CPFM Investment Portfolio Management 3 — Questions and Answers
Question 1: A bond's duration measures its sensitivity to changes in:
- Equity prices
- Interest rates (Correct answer)
- Currency exchange
- Credit spreads only
Correct answer: Interest rates
Duration estimates how much a bond's price changes for a given change in interest rates.
Question 2: What does alpha represent in portfolio performance?
- Return attributable to market movement
- Excess return above the benchmark expected return (Correct answer)
- The risk-free rate
- Total portfolio risk
Correct answer: Excess return above the benchmark expected return
Alpha is the return earned beyond what the model predicts given the portfolio's risk, reflecting manager skill.
Question 3: A correlation coefficient of -1 between two assets indicates:
- They move identically
- They move in perfectly opposite directions (Correct answer)
- No relationship
- Both are risk-free
Correct answer: They move in perfectly opposite directions
A correlation of -1 means the assets move in perfectly opposite directions, offering strong diversification.
Question 4: Tactical asset allocation differs from strategic allocation because it:
- Never changes weights
- Makes short-term shifts to exploit market opportunities (Correct answer)
- Ignores risk tolerance
- Only holds cash
Correct answer: Makes short-term shifts to exploit market opportunities
Tactical allocation temporarily deviates from strategic targets to capitalize on perceived short-term opportunities.
Question 5: Value at Risk (VaR) estimates:
- Guaranteed minimum return
- Potential loss over a period at a given confidence level (Correct answer)
- Total dividends
- Average duration
Correct answer: Potential loss over a period at a given confidence level
VaR estimates the maximum expected loss over a defined horizon at a specified confidence level.
Question 6: Which investment typically offers the highest liquidity?
- Real estate
- Money market funds (Correct answer)
- Private equity
- Collectibles
Correct answer: Money market funds
Money market funds are highly liquid and can be converted to cash quickly with minimal price impact.
Question 7: A laddered bond portfolio helps manage:
- Equity beta
- Reinvestment and interest rate risk (Correct answer)
- Currency risk
- Liquidity of stocks
Correct answer: Reinvestment and interest rate risk
Bond ladders stagger maturities to reduce reinvestment and interest rate risk over time.
CPFM Investment Portfolio Management 3
A bond's duration measures its sensitivity to changes in: