CPS Portfolio Construction and Design 2

Question 1

What is the efficient frontier in modern portfolio theory?

Accepted Answer

The set of portfolios offering maximum return for a given risk level

Answer

The efficient frontier represents portfolios that offer the highest expected return for each level of risk.

Question 2

Which metric measures the return per unit of total risk in portfolio analysis?

Accepted Answer

Sharpe Ratio

Answer

The Sharpe Ratio measures excess return per unit of total risk (standard deviation), helping compare portfolio efficiency.

Question 3

What does 'correlation' between assets indicate in portfolio construction?

Accepted Answer

How assets move in relation to each other

Answer

Correlation indicates how two assets move relative to each other, with low or negative correlation providing diversification benefits.

Question 4

Which asset class is typically added to a portfolio to reduce equity risk through diversification?

Accepted Answer

Fixed income / bonds

Answer

Fixed income securities like bonds typically have low or negative correlation with equities, providing diversification benefits.

Question 5

What is 'core-satellite' portfolio construction?

Accepted Answer

Combining a stable core with opportunistic satellite positions

Answer

Core-satellite construction pairs a low-cost, diversified core with smaller satellite positions targeting specific opportunities or alpha.

CPS - Certified Portfolio Specialist Practice Test