CPS Exam Preparation and CPS Certification Process 2 — Questions and Answers
Question 1: What topic area related to Modern Portfolio Theory should CPS candidates understand?
- Medieval trade economics
- The relationship between risk and return, diversification, and the efficient frontier (Correct answer)
- Real estate valuation only
- Agricultural commodity pricing
Correct answer: The relationship between risk and return, diversification, and the efficient frontier
Modern Portfolio Theory (MPT) is foundational to CPS content, covering how diversification reduces risk and the efficient frontier concept.
Question 2: Which performance measurement concept is important for CPS exam candidates to understand?
- Only gross total return
- Risk-adjusted return measures like Sharpe Ratio, Treynor Ratio, and Alpha (Correct answer)
- Only benchmark-relative returns
- Only after-tax returns
Correct answer: Risk-adjusted return measures like Sharpe Ratio, Treynor Ratio, and Alpha
Risk-adjusted performance measures such as Sharpe Ratio, Treynor Ratio, and Jensen's Alpha are key tools for evaluating portfolio performance tested on the CPS exam.
Question 3: What should CPS candidates know about the Capital Asset Pricing Model (CAPM)?
- It only applies to real estate investments
- It describes the relationship between systematic risk (beta) and expected return (Correct answer)
- It calculates exact future stock prices
- It eliminates the need for diversification
Correct answer: It describes the relationship between systematic risk (beta) and expected return
CAPM establishes that expected return on an investment equals the risk-free rate plus the investment's beta times the market risk premium.
Question 4: What is Jensen's Alpha and why is it important for the CPS exam?
- A method for calculating bond prices
- A measure of portfolio performance versus what CAPM would predict given the portfolio's beta (Correct answer)
- The first letter of a Greek alphabet used in statistics only
- A measure of portfolio size
Correct answer: A measure of portfolio performance versus what CAPM would predict given the portfolio's beta
Jensen's Alpha measures how much a portfolio outperformed or underperformed relative to what CAPM predicted given its level of systematic risk.
Question 5: What does the CPS curriculum typically cover regarding fixed income?
- Only government bonds
- Duration, convexity, yield curves, credit analysis, and bond portfolio strategies (Correct answer)
- Only corporate bonds
- Only international bonds
Correct answer: Duration, convexity, yield curves, credit analysis, and bond portfolio strategies
The CPS fixed income curriculum covers duration, convexity, interest rate risk, credit analysis, yield curve strategies, and portfolio construction techniques.
Question 6: Which topic area regarding client relationships is covered in CPS exam preparation?
- Marketing and advertising strategies
- Investment policy statement creation and matching portfolios to client goals and risk tolerance (Correct answer)
- Tax return preparation
- Real estate transaction management
Correct answer: Investment policy statement creation and matching portfolios to client goals and risk tolerance
CPS exam preparation includes understanding how to create investment policy statements and construct portfolios aligned with individual client goals, constraints, and risk profiles.
CPS Exam Preparation and CPS Certification Process 2
What topic area related to Modern Portfolio Theory should CPS candidates understand?