CPFM Investment Portfolio Management 2

Question 1

What does the Sharpe ratio measure in a portfolio?

Accepted Answer

Risk-adjusted excess return per unit of total risk

Answer

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?

Accepted Answer

Unsystematic (specific) risk

Answer

Diversification reduces unsystematic, security-specific risk while systematic market risk remains.

Question 3

In the Capital Asset Pricing Model, beta measures a security's:

Accepted Answer

Sensitivity to market movements

Answer

Beta measures a security's sensitivity to overall market movements, capturing systematic risk.

Question 4

What is the main goal of strategic asset allocation?

Accepted Answer

Setting long-term target weights based on objectives and risk tolerance

Answer

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:

Accepted Answer

The highest expected return for a given level of risk

Answer

Efficient frontier portfolios provide the maximum expected return for each level of risk.

CPFM Practice Test