CPT Risk Management & Capital Allocation 3

Question 1

A trader uses the Kelly Criterion and calculates a Kelly percentage of 25%. To reduce risk of ruin while still benefiting from Kelly sizing, the recommended approach is to use:

Accepted Answer

Half Kelly (12.5%)

Answer

Half Kelly (50% of the full Kelly percentage) is widely recommended to reduce volatility and risk of ruin while preserving most of the long-term growth benefit.

Question 2

Which scenario best illustrates 'overleverage' risk for a retail trader?

Accepted Answer

Using 50:1 leverage on a volatile forex pair with no stop-loss

Answer

Using 50:1 leverage on a volatile pair with no stop-loss exposes the trader to catastrophic loss that can wipe out the entire account on a single adverse move.

Question 3

What is the primary purpose of a 'maximum daily loss limit' rule in a professional trading firm?

Accepted Answer

To prevent a single bad day from causing irreversible account damage that compromises future trading

Answer

A daily loss limit caps how much can be lost in one session, preserving enough capital and psychological stability to continue trading the next day.

Question 4

In the context of prop trading evaluations, what does 'scaling up' typically mean?

Accepted Answer

Increasing position size proportionally as account equity grows after consistent profitability

Answer

Scaling up means the prop firm grants larger capital allocations to traders who demonstrate consistent profitability and disciplined risk management.

Question 5

A trader has a win rate of 60% and an average win of $200, but an average loss of $400. What is the expected value per trade?

Accepted Answer

-$40

Answer

EV = (0.60 × $200) − (0.40 × $400) = $120 − $160 = −$40; the strategy is a net loser despite the high win rate.

(CPT) Certified Pro Trader Practice Test

(CPT) Certified Pro Trader Practice Test

CPT Risk Management & Capital Allocation 3