IAR Portfolio Management 1

Question 1

According to Modern Portfolio Theory (MPT), what is the primary benefit of diversification?

Accepted Answer

It reduces unsystematic risk without proportionally reducing expected return

Answer

MPT shows that combining assets with low correlations reduces unsystematic (company-specific) risk while maintaining expected return, improving the risk-return trade-off.

Question 2

The efficient frontier in Modern Portfolio Theory represents portfolios that:

Accepted Answer

Maximize expected return for a given level of risk

Answer

The efficient frontier consists of portfolios that offer the highest expected return for each level of risk (standard deviation), representing optimal diversification.

Question 3

An investment adviser is determining strategic asset allocation for a client. Which factor is MOST important in this decision?

Accepted Answer

The client's investment time horizon and risk tolerance

Answer

Strategic asset allocation is a long-term framework driven primarily by the client's time horizon and risk tolerance, which determine the appropriate mix of asset classes.

Question 4

Which of the following BEST describes systematic risk?

Accepted Answer

Market-wide risk that affects all securities and cannot be diversified away

Answer

Systematic risk (market risk) stems from macroeconomic factors affecting all investments, such as interest rate changes or recessions, and cannot be eliminated through diversification.

Question 5

A portfolio has a beta of 1.4. If the market rises 10%, what is the expected portfolio return based on beta alone?

Accepted Answer

14%

Answer

Beta measures sensitivity to market movements; a beta of 1.4 means the portfolio is expected to move 1.4 times the market return, so 1.4 × 10% = 14%.

IAR Practice Test

IAR Practice Test

IAR Portfolio Management 1