Investment Jobs Portfolio Analysis Test 2 — Questions and Answers
Question 1: Which risk measure estimates the maximum potential loss in a portfolio over a given time period at a specified confidence level?
- Standard deviation
- Beta
- Value at Risk (VaR) (Correct answer)
- Treynor ratio
Correct answer: Value at Risk (VaR)
Value at Risk (VaR) estimates the maximum loss expected on a portfolio over a defined time horizon at a given confidence level (e.g., 95% or 99%).
Question 2: In the Capital Asset Pricing Model (CAPM), what does the security market line (SML) represent?
- The efficient frontier of risky assets
- The relationship between systematic risk (beta) and expected return (Correct answer)
- The correlation between two securities
- The optimal portfolio combining the market and risk-free asset
Correct answer: The relationship between systematic risk (beta) and expected return
The Security Market Line plots expected return as a linear function of beta (systematic risk), showing the required return for any level of market risk.
Question 3: Which type of risk can be eliminated through diversification?
- Systematic risk
- Market risk
- Unsystematic (idiosyncratic) risk (Correct answer)
- Interest rate risk
Correct answer: Unsystematic (idiosyncratic) risk
Unsystematic (or idiosyncratic) risk is company-specific risk that can be diversified away by holding a broad portfolio of uncorrelated assets.
Question 4: A portfolio manager uses the Treynor ratio to evaluate performance. What risk measure does this ratio use?
- Standard deviation
- Beta (Correct answer)
- Semi-variance
- Duration
Correct answer: Beta
The Treynor ratio divides excess portfolio return by beta (systematic risk), making it appropriate for evaluating diversified portfolios that are part of a larger portfolio.
Question 5: What is the primary purpose of portfolio rebalancing?
- To maximize short-term returns
- To restore the portfolio to its target asset allocation (Correct answer)
- To minimize transaction costs
- To eliminate all risk from the portfolio
Correct answer: To restore the portfolio to its target asset allocation
Portfolio rebalancing involves buying and selling assets to bring the portfolio back to its intended asset allocation after market movements cause drift.
Question 6: Which analytical framework divides portfolio returns into asset allocation, security selection, and interaction effects?
- Markowitz mean-variance analysis
- Brinson-Hood-Beebower performance attribution (Correct answer)
- Black-Litterman model
- Factor analysis
Correct answer: Brinson-Hood-Beebower performance attribution
The Brinson-Hood-Beebower (BHB) model is a widely used framework for attributing portfolio performance to asset allocation decisions versus security selection.
Investment Jobs Portfolio Analysis Test 2
Which risk measure estimates the maximum potential loss in a portfolio over a given time period at a specified confidence level?