Risk Assessment & Asset Allocation Flashcards
7 cards from real CFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Assessment & Asset Allocation flashcards as text
A fund manager observes that two assets have a correlation coefficient of -1.0. What does this imply for portfolio construction?
Answer: Perfect diversification is achievable, potentially eliminating all portfolio risk
A correlation of -1.0 means assets move in perfectly opposite directions, allowing a portfolio to be constructed that eliminates all unsystematic and systematic risk.
Which risk measure captures the probability that portfolio losses will exceed a specified threshold over a given time horizon?
Answer: Value at Risk (VaR)
Value at Risk (VaR) quantifies the maximum expected loss at a given confidence level over a specified time period.
In mean-variance optimization, the efficient frontier represents portfolios that:
Answer: Maximize return for every level of risk
The efficient frontier consists of portfolios that maximize expected return for each level of risk (standard deviation), with no other portfolio offering a better risk-return tradeoff.
A portfolio has a beta of 1.4. If the market rises 10%, the portfolio is expected to:
Answer: Rise 14%
Beta measures systematic risk; a beta of 1.4 means the portfolio is expected to move 1.4 times the market movement, so a 10% market gain implies a 14% portfolio gain.
Which asset class has historically exhibited the lowest correlation with US equities, making it most useful for diversification?
Answer: Commodities
Commodities have historically exhibited low or negative correlation with US equities, providing meaningful diversification benefits in a multi-asset portfolio.
Conditional Value at Risk (CVaR), also known as Expected Shortfall, is preferred over VaR because it:
Answer: Captures the average loss in the tail beyond the VaR threshold
CVaR measures the expected loss given that the loss exceeds the VaR threshold, capturing tail risk that VaR ignores.
A risk-averse investor would prefer which of the following portfolio characteristics, all else equal?
Answer: Lower variance and same expected return
Risk-averse investors prefer less uncertainty for a given expected return, so a portfolio with lower variance at the same expected return is strictly preferred.