CPT Risk Management & Capital Allocation 2

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?

Accepted Answer

$41,342

Answer

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)?

Accepted Answer

Volatility-based position sizing

Answer

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?

Accepted Answer

1:3

Answer

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?

Accepted Answer

The risk that positions believed to be uncorrelated move together during stress events

Answer

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?

Accepted Answer

The probability-weighted average outcome of all possible trade results

Answer

Expected value is calculated as (win rate × average win) − (loss rate × average loss), representing the average outcome per trade over many repetitions.

(CPT) Certified Pro Trader Practice Test

(CPT) Certified Pro Trader Practice Test

CPT Risk Management & Capital Allocation 2