CME-1 Investment Analysis & Portfolio Management 2

Question 1

What is 'Value at Risk' (VaR) used for in portfolio management?

Accepted Answer

Estimating the maximum potential loss over a specific time period at a given confidence level

Answer

VaR estimates the potential loss a portfolio could face within a defined time horizon at a specified confidence level, e.g., 95% one-day VaR of SAR 1 million.

Question 2

Which investment approach focuses on selecting undervalued stocks based on fundamental analysis?

Accepted Answer

Value investing

Answer

Value investing, associated with Benjamin Graham and Warren Buffett, seeks stocks trading below their intrinsic value using fundamental analysis of financial statements.

Question 3

What is the Sharpe Ratio used to measure?

Accepted Answer

Risk-adjusted return: excess return per unit of total risk (standard deviation)

Answer

Sharpe Ratio = (Portfolio Return − Risk-Free Rate) ÷ Standard Deviation. A higher Sharpe Ratio indicates better risk-adjusted performance.

Question 4

What does 'alpha' represent in portfolio performance measurement?

Accepted Answer

Excess return over the benchmark after adjusting for systematic risk

Answer

Alpha measures a portfolio manager's ability to generate returns above the risk-adjusted benchmark; positive alpha indicates outperformance, negative alpha underperformance.

Question 5

What is the difference between active and passive portfolio management?

Accepted Answer

Active management attempts to outperform a benchmark through security selection; passive management replicates a benchmark index

Answer

Active managers research and select securities attempting to beat the market index, while passive managers replicate an index (e.g., TASI) to match its performance at lower cost.

CME-1 Practice Test

CME-1 Practice Test

CME-1 Investment Analysis & Portfolio Management 2