FIA Portfolio Theory & Asset Management 3

Question 1

According to CAPM, which type of risk is rewarded with higher expected returns?

Accepted Answer

Systematic risk

Answer

CAPM states that only systematic (market) risk is compensated because unsystematic risk can be diversified away.

Question 2

What does a portfolio beta of 1.5 indicate?

Accepted Answer

The portfolio moves 1.5 times as much as the market

Answer

A beta of 1.5 means the portfolio is expected to move 1.5% for every 1% move in the market.

Question 3

Which asset allocation strategy involves periodically buying and selling assets to maintain original target weights?

Accepted Answer

Rebalancing

Answer

Rebalancing restores a portfolio to its original strategic target weights after market movements cause drift.

Question 4

In portfolio management, what does 'alpha' represent?

Accepted Answer

Return earned in excess of what CAPM predicts given the portfolio's beta

Answer

Alpha measures the portfolio's excess return beyond the expected return based on its systematic risk (beta).

Question 5

Which bond portfolio strategy aims to match asset duration to liability duration to reduce interest rate risk?

Accepted Answer

Immunization

Answer

Immunization matches the duration of assets and liabilities so that interest rate changes have offsetting effects.

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