CFE Investment & Portfolio Management Flashcards

Which measure represents the total return an investor earns if a bond is held until it matures?

Answer: Yield to maturity (YTM)

Yield to maturity (YTM) represents the total annualized return on a bond if held to maturity, accounting for coupon payments and any price difference from par.

A financial examiner identifies securities held by a bank that have lost significant value and are unlikely to recover. These are best classified as:

Answer: Other-than-temporarily impaired (OTTI)

Securities with permanent value decline are classified as other-than-temporarily impaired (OTTI), requiring immediate recognition of credit losses.

Which asset allocation strategy automatically rebalances a portfolio by selling outperforming assets and buying underperforming ones?

Answer: Strategic (rebalancing) asset allocation

Strategic asset allocation with periodic rebalancing maintains target weights by selling assets that have grown beyond their target percentage and buying those below target.

What is the primary concern with a financial institution holding excessive amounts of illiquid long-term investments?

Answer: Asset-liability mismatch causing liquidity risk

Holding illiquid long-term assets against short-term liabilities creates an asset-liability mismatch, posing liquidity risk if depositors demand funds.

Which US regulatory body oversees investment advisers managing assets over $110 million?

Answer: SEC

The Securities and Exchange Commission (SEC) has jurisdiction over investment advisers with assets under management exceeding $110 million.

A portfolio shows negative correlation between two asset classes. What does this mean for diversification?

Answer: The assets move in opposite directions, providing diversification benefits

Negative correlation means assets move in opposite directions, so when one falls the other rises, reducing overall portfolio volatility and improving diversification.