IMC Portfolio Management Principles

Question 1

What is the 'efficient frontier' in modern portfolio theory?

Accepted Answer

The set of portfolios that offer the highest expected return for a given level of risk, or the lowest risk for a given expected return

Answer

The minimum return required by a portfolio manager

Answer

The maximum risk a regulator permits

Answer

The boundary between investment grade and high yield

Question 2

What is the Capital Asset Pricing Model (CAPM) used for?

Accepted Answer

To determine the expected return of an asset based on its systematic risk (beta) relative to the market

Answer

To calculate a company's earnings per share

Answer

To calculate the fair value of a bond

Answer

To measure operational risk in banks

Question 3

In portfolio construction, what is 'standard deviation' used to measure?

Accepted Answer

The total risk (volatility) of a portfolio or investment, measuring the dispersion of returns around the mean

Answer

The average return of a portfolio over time

Answer

The correlation between two assets

Answer

The skewness of return distribution

Question 4

What does 'absolute return' mean as an investment objective?

Accepted Answer

Targeting a positive return regardless of market direction, rather than outperforming a benchmark

Answer

Achieving a return above inflation only

Answer

Achieving the highest possible return without any risk constraints

Answer

Matching the return of a specified index

Question 5

What is 'tracking error' in the context of index funds?

Accepted Answer

The degree to which a fund's returns deviate from its benchmark index

Answer

Errors made by index providers in calculating indices

Answer

The difference between bid and offer prices

Answer

The fund's total expense ratio

Question 6

What is the primary goal of 'liability-driven investing' (LDI)?

Accepted Answer

To manage assets specifically to meet future liabilities, such as pension obligations

Answer

To maximise absolute returns regardless of obligations

Answer

To minimise management fees

Answer

To invest only in liability-free companies