Investment Jobs Portfolio Analysis Test 2

Question 1

Which risk measure estimates the maximum potential loss in a portfolio over a given time period at a specified confidence level?

Accepted Answer

Value at Risk (VaR)

Answer

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?

Accepted Answer

The relationship between systematic risk (beta) and expected return

Answer

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?

Accepted Answer

Unsystematic (idiosyncratic) risk

Answer

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?

Accepted Answer

Beta

Answer

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?

Accepted Answer

To restore the portfolio to its target asset allocation

Answer

Portfolio rebalancing involves buying and selling assets to bring the portfolio back to its intended asset allocation after market movements cause drift.

Investment Practice Test

Investment Practice Test

Investment Jobs Portfolio Analysis Test 2