TWR chains sub-period returns together, neutralizing the impact of client-driven cash flows and isolating manager performance.

(CIMA) Certified Investment Management Analyst Practice Test

(CIMA) Certified Investment Management Analyst Practice Test

CIMA Risk & Return Analysis 4