CPT Risk Management & Capital Allocation 2 — Questions and Answers
Question 1: A trader has a $50,000 account and uses a 2% risk-per-trade rule. After 10 consecutive losses, approximately how much capital remains?
- $40,000
- $41,342 (Correct answer)
- $43,800
- $45,000
Correct answer: $41,342
With 2% risk per trade compounded, after 10 losses: $50,000 × (0.98)^10 ≈ $41,342.
Question 2: Which risk management approach adjusts position size based on recent market volatility, typically using Average True Range (ATR)?
- Fixed fractional sizing
- Kelly Criterion
- Volatility-based position sizing (Correct answer)
- Martingale sizing
Correct answer: Volatility-based position sizing
Volatility-based position sizing uses ATR to normalize risk so that each trade risks approximately the same dollar amount regardless of the asset's volatility.
Question 3: A trader enters a long position at $100 with a stop-loss at $95 and a profit target at $115. What is the Risk-to-Reward ratio?
- 1:2
- 1:3 (Correct answer)
- 3:1
- 2:1
Correct answer: 1:3
Risk is $5 (100-95) and reward is $15 (115-100), giving a 1:3 risk-to-reward ratio.
Question 4: What does 'correlation risk' refer to in portfolio management?
- The risk that stop-loss orders will not be filled at the specified price
- The risk that positions believed to be uncorrelated move together during stress events (Correct answer)
- The risk of holding correlated assets with different expiry dates
- The risk that a broker's platform fails during high-volatility periods
Correct answer: The risk that positions believed to be uncorrelated move together during stress events
Correlation risk is the danger that assets assumed to be diversifying actually move together during market stress, eliminating the expected diversification benefit.
Question 5: Which of the following best describes 'expected value' (EV) in the context of a trading strategy?
- The average profit of the last 20 trades
- The probability-weighted average outcome of all possible trade results (Correct answer)
- The maximum potential profit on a single trade
- The breakeven win rate required at a given risk-reward ratio
Correct answer: The probability-weighted average outcome of all possible trade results
Expected value is calculated as (win rate × average win) − (loss rate × average loss), representing the average outcome per trade over many repetitions.
Question 6: A professional trader who risks 1% per trade with a 2:1 reward-to-risk ratio needs a minimum win rate above what percentage to be profitable?
- 25%
- 33% (Correct answer)
- 40%
- 50%
Correct answer: 33%
At a 2:1 reward-to-risk ratio, the breakeven win rate is 1/(1+2) = 33.3%, so any win rate above ~33% yields positive expectancy.
Question 7: What is a 'drawdown' in trading?
- A withdrawal of profits from the trading account
- The decline from a peak equity value to a subsequent trough before a new peak is reached (Correct answer)
- The transaction fee charged per trade by the broker
- The margin call threshold set by the broker
Correct answer: The decline from a peak equity value to a subsequent trough before a new peak is reached
Drawdown measures the peak-to-trough decline in account equity before a new high is made, reflecting the magnitude of losing periods.
CPT Risk Management & Capital Allocation 2
A trader has a $50,000 account and uses a 2% risk-per-trade rule.
After 10 consecutive losses, approximately how much capital remains?