CIMA Risk and Performance Measurement 2 — Questions and Answers
Question 1: Which risk measure captures the average loss in the worst-case scenarios beyond the Value at Risk threshold?
- Standard deviation
- Expected Shortfall (CVaR) (Correct answer)
- Tracking error
- Beta
Correct answer: Expected Shortfall (CVaR)
Expected Shortfall (Conditional VaR) measures the average loss in the tail beyond the VaR cutoff, providing a more complete picture of tail risk.
Question 2: A portfolio has an annualized return of 12% with a standard deviation of 18%. The risk-free rate is 3%. What is the Sharpe ratio?
- 0.50 (Correct answer)
- 0.67
- 0.75
- 0.83
Correct answer: 0.50
Sharpe ratio = (12% - 3%) / 18% = 9% / 18% = 0.50.
Question 3: Which of the following best describes systematic risk in a portfolio context?
- Risk that can be eliminated through diversification
- Market-wide risk that cannot be diversified away (Correct answer)
- Credit risk associated with individual issuers
- Operational risk from internal process failures
Correct answer: Market-wide risk that cannot be diversified away
Systematic risk is market-wide risk driven by macroeconomic factors that affects all assets and cannot be eliminated through diversification.
Question 4: The Treynor ratio differs from the Sharpe ratio in that it uses which measure in the denominator?
- Standard deviation
- Tracking error
- Beta (Correct answer)
- Semi-deviation
Correct answer: Beta
The Treynor ratio uses beta (systematic risk) in the denominator, while the Sharpe ratio uses standard deviation (total risk).
Question 5: An investor measures downside risk using a target return of 5%. Which risk metric is most appropriate?
- Variance
- Sortino ratio denominator (downside deviation) (Correct answer)
- Beta
- Correlation coefficient
Correct answer: Sortino ratio denominator (downside deviation)
Downside deviation (used in the Sortino ratio) only penalizes returns falling below a specified target, capturing downside risk relative to that threshold.
Question 6: Which performance attribution component isolates the manager's skill in selecting individual securities within each sector?
- Allocation effect
- Selection effect (Correct answer)
- Interaction effect
- Currency effect
Correct answer: Selection effect
The selection effect in Brinson-Hood-Beebower attribution measures the manager's ability to pick securities that outperform the benchmark within a sector.
Question 7: A bond portfolio has a duration of 6 years and interest rates rise by 50 basis points. Approximately how much will the portfolio value change?
- +3.0%
- -3.0% (Correct answer)
- +0.5%
- -0.5%
Correct answer: -3.0%
Price change ≈ -Duration × ΔRate = -6 × 0.005 = -0.03, or approximately -3.0%.
CIMA Risk and Performance Measurement 2
Which risk measure captures the average loss in the worst-case scenarios beyond the Value at Risk threshold?