CPS Risk Management in Portfolios 3

Question 1

What is 'scenario analysis' in risk management?

Accepted Answer

Evaluating portfolio performance under different hypothetical market conditions

Answer

Scenario analysis evaluates how a portfolio would perform under various hypothetical market conditions such as a recession or rate spike.

Question 2

What does 'stress testing' a portfolio involve?

Accepted Answer

Simulating extreme adverse market conditions to assess potential losses

Answer

Stress testing simulates extreme market scenarios (like a 2008-style crash) to understand potential worst-case portfolio losses.

Question 3

What is 'counterparty risk' in portfolio management?

Accepted Answer

Risk that the other party to a transaction will default on its obligations

Answer

Counterparty risk is the chance that the other party in a financial transaction will fail to fulfill their contractual obligations.

Question 4

Which of the following is a 'risk-adjusted return' metric?

Accepted Answer

Treynor Ratio

Answer

The Treynor Ratio measures return per unit of systematic risk (beta), making it a risk-adjusted performance metric.

Question 5

What is 'reinvestment risk' in bond portfolio management?

Accepted Answer

The risk that coupon payments must be reinvested at lower rates

Answer

Reinvestment risk is the possibility that bond coupon payments will have to be reinvested at lower interest rates, reducing overall yield.

CPS - Certified Portfolio Specialist Practice Test