CFM Investment Analysis & Portfolio Management

Question 1

What is the primary goal of portfolio diversification?

Accepted Answer

To reduce overall portfolio risk

Answer

Portfolio diversification involves investing in a variety of assets across different classes, industries, and geographies. The primary goal is to spread risk, so that if one investment performs poorly, others may perform well, offsetting potential losses. This strategy aims to reduce the overall volatility and risk of the portfolio without necessarily sacrificing returns.

Question 2

What does beta measure in a stock?

Accepted Answer

Volatility compared to the market

Answer

Beta is a measure of a stock's volatility, or systematic risk, in relation to the overall market. A beta of 1 indicates the stock's price moves with the market, while a beta greater than 1 suggests higher volatility and a beta less than 1 suggests lower volatility. It helps investors understand how much a stock's price is expected to move in response to market changes.

Question 3

What is the function of the Sharpe ratio?

Accepted Answer

To assess risk-adjusted returns

Answer

The Sharpe ratio measures the performance of an investment by adjusting for its risk. It calculates the excess return (return above the risk-free rate) per unit of total risk (standard deviation). A higher Sharpe ratio indicates a better risk-adjusted return, meaning the investment is generating more return for the amount of risk taken.

Question 4

What is considered a defensive stock?

Accepted Answer

A stock with stable returns during downturns

Answer

A defensive stock refers to a company whose earnings and stock price are relatively stable and tend to hold up well during economic downturns or recessions. These companies typically operate in essential sectors like utilities, consumer staples, or healthcare, providing products and services that people need regardless of the economic climate. They are valued for their consistent performance and lower volatility.

Question 5

Which of the following is a component of the Capital Asset Pricing Model (CAPM)?

Accepted Answer

Risk-free rate

Answer

The Capital Asset Pricing Model (CAPM) is a financial model that calculates the expected return on an asset or investment. Its key components include the risk-free rate, which represents the return on an investment with zero risk (e.g., U.S. Treasury bonds), the market risk premium, and the asset's beta. The risk-free rate serves as the baseline return an investor expects for taking no risk.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Investment Analysis & Portfolio Management