Exam Preparation and CPS Certification Process Flashcards

What does 'portfolio attribution analysis' measure and why is it tested on the CPS exam?

Answer: How much of portfolio return came from asset allocation decisions versus security selection

Performance attribution separates portfolio returns into components from asset allocation and security selection decisions, helping evaluate where value was added or lost.

What is the 'Treynor Ratio' and how does it differ from the Sharpe Ratio?

Answer: Treynor uses systematic risk (beta) while Sharpe uses total risk (standard deviation)

The Treynor Ratio measures return per unit of systematic risk (beta), while the Sharpe Ratio measures return per unit of total risk (standard deviation).

What does the 'information ratio' measure in portfolio management?

Answer: Active return relative to the active risk (tracking error) taken

The information ratio measures the portfolio's active return (above benchmark) per unit of tracking error, evaluating the consistency of active management.

What should CPS candidates understand about 'Monte Carlo simulation' in portfolio planning?

Answer: A technique that runs thousands of simulations to estimate the probability of achieving financial goals

Monte Carlo simulation uses many random scenarios to estimate the probability that a portfolio will meet a client's financial goals under various market conditions.

What is the significance of understanding 'sequence of returns risk' for the CPS exam?

Answer: Poor early returns can permanently damage a portfolio that is being drawn down, even if later returns recover

Sequence of returns risk is critical for retirees because experiencing poor returns early in retirement while withdrawing funds can deplete the portfolio even if returns later improve.

What is 'portfolio rebalancing frequency' and how should CPS candidates think about it?

Answer: Rebalancing frequency involves trade-offs between maintaining target allocation and transaction costs

CPS professionals must understand that rebalancing frequency involves balancing the cost of drift from target allocation against the transaction costs and tax consequences of frequent rebalancing.