CIMA Risk & Return Analysis 5

Question 1

Which scenario best illustrates reinvestment risk for a fixed-income investor?

Accepted Answer

Interest rates fall after purchase, so coupon payments are reinvested at lower rates, reducing total return.

Answer

Reinvestment risk is the risk that coupon cash flows will be reinvested at rates lower than the bond's yield to maturity.

Question 2

In a scenario where two assets are perfectly positively correlated (ρ = +1), the portfolio standard deviation equals:

Accepted Answer

The weighted average of the two assets' standard deviations

Answer

When ρ = +1, portfolio variance reduces to (w1σ1 + w2σ2)², so σp equals the weighted average — no diversification benefit.

Question 3

The Sortino ratio differs from the Sharpe ratio in that it uses:

Accepted Answer

Downside deviation (semi-standard deviation) instead of total standard deviation in the denominator

Answer

The Sortino ratio penalizes only downside volatility, making it more useful for evaluating investments with asymmetric return distributions.

Question 4

A portfolio manager claims to have beaten the market. Jensen's alpha is calculated as +2.5%. This means:

Accepted Answer

The portfolio earned 2.5% more than predicted by CAPM after adjusting for systematic risk.

Answer

Jensen's alpha = actual return − CAPM required return, so +2.5% indicates genuine risk-adjusted outperformance above the equilibrium expectation.

Question 5

Which of the following is a key assumption of the Capital Asset Pricing Model (CAPM)?

Accepted Answer

All investors have homogeneous expectations about asset returns and risks.

Answer

CAPM assumes all investors share identical expectations (homogeneous expectations), enabling them to hold the same risky portfolio.

(CIMA) Certified Investment Management Analyst Practice Test