#1
Which of the following is NOT a type of financial risk?
Operational risk
ExplanationOperational risk is not a type of financial risk; it relates to operational failures and internal processes.
#2
What does CAPM stand for in finance?
Capital Asset Pricing Model
ExplanationCAPM stands for Capital Asset Pricing Model, a method used to determine the expected return on an investment.
#3
What is the primary goal of portfolio management?
To achieve a balance between risk and return
ExplanationPortfolio management aims to achieve a balance between maximizing returns and managing risk.
#4
Which of the following is a characteristic of diversification in portfolio management?
It reduces total risk
ExplanationDiversification reduces total portfolio risk by spreading investments across different assets.
#5
What is the concept of correlation in portfolio management?
It measures the relationship between two assets' returns
ExplanationCorrelation measures the degree of relationship between the returns of two assets in a portfolio.
#6
What does 'beta' represent in the context of financial risk?
A measure of market risk
ExplanationBeta is a measure of an asset's market risk, indicating its sensitivity to market movements.
#7
What is the formula for calculating the standard deviation of a portfolio return?
∑(wi × (σi)^2)
ExplanationThe formula for the standard deviation of a portfolio return involves the weights and variances of individual assets.
#8
What is the formula for calculating the expected return of a portfolio?
∑(wi × ri)
ExplanationThe expected return of a portfolio is calculated by summing the products of weights and individual asset returns.
#9
In the context of portfolio management, what does the term 'alpha' represent?
Excess return relative to the market
ExplanationAlpha represents the excess return of a portfolio relative to its expected market return.
#10
What is the primary purpose of Monte Carlo simulation in portfolio management?
To estimate portfolio risk and return
ExplanationMonte Carlo simulation is used to estimate the potential outcomes of a portfolio under different market conditions.
#11
Which of the following is NOT a measure of portfolio risk?
Beta
ExplanationBeta is a measure of market risk and is considered a measure of portfolio risk.
#12
Which of the following is a limitation of the Capital Asset Pricing Model (CAPM)?
It does not account for unsystematic risk
ExplanationCAPM does not consider unsystematic (specific) risk in its calculations.
#13
Which of the following best describes the term 'portfolio optimization'?
Finding the best combination of assets to achieve a specific objective
ExplanationPortfolio optimization involves selecting the optimal combination of assets to meet specific investment objectives.
#14
What is the primary limitation of using historical data in portfolio management?
It does not account for future market conditions
ExplanationHistorical data may not accurately reflect future market conditions, posing a limitation in portfolio management.
#15
What is the main objective of stress testing in portfolio management?
To assess the impact of extreme market conditions on a portfolio
ExplanationStress testing evaluates how a portfolio performs under extreme market conditions, helping assess potential risks and vulnerabilities.