CPFM Investment Portfolio Management 2 — Questions and Answers
Question 1: What does the Sharpe ratio measure in a portfolio?
- Total return only
- Risk-adjusted excess return per unit of total risk (Correct answer)
- Dividend yield
- Portfolio turnover
Correct answer: Risk-adjusted excess return per unit of total risk
The Sharpe ratio divides excess return over the risk-free rate by standard deviation, measuring return per unit of total risk.
Question 2: Diversification primarily reduces which type of risk?
- Systematic (market) risk
- Unsystematic (specific) risk (Correct answer)
- Inflation risk
- Interest rate risk
Correct answer: Unsystematic (specific) risk
Diversification reduces unsystematic, security-specific risk while systematic market risk remains.
Question 3: In the Capital Asset Pricing Model, beta measures a security's:
- Total volatility
- Sensitivity to market movements (Correct answer)
- Dividend payout
- Liquidity
Correct answer: Sensitivity to market movements
Beta measures a security's sensitivity to overall market movements, capturing systematic risk.
Question 4: What is the main goal of strategic asset allocation?
- Timing short-term market swings
- Setting long-term target weights based on objectives and risk tolerance (Correct answer)
- Maximizing trading frequency
- Avoiding all equities
Correct answer: Setting long-term target weights based on objectives and risk tolerance
Strategic asset allocation establishes long-term target weights aligned with investor goals and risk tolerance.
Question 5: An efficient portfolio on the efficient frontier offers:
- The lowest possible return
- The highest expected return for a given level of risk (Correct answer)
- Zero risk
- Maximum turnover
Correct answer: The highest expected return for a given level of risk
Efficient frontier portfolios provide the maximum expected return for each level of risk.
Question 6: Rebalancing a portfolio involves:
- Selling all holdings annually
- Realigning weights back to target allocations (Correct answer)
- Buying only the best performer
- Eliminating bonds
Correct answer: Realigning weights back to target allocations
Rebalancing restores asset weights to their target allocation after market movements cause drift.
Question 7: Which metric measures return per unit of systematic risk?
- Sharpe ratio
- Treynor ratio (Correct answer)
- Standard deviation
- Current ratio
Correct answer: Treynor ratio
The Treynor ratio divides excess return by beta, measuring return per unit of systematic risk.
CPFM Investment Portfolio Management 2
What does the Sharpe ratio measure in a portfolio?