IMC Portfolio Management

Question 1

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

Accepted Answer

It reduces unsystematic (specific) risk without necessarily reducing expected return

Answer

It eliminates all investment risk

Answer

It guarantees a minimum level of return

Answer

It increases the portfolio's exposure to market risk

Question 2

The Capital Asset Pricing Model (CAPM) is expressed as E(Ri) = Rf + βi(E(Rm) - Rf). What does the term βi represent?

Accepted Answer

The sensitivity of the asset's return to movements in the overall market

Answer

The risk-free rate of return

Answer

The expected return of the market portfolio

Answer

The unsystematic risk of the asset

Question 3

An investor with a 'balanced' risk profile would most likely hold which of the following asset allocations?

Accepted Answer

A mix of equities, bonds, property and some cash

Answer

100% equities

Answer

100% cash deposits

Answer

100% high-yield bonds

Question 4

What is 'rebalancing' in the context of portfolio management?

Accepted Answer

Adjusting portfolio holdings to restore the original target asset allocation

Answer

Completely changing the investment strategy

Answer

Selling all assets and moving to cash

Answer

Increasing leverage in the portfolio

Question 5

Which performance measure adjusts returns for total risk using standard deviation?

Accepted Answer

The Sharpe ratio

Answer

The Treynor ratio

Answer

Jensen's alpha

Answer

The information ratio

Question 6

What is the key advantage of a passive (index-tracking) investment strategy compared to active management?

Accepted Answer

It typically has lower management fees and transaction costs

Answer

It always outperforms the benchmark

Answer

It provides guaranteed returns

Answer

It eliminates market risk entirely