CPM Risk Management

Question 1

Which risk measure quantifies the maximum expected loss over a given time period at a specified confidence level?

Accepted Answer

Value at Risk (VaR)

Answer

Value at Risk (VaR) estimates the maximum loss expected over a defined time horizon at a given confidence level (e.g., 95% or 99%).

Question 2

A portfolio manager notices that a fund's returns correlate strongly with a broad market index during downturns but diverge during upturns. This best describes which type of risk?

Accepted Answer

Downside correlation risk

Answer

Downside correlation risk refers to the tendency of assets to become more correlated during market downturns, reducing diversification benefits precisely when they are most needed.

Question 3

Which of the following is a limitation of using historical standard deviation as a standalone risk measure for a portfolio?

Accepted Answer

It assumes returns are normally distributed and stationary

Answer

Standard deviation assumes normally distributed returns, but portfolio returns often exhibit fat tails and skewness, making historical standard deviation alone insufficient.

Question 4

Conditional Value at Risk (CVaR) is considered superior to VaR because it:

Accepted Answer

Captures the average loss beyond the VaR threshold

Answer

CVaR (also called Expected Shortfall) measures the average loss in the worst-case scenarios beyond the VaR cutoff, providing better insight into tail risk.

Question 5

A portfolio manager wants to hedge interest rate risk in a bond portfolio. The most direct hedging instrument would be:

Accepted Answer

Interest rate swaps or Treasury futures

Answer

Interest rate swaps and Treasury futures directly offset changes in bond prices caused by interest rate movements, making them the most appropriate hedges.

CPM - Certified Portfolio Manager Practice Test

CPM - Certified Portfolio Manager Practice Test

CPM Risk Management