CPA Investment Strategies 2

Question 1

A portfolio manager wants to reduce unsystematic risk without reducing expected return. Which strategy best achieves this?

Accepted Answer

Diversification across uncorrelated assets

Answer

Diversification across uncorrelated assets eliminates unsystematic (company-specific) risk while preserving expected return, per modern portfolio theory.

Question 2

Under the Capital Asset Pricing Model (CAPM), which factor determines a security's required rate of return?

Accepted Answer

The security's beta relative to the market

Answer

CAPM uses beta (systematic risk) to determine required return: E(R) = Rf + β(Rm − Rf).

Question 3

An investor purchases a zero-coupon bond at a deep discount. What is the primary risk this investor faces?

Accepted Answer

Interest rate risk due to long duration

Answer

Zero-coupon bonds have duration equal to their maturity, making them highly sensitive to interest rate changes.

Question 4

Which of the following best describes a 'covered call' options strategy?

Accepted Answer

Selling a call option while holding the underlying stock

Answer

A covered call involves writing (selling) a call option on shares already owned, generating premium income while capping upside.

Question 5

The Sharpe ratio measures portfolio performance by:

Accepted Answer

Dividing excess return by total standard deviation

Answer

The Sharpe ratio = (Portfolio Return − Risk-Free Rate) / Portfolio Standard Deviation, measuring return per unit of total risk.

(CPA) Certified Practicing Accountant Practice Test

(CPA) Certified Practicing Accountant Practice Test

CPA Investment Strategies 2