CPM Asset Allocation & Diversification 2

Question 1

The correlation coefficient between two assets ranges from:

Accepted Answer

−1 to +1

Answer

Correlation coefficients range from −1 (perfect negative correlation) to +1 (perfect positive correlation), with 0 indicating no linear relationship.

Question 2

A portfolio equally divided between stocks and bonds reduces risk primarily because:

Accepted Answer

Stocks and bonds historically have low or negative correlations with each other

Answer

Stocks and bonds often move in opposite directions (especially during risk-off events), so combining them reduces overall portfolio volatility through diversification.

Question 3

Which portfolio construction technique allocates assets based on risk contribution rather than dollar value?

Accepted Answer

Risk parity

Answer

Risk parity allocates portfolio weights so that each asset class contributes equally to total portfolio risk, often using leverage to boost lower-volatility assets.

Question 4

A core-satellite portfolio structure involves:

Accepted Answer

A passive core holding supplemented by active satellite positions targeting specific opportunities

Answer

Core-satellite combines a low-cost passive core (providing broad market exposure) with active satellite positions aimed at generating alpha or targeting specific themes.

Question 5

Which of the following best describes a glide path in asset allocation?

Accepted Answer

A systematic shift from higher-risk to lower-risk assets as a target date approaches

Answer

A glide path gradually reduces risk (e.g., by shifting from equities to bonds) as an investor approaches a target date such as retirement, aligning risk with decreasing time horizon.

CPM - Certified Portfolio Manager Practice Test

CPM - Certified Portfolio Manager Practice Test

CPM Asset Allocation & Diversification 2