CPT Portfolio Diversification Strategies 2

Question 1

Which metric measures the degree to which two assets move together, ranging from -1 to +1?

Accepted Answer

Correlation coefficient

Answer

The correlation coefficient quantifies the linear relationship between two assets, with -1 indicating perfect negative correlation and +1 indicating perfect positive correlation.

Question 2

An investor holds only domestic large-cap stocks. Which diversification step would most reduce country-specific risk?

Accepted Answer

Adding international equities

Answer

Adding international equities introduces exposure to different economic cycles and political environments, reducing country-specific (sovereign) risk.

Question 3

What is the primary purpose of rebalancing a diversified portfolio?

Accepted Answer

To restore the portfolio to its target asset allocation

Answer

Rebalancing restores a portfolio to its intended risk profile after market movements cause asset class weights to drift from targets.

Question 4

Which portfolio construction approach weights assets inversely to their volatility?

Accepted Answer

Risk parity portfolio

Answer

Risk parity allocates more capital to lower-volatility assets so each asset contributes equally to overall portfolio risk.

Question 5

An investor adds Treasury bonds to an equity portfolio. The primary diversification benefit comes from bonds':

Accepted Answer

Tendency to appreciate when equities fall sharply

Answer

Treasuries typically exhibit negative or low correlation with equities during market downturns, providing a cushion when stocks decline.

(CPT) Certified Pro Trader Practice Test

(CPT) Certified Pro Trader Practice Test

CPT Portfolio Diversification Strategies 2