CPS Exam Preparation and CPS Certification Process 3

Question 1

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

Accepted Answer

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

Answer

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

Question 2

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

Accepted Answer

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

Answer

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

Question 3

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

Accepted Answer

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

Answer

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

Question 4

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

Accepted Answer

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

Answer

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.

Question 5

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

Accepted Answer

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

Answer

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.

CPS - Certified Portfolio Specialist Practice Test

CPS - Certified Portfolio Specialist Practice Test

CPS Exam Preparation and CPS Certification Process 3