Exam Modules Finals by section

You're analyzing the probability of potential losses in a portfolio. You're focusing on the tail of the distribution under extreme events. Furthermore, you want to know how big the loss will be when there is an exceedance event. Which of the following risk metrics would answer your question? A) expected shortfall B) semi-standard deviation C) downside deviation D) value-at-risk

ANSWER A

Calculate the Sharpe Ratio for the following mutual fund: Return Risk-free Rate Year 1 17% 4.0% Year 2 12% 3.5% Year 3 8% 3.0% Year 4 11% 3.5% Year 5 7% 3.0% A) 2.41 B) 3.49 C) 3.12 D) 1.93

ANSWER A CIMA Section IV.C. Performance Measurement and Attribution Step 1: 17 - 4 = 13; 12 - 3.5 = 8.5; 8 - 3 = 5; 11 - 3.5 = 7.5; 7 - 3 = 4. Average real return = 7.60. Step 2: Calculate SDEV (13, 8.5, 5, 7.5, 4) = 3.1528. Step 3: Divide 7.60 by 3.1528 = 2.4106. Here we used population (N) to get SDEV. But be ready to calculate using sample (n-1) just in case.

The emerging markets fund you're tracking has an expected return of 14.1% and a standard deviation of 19.8%. The MSCI emerging markets index has an expected return of 13.3% and a standard deviation of 22.4%. The covariance between the two is .0278. What is the correlation between the two? A) 0.6268 B) 0.4329 C) 0.6579 D) 0.4842

ANSWER A Correlation = covariance divided by the product of the standard deviations. CCA,B = CovA,B / (SDA * SDB) = 0.0278 / (0.198 * 0.224) = 0.6268.

A preferred stock will pay a dividend of $3.00 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 9% on this stock. Use the constant growth dividend discount model (DDM) to calculate the intrinsic value of this preferred stock. A) $31.82 B) $0.27 C) $56.25 D) $33.33

ANSWER D 3.00/.09 = 33.33

A 6%, 30-year corporate bond was recently being priced to yield 8%. The Macaulay duration for the bond is 8.4 years. Given this information, the bond's modified duration would be equal to: A) 9.27 B) 8.05 C) 7.78 D) 9.44

ANSWER C CIMA Section II.C. Fixed Income D* = D/(1 + y); D* = 8.4/(1.08) = 7.78.

A ___________ would indicate movements in an investment or asset that are inversely related to a market or benchmark (goes up when the market goes down and vice versa). ______________ is possible but not common. A) negative beta B) inverted covariance C) inverted returns D) negative alpha

ANSWER A

Maggy is an advisor who works with both individuals and institutions. She has just met with a potential client: the investment committee of an endowment fund. The committee was interested in Maggy's background, investment philosophy and fees; but they seemed primarily focused on whether their fund would be able to meet projected distribution needs of the organization ten years down the road. The committee is concerned specifically with __________________. A) shortfall risk​​​​​​​ B) loss of principal C) interest rate risk D) reinvestment risk

ANSWER A By definition

Given an optimal risky portfolio with expected return of 12% and standard deviation of 23% and a risk-free rate of 3%, what is the slope of the best feasible CAL? A) 0.08 B) 0.64 C) 0.39 D) 0.35

ANSWER C Section III.A. Portfolio Theories and Models Slope = (12 - 3)/23 = .391; you're simply calculating the Sharpe ratio which is used to measure the slope of the CAL.

Holding other factors constant, which one of the following bonds has the smallest price volatility? A) 5-year, 10% coupon bond B) 5-year, 12% coupon bond C) 5-year, 14% coupon bond D) 5-year, 0% coupon bond

ANSWER C Duration (and thus price volatility) is lower when the coupon rates are higher

Which of the following most accurately describes arbitrage as it relates to investing strategies? A) Gains may be made by capitalizing on shifting risks. B) Arbitrage opportunities often exist in fully developed, efficient markets. C) Transactions that produce profits for any given level of risk D) Prices change while risk does not thus offering opportunities to gain. CIMA Section IV.A. Risk The definition of "arbitrage" is a set of transactions that produces riskless profits; hence, the price changes while risk does not. The gains are made based on price inconsistencies (or mispricing).

ANSWER D The definition of "arbitrage" is a set of transactions that produces riskless profits; hence, the price changes while risk does not. The gains are made based on price inconsistencies (or mispricing).

Which of the following bonds has the longest duration? A) a 4-year maturity, 8% coupon bond B) a 12-year maturity, 8% coupon bond C) a 4-year maturity, 0% coupon bond D) a 12-year maturity, 0% coupon bond The longer the maturity and the lower the coupon, the greater the duration

ANSWER D The longer the maturity and the lower the coupon, the greater the duration

The alpha of a stock is 0%. The return on the market index is 10%. The risk-free rate of return is 5%. The stock earns a return that exceeds the risk-free rate by 5% and there are no firm-specific events affecting the stock performance. The beta of the stock is _______. A) 0.75 B) 0.67 C) 1.33 D) 1.0

ANSWER D Using CAPM: Rf + beta (Rm - Rf) 5% + x (10% - 5%) = 1.0

WHAT DOES VaR mean?

Examples: With 95% probability (that's obviously a high probability) this portfolio might lose up to $2.1m (which is a 21% loss) in a single year. But of course, we're not completely sure, so technically the actual result "could" be worse. If we want even more confidence, the potential loss will obviously be worse; and at 99% probability (even higher probability) this portfolio might lose as much as $3.46m (a 35% loss) in a single year. Same disclaimer as above regarding the actual result "could" be worse. With 95% probability this portfolio might, at or nearly its worst, lose $2.97m in over a really bad 6-month period. Again, the actual result could be worse. With 95% probability this portfolio might, at or nearly its worst, lose $939k over a really awful 5-year period. Again, the actual result could be worse. Certainly, there are downsides to using VaR in this over-simplistic manner, and one of the results can certainly be an underestimation of risk of loss.

Question: How much of a $1,000,000 portfolio is at risk this year, with 99% confidencewhen the portfolio's expected return is 11% and has a standard deviation of 13%. a. $130,000 b. $192,900 c. $65,000 d. $90,909

ANSWER B $192,900 Solution: CIMA Section IV.B. Risk Measurements VaR = - [(expected return) + (z-score x SDEV)] x portfolio value VaR = - [(.11) + (-2.33 x .13)] x $1,000,000 VaR = .1929 x $1,000,000VaR = $192,900 Remember the confidence levels: 95% = -1.65, 99% = -2.33

The Yachtsman Fund had NAV per share of $36.12 on January 1, 2009. On December 31 of the same year the fund's NAV was $39.71. Income distributions were $0.64, and the fund had capital gain distributions of $1.13. Without considering taxes and transactions costs, what rate of return did an investor receive on the Yachtsman Fund last year? A) 14.39% B) 17.68% C) 14.84% D) 18.52%

ANSWER C CIMA Section II.A. Investment Vehicles R = ($39.71 - 36.12 + .64 + 1.13)/$36.12 = 14.84%.

As the number of securities in a portfolio is increased, what happens to the average portfolio standard deviation? A) It decreases at an increasing rate. B) It increases at an increasing rate. C) It decreases at a decreasing rate. D) It increases at a decreasing rate.

ANSWER C CIMA Section IV.B. Risk Measurements Statman's study showed that the risk of the portfolio would decrease as random stocks were added. At first the risk decreases quickly, but then the rate of decrease slows substantially.

As diversification increases, the total variance of a portfolio approaches ____________. A) 1 B) -1 C) 0 D) the variance of the market portfolio

ANSWER D As more and more securities are added to the portfolio, unsystematic risk decreases and most of the remaining risk is systematic, as measured by the variance of the market portfolio.

Suppose you buy 100 shares of Abolishing Dividend Corporation at the beginning of year 1 for $80. Abolishing Dividend Corporation pays no dividends. The stock price at the end of year 1 is $100, $120 at the end of year 2, and $150 at the end of year 3. The stock price declines to $100 at the end of year 4, and you sell your 100 shares. For the four years, your geometric average return is: A) 1.0% B) 9.2% C) 0.0% D) 5.7%

ANSWER D CIMA Section IV.C. Performance Measurement and Attribution [(1.25)(1.20)(1.25)(0.6667)]1/4 - 1.0 = 5.7%

Which of the following statements about international investing are not accurate? I. Investing in ADRs is typically an attractive way to invest in international companies. II. Hedging broadly diversified international equity positions is not typically a necessary strategy to manage currency risk. III. Hedging broadly diversified international bond positions is not typically an essential strategy to manage currency risk. IV. Investing in multi-national companies offers strong international diversification benefits. A) III and IV only B) II and III only C) IV and I only D) I and II only CIMA Section I.C. Global Capital Markets History and Valuation Investing in ADRs is typically an attractive way to invest in international companies (CIMA text, page 266). Hedging broadly diversified international equity positions is not typically a necessary strategy to manage currency risk (CIMA text, page 261). Hedging broadly diversified international bond positions is typically considered a necessary strategy to manage risk (CIMA text, page 303). Investing in most multi-national companies does not offer strong international diversification benefits (CIMA text, page 268).

ANSWER A CIMA Section I.C. Global Capital Markets History and Valuation Investing in ADRs is typically an attractive way to invest in international companies (CIMA text, page 266). Hedging broadly diversified international equity positions is not typically a necessary strategy to manage currency risk (CIMA text, page 261). Hedging broadly diversified international bond positions is typically considered a necessary strategy to manage risk (CIMA text, page 303). Investing in most multi-national companies does not offer strong international diversification benefits (CIMA text, page 268).

Which of the following statements about the Dow Theory is accurate? A) Critics claim that the Dow Theory does not identify market turns until long after they have occurred and have already been confirmed. B) The Dow Theory asserts that only primary trends affect stock prices. C) The goal of the Dow Theory is to identify short, intermediate, and long-term trends. D) The Dow Theory is considered a sentiment-based analysis tool that claims advances in the market are confirmed if accompanied by a similar advance in another of its indices.

ANSWER A CIMA Section III.D. Tools and Strategies The goal of the Dow Theory is to identify long-term trends. The Dow Theory is considered a momentum based tool that claims advances in the market are confirmed if accompanied by a similar advance in another of its indices. The Dow Theory asserts that primary, intermediate, and minor trends simultaneously affect stock prices. Critics claim that the Dow Theory does not identify market turns until long after they have occurred and have already been confirmed.

Which term below uses the historical performance of a fund and indices to identify the most appropriate benchmark using regression analysis? A) returns-based analysis B) Fama-French analysis C) attribution analysis D) holdings-based analysis

ANSWER A CIMA Section IV.C. Performance Measurement and Attribution Returns-based analysis uses the historical performance of a fund and indices to identify the most appropriate benchmark using regression analysis.

You purchase a share of Boeing stock for $90. One year later, after receiving a dividend of $3, you sell the stock for $92. What was your holding-period return? A) 5.56% B) 2.22% C) 4.44% D)3.33% CIMA Section IV.C. Performance Measurement and Attribution HPR = (92 - 90 + 3)/90 = 5.56%

ANSWER A CIMA Section IV.C. Performance Measurement and Attribution HPR = (92 - 90 + 3)/90 = 5.56%

Which of the following references below is acceptable according to IWI's Rules and Guidelines for Use of the CIMA Marks? A) "Bob Johnson holds the Certified Investment Management Analyst® certification, administered by Investments & Wealth Institute ® and taught in conjunction with Yale School of Management." B) "Mike Russell earned his Certified Investment Management Advisor® designation after completing Yale's CIMA registered education program and passing the CIMA certification exam." C) "Jane Smith received her CIMA® certification from Yale School of Management." D) "Michelle Larson completed Yale School of Management's CIMA® registered education program and passed the CIMA certification exam thus earning IWI's CERTIFIED INVESTMENT MANAGEMENT ANALYST® certification."

ANSWER A CIMA Section V.A. IWI Code of Professional Responsibility The "Jane Smith..." answer choice is not correct because IWI administers the CIMA marks, not Yale SOM. The "Mike Russell..." answer choice is not correct because CIMA stands for Certified Investment Management "Analyst," not "Advisor." The "Bob Johnson..." answer choice is correct per page 12 of the document below. The "Michelle Larson..." answer choice is incorrect usage because Certified Investment Management Analyst should not be spelled out using all capital letters.

You and your independent firm's investment committee have recently decided to add several funds to your model strategic asset allocation portfolios. Which of the following metrics will be more beneficial in monitoring the appropriateness of the index and comparing each fund to the other? A) R2 and Sharpe Ratio B) tracking error and standard deviation C) M-squared and beta D) capture ratio and Jensen's alpha First you need to use R2 to determine the appropriateness of the index being used. Second you could use several metrics to compare the funds' performance, including beta, Treynor ratio, Jensen's alpha, information ratio, Sharpe ratio, etc. Metrics comparing performance per unit of risk due to volatility in price or return movements would arguably be most helpful.

ANSWER A First you need to use R2 to determine the appropriateness of the index being used. Second you could use several metrics to compare the funds' performance, including beta, Treynor ratio, Jensen's alpha, information ratio, Sharpe ratio, etc. Metrics comparing performance per unit of risk due to volatility in price or return movements would arguably be most helpful.

Question: Calculate active share of the following fund: Index Portfolio Allocation Allocation Asset A 20% 5% Asset B 35% 45% Asset C 15% 10% Asset D 30% 40% a. 40 b. 20 c. 0 d. 10

ANSWER B 20 Solution: [(5 - 20) + (45 - 35) +(10 - 15)+ (40 - 30)]/ 2 = 40 / 2 = 20 Use absolute values (i.e., remove negative signs from any result before summing).

Tech Fund has a standard deviation of 17.28 and Energy Fund has a standard deviation of 14.35. What is the covariance between the two investments below? Year Tech Fund Energy Fund 1 36.45 14.10 2 -5.17 15.17 3 12.46 -15.7 4 9.10 2.20 A) 12.90 B) 4.70 C) 7.38 D) 5.53

ANSWER A First, calculate the average returns of both funds. Tech Fund = 13.21. Energy Fund = 3.94. Now take the differences between the tech fund's single and average returns and multiply by the differences between the energy fund's single and average returns. [(36.45 - 13.21) x (14.10 - 3.94)] + [(-5.17 - 13.21) x (15.17 - 3.94)] + [(12.46 - 13.21) x (-15.70 - 3.94)] + [(9.10 - 13.21) x (2.20 - 3.94)] = (236.12) + (-206.410) + (14.73) + (7.15) = 51.59. 51.59/4 = 12.8975. Note the question calls for Covariance of a population though it's ambiguous by the question and the standard deviations provided are that of a sample. Sample covariance is easily converted to population covariance by multiplying by (n-1) and dividing by n: Covp = Covs * (n-1)/n. A similar calculation can be used to convert standard deviation of a sample to one of a population. Some may rely on the calculator to determine the correlation coefficient and the formula: CovA,B = CorrCoeff * SDA * SDB in which case it must be clear that using the sample standard deviations provided will result in the Cov of the sample.Normally, we would not expect the CIMA certification exam to provide sample-related data and ambiguously ask for a population statistic, but for any calculation in which there is a sample vs. population consideration, be prepared to calculate either and be clear about which one your calculator provides as a default. The good news is if the question is ambiguous, like this one, based on student feedback, we do not expect both answers (for sample and population) would be available.

Mean Variance Optimization (MVO) requires each of the following inputs except for ________________. A) measurements of skewness and kurtosis B) returns C) risk (e.g., standard deviation) D) correlations

ANSWER A Section III.A. Portfolio Theories and Models Mean Variance Optimization (MVO) is a quadratic equation for which inputs include: risk as measured by volatility (e.g., variance or standard deviation), returns, and correlations.

Yale Capital, LLC is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Analysts expect the price of Yale Capital, LLC shares to be $22 a year from now. The beta of Yale Capital, LLC stock is 1.25. What is the intrinsic value of Yale Capital, LLC's stock today? A) $20.60 B) $20.00 C) $12.12 D) $22.00

ANSWER A k = .04 + 1.25 (.14 - .04); k = .165; .165 = (22 - P + 2)/P; .165P = 24 - P; 1.165P = 24; P = 20.60 This question involves using the required rate of return (as determined by CAPM). In addition, we'll apply that information along with the holding period return formula to determine the intrinsic value. Again, under the Capital Asset Pricing Model, the required rate of return for investment, labeled k, is: k = Risk-free rate Rf + ß (Rm - Rf). In this case, the question again gives us all these elements, so we have: k = Rf + ß (Rm - Rf) = 4% + 1.25(14%-4%) = 16.5% or 0.165 Given the expected value and dividends in one year, we can calculate what the current intrinsic value must be in order to provide the theoretical required return, which could also be viewed as the Holding Period Return (HPR). So, we can set HPR = Required Rate of Return or 0.165. Now, HPR is also defined as: HPR = (Future Price - Current Price + Div) / Current Price So, using our data, we would have: 0.165 = (Future Price $22 - Current Price P + Div $2) / Current Price P0.165 = (22 -P + 2)/P0.165 = (24 - P)/P0.165P = 24 - P1.165P = 24P =20.6 What we're saying here is that if we know the required rate of return (CAPM) and the future price and dividend, we can solve for the theoretically correct (i.e., intrinsic) value. Note that if we had the growth rate of the dividend, we could also employ the Dividend Discount Model, which is what the other problem called for. In fact, at this point, since we have another mechanism for considering the intrinsic value, we could also now calculate the expected dividend growth rate g.

Which of the following statements about different investment strategies are true? I. The constant mix method may be appropriate within certain strategic asset allocation portfolios. II. Constant proportion portfolio insurance methods assume an investor's risk tolerance goes down as his/her wealth goes up. III. Buy and hold strategies include an initial purchase of different assets and only rebalancing thereafter. IV. Absolute return strategies may include leverage and short-selling if the structure allows them. A) IV and I​​​​​​​ only B) I and II only C) II and III only D) III and IV only

ANSWER A CIMA Section III.D. Tools and Strategies The constant mix methods may be appropriate within certain strategic asset allocation portfolios. Constant proportion portfolio insurance methods assume an investor's risk tolerance goes up as his/her wealth goes up. Buy and hold strategies include an initial purchase only with no rebalancing thereafter. Absolute return strategies may include leverage and short-selling if the structure allows them.

Calculate the equity premium from the following data: Stock market index return = 10.2%Corporate bond index return = 7.1%Short-term treasury bills = 3.7%Inflation = 2.2% A) 6.27% B) 6.50% C) 8.00% D) 7.83%

ANSWER A...or B The equity premium equals the excess of the stock market index return and the risk-free rate (i.e., return of the short-term Treasury bill).[(1+.102)/(1+.037)]-1 = 6.27%Note: Some calculate the equity premium by simply subtracting the risk-free rate from the market return (10.2% - 3.7% = 6.5%), and you should be ready to do it this way on the cert-exam if doing the above calculation does not appear as an answer choice, but we've shown you the more technical way to calculate the equity premium here.

Robert Shiller's CAPE (cyclically adjusted PE) ratio smoothes out fluctuations in earnings due to the business cycle. CAPE uses earnings per share figures ______________ and ______________ as the denominator. A) adjusted for seasonality / averaged over 5 years B) adjusted for inflation / averaged over 10 years C) adjusted for interest rates / averaged over 5 years D) adjusted for interest rates / averaged over 3 years

ANSWER B

Which of the following are true regarding the APT? I. The Security Market Line does not apply to the APT. II. More than one factor can be important in determining returns. III. Almost all individual securities satisfy the APT relationship. IV. It doesn't rely on the market portfolio that contains all assets. A) II and III only B) II, III, and IV only C) I and IV only D) I, II, and III only

ANSWER B

The risk-free rate is 7 percent. The expected market rate of return is 15 percent. If you expect a stock with a beta of 1.3 to offer a rate of return of 12 percent, you should: A) buy the stock because it is overpriced. B) sell short the stock because it is overpriced. C) sell the stock short because it is underpriced. D) buy the stock because it is underpriced.

ANSWER B 12% < 7% + 1.3(15% - 7%) = 17.40%; therefore, stock is overpriced and should be shorted.

All of the following are disadvantages of which type of equity index? No distinction is made between relative or absolute valuations.Difficult to keep stocks in this index due to constant fluctuations.Difficult for funds to manage substantial amounts of money in this type of index. A) Price-weighted index B) Equal-weighted index C) Capitalization-weighted index D) Fundamentally-weighted index

ANSWER B CIMA Section II.B. Equity See Key Concepts slides for descriptions, and advantages and disadvantages of various methods for equity indexing.

You recently received an inheritance and are quickly approaching your expected retirement age. The inheritance is roughly 20% of the assets you now expect to draw upon once you retire. You treat the new money received simply as a part of the entire retirement portfolio, nothing more, nothing less. Based on the Central Bank's infusion of cash into the economy you have expected inflation to rise and have positioned your investments accordingly. Rates however have been declining and some prices have even been falling which does not make sense to you. You are uncertain now and do not make changes to your portfolio. Which of the following mental heuristics best explains what has happened to you? A) cognitive dissonance and regret aversion B) disposition effect and anchoring C) endowment effect and affinity bias D) mental accounting and conservatism

ANSWER B CIMA Section III.B. Behavioral Finance Theory Cognitive dissonance is certainly in play here as the reality of disinflation or deflation does not make sense to you based on your understanding of what you think should happen. Regret aversion may be keeping you from adjusting the portfolio. Endowment effect and mental accounting do not seem to have an impact as you treat your inheritance the same as your other funds. The disposition effect may be involved if you are holding losers too long, but we really don't know from the fact pattern the extent of any losses. There is no indication of affinity bias in the details given.

The disposition effect is often cited when investors do which of the following? A) Hold onto winners and losers too long. B) Sell winners too quickly and hold onto losers too long. C) Sell winners and sell losers too quickly. D) Sell losers too quickly and hold onto winners too long.

ANSWER B CIMA Section III.B. Behavioral Finance Theory The disposition effect describes scenarios in which investors typically hold onto losing investments too long but sell winning investments too early. The tendency to hold onto losing investments too long can be tied back to the so-called "snake-bit effect" where investors are seeking to avoid losses. The tendency to sell winners too early may be traced to an investor's seeking to lock in a gain and in doing so either avoid the risk of losing said gain, and/or to experience the immediate gratification that comes from the realized gain.

Which of the following characteristics or results is exclusively related to regret-aversion bias when comparing it with the endowment effect, mental accounting, and self-attribution bias? A) May lead investors to hold losing assets for too long. B) May lead investors to engage in herding behavior. C) May lead investors to hold winning assets for too long. D) May lead investors to be too conservative.

ANSWER B CIMA Section III.B. Behavioral Finance TheoryRegret-Aversion Described: People often avoid making decisions or taking action because they are afraid that they will make a mistake; or that looking back, the decision they make will prove less than optimal. Bias Type: Emotional Regret aversion can cause investors to be too conservative in their investment choices. Having suffered losses in the past, some investors have trouble making sensible new investments. This behavior can lead to long-term underperformance and can jeopardize investment goals. This question tests the depth of your knowledge on the biases and forces you to pick out an attribute that only applies to regret-aversion. As you know, many of the biases listed in the CIMA curriculum have comparable and, in some cases, several of the same characteristics. We expect that you will have to know the biases well enough to distinguish at this level of detail on the CIMA certification exam. All of the behaviors are representative of regret-aversion, including herding, as it can be easier to follow the crowd, assuming that the collective whole knows best and therefore any decisions made contrary to the masses that turn out incorrect could lead to lots of pain. Endowment effect: includes the possibility of investors holding assets for too long and possibly being overly conservative Mental accounting: arguably includes an overly conservative position, and the possibility of holding investments for too long in any one account without regard to the overall portfolio. Self-attribution: could lead to holding winners or losers too long but usually entices investors to be more risky rather than more conservative and does not encourage herding as the individual typically desires to make his or her own choices.

Which of the following investment strategies typically identifies the most clearly defined risk management techniques? A) market timing B) dynamic asset allocation​​​​​​​ C) strategic asset allocation D) tactical asset allocation

ANSWER B CIMA Section III.D. Tools and Strategies Dynamic asset allocation offers defined risk management techniques such as constant proportion portfolio insurance.

An investor holds a AA-rated corporate bond with 7 years to maturity, the coupon is 6.5%, inflation is 1.5%, and the current yield is 3.0%. Macro-economic conditions are uncertain, but inflation is expected to remain stable. The investor may need to sell the bonds before maturity. Which of the following are the investor's primary risks in holding this bond to maturity? I. interest rate risk II. reinvestment risk III. credit risk IV. purchasing power risk A) II and III only B) I and II only C) I and IV only D) II and IV only

ANSWER B CIMA Section IV.A. Risk Inflation is expected to be low (at or near 1.5%) and the yield on this bond is above inflation, so purchasing power is not the biggest concern. Credit risk should not be considered one of the bigger risks given a AA rating despite the uncertain economic conditions. We don't have enough information to confirm whether rates will rise or fall so interest rate risk and reinvestment risk are concerns.

When assessing tail risk by looking at the 5% worst-case scenario, the VaR is the ____________________________________. A) most pessimistic as it is the most complete measure of risk B) most optimistic as it takes the highest return (smallest loss) of all the cases C) most unrealistic as it is the least complete measure of risk D) most realistic as it is the most complete measure of risk

ANSWER B CIMA Section IV.B. Risk Measurements When assessing tail risk by looking at the 5% worst-case scenario, the VaR is the most optimistic as it takes the highest return (smallest loss) of all the cases.

The following data are available relating to the performance of Wildcat Fund and the market portfolio: Wildcat Fund Market Portfolio Average Return 18% 15% Standard Deviation 25% 20% Beta 1.25 1.00 Residual SDEV 2% 0% The risk-free return during the sample period was 7%. What is the information ratio measure of performance evaluation for Wildcat Fund? A) 1.00% B) 50.00% C) 8.80% D) 44.00%

ANSWER B CIMA Section IV.C. Performance Measurement and Attribution P = 18% - [7% +1.25(15% - 7%)] = 1%; P/(eP) = 1%/2% = 0.50, or 50.00% Note: There are several possible ways to calculate information ratio (in practice). This solution used the CAPM to determine excess return (vs. simply subtracting the market return from the fund return) and used the residual standard deviation of the fund which was given (since the difference of the SDEV of fund and market was the same, given that SDEV of the market was zero).

Given the recent turbulent financial markets, you begin offering your clients access to a balanced portfolio consisting of 20% long-term corporate bonds, 20% diversified stock funds, 20% real assets, 20% U.S. Treasury bonds, and 20% in a diversified currency fund. Often called an all-weather portfolio, this model identifies market types and risks and seeks to manage them most appropriately. This type of investing is also called: I. dynamic asset allocation. II. a Black-Litterman model. III. risk parity investing. IV. risk factor investing. A) II, III, and IV only B) III and IV only C) I and II only D) II and III only

ANSWER B CIMA Section V.D. Portfolio Construction Risk factor investing consists of identifying various risk factors and allocating investments based on expectations about risk, as compared with traditional asset allocation models which allocate investments based on asset classes or styles and/or risk-return optimization models. Risk parity investing includes identifying risk factors and managing those risks instead of investing based on mean-variance and other optimization models. Risk parity often includes using leverage on lower risk assets to help counterbalance higher risk assets and boost returns. Black-Litterman models allow one to overlay expectations about risk, return, and other factors onto existing allocation models. Dynamic asset allocation often includes tactical shifts and/or market timing techniques, but it is also identified as a method for managing downside risk in traditional asset allocation models by making periodic adjustments to allocations based on gains and losses of each allocation.

Real asset categories (e.g., commodities, real estate, natural resources, etc.) have moderate to high correlations to U.S. stocks. Most real asset categories have _____________ correlation(s) to U.S bonds. A) negative B) low positive C) moderately positive D) no

ANSWER B Section II.F. Real Assets Most real asset categories have positive but low correlations to U.S. bonds (from around zero to 20-30 based on longer-term periods).

A so-called "kink" in the Capital Allocation Line (CAL) best demonstrates: A) the efficient frontier when maximum leverage is used. B) when the rate to borrow exceeds the lending rate. C) the tangency line. D) the optimal portfolio of risky assets.

ANSWER B Section III.A. Portfolio Theories and Models The so-called "kink" in a Capital Allocation Line indicates that leverage is being used, and that the rate to borrow exceeds the lending rate.

Consider a T-bill with a rate of return of 5 percent and the following risky securities: Security A: E(r) = 0.15; Variance = 0.04 Security B: E(r) = 0.10; Variance = 0.0225 Security C: E(r) = 0.12; Variance = 0.01 Security D: E(r) = 0.13; Variance = 0.0625 From which set of portfolios, formed with the T-bill and any one of the 4 risky securities, would a risk-averse investor always choose his portfolio? A) The set of portfolios formed with the T-bill and security A. B) The set of portfolios formed with the T-bill and security C. C) The set of portfolios formed with the T-bill and security B. D) The set of portfolios formed with the T-bill and security D.

ANSWER B Security C has the highest reward-to-volatility ratio. According to Modern Portfolio Theory, risk-averse investors always choose the investment with the optimal mix (i.e., highest return per unit of risk taken). So, we need to divide the expected returns of securities A, B, C, and D by their respective risk (variance) to see which offers the best trade-off between risk and return. Security A = 15/4 = 3.75 Security B = 10/2.25 = 4.44 Security C = 12/1 = 12 Security D = 13/6.25 = 2.08 ... thus Security C has the best trade-off by far and will be the selection of the risk-averse investor.

Which of the following investments has the greatest potential for loss? Investment = Tech Stock Energy Fund Healthcare Growth SDEV .44, .26, 29, .31 Beta 1.15, 0.65, 1.05, 0.89 Semi-Variance .15, .12, .18, . 17 A) Tech Stock B) Healthcare Stock C) Energy Fund D) Growth Fund

ANSWER B Semi-variance is the key metric here as it demonstrates the fund's potential average loss. Standard deviation measures total volatility around the mean (i.e., above and below). Beta measures the fund's tendency to move or respond to movements in the market. So, we look for the highest semi-variance to identify the fund with the highest potential for loss.

Given the information below, which of the following benchmarks offers the best closeness or tightness of fit to the portfolio you manage for your clients? The risk-free rate is 2.5%, your portfolio return and standard deviation are 11.5% and 16.3% respectively. S&P500. Wilshire 5000. Russell 2000. Morningstar Return. 14 15 17 16 Beta 0.76 0.70 0.82 0.83 SDEV 15.5% 16.2% 18.4% 16.7% A) Wilshire 5000 B) Russell 2000 C) S&P 500 D) M'Star Category Avg.

ANSWER B The coefficient of determination gives the variation in one variable explained by another and is an important statistic in investments. No causality is claimed by the coefficient of determination. It is the job of the investor to interpret it. This problem calls for finding the index with the highest coefficient of determination or R2 (also often referred to using the Greek letter Rho as ρ2). Statistically, R-squared is the ratio of the portfolio's market-related (systematic) variance to its total variance. The formula is: R2 = β2 x (Sm2/(Sp2) where R2 = R-squared = Coefficient of Determination β2 = Beta-squared Sm2 = standard deviation of the market-squared or variance of the market Sp2 = standard deviation of the portfolio-squared or variance of the portfolio Multiply β2 by the square of the standard deviation of the index (Sm2) for each index and divided by the square of the standard deviation of the portfolio Sp2): Coefficient of Determinations or R2s S&P 500 = 0.762 x 0.1552 / 0.1632 = 0.76 * 0.76 * 0.155 * 0.155 / (0.163 * 0.163) = 0.522 Wilshire 5000 = 0.702 x 0.1622 / 0.1632 = 0.49 * 0.0262 / 0.0266 = 0.484 Russell 2000 = 0.822 x 0.1842 / 0.1632 = 0.6724 * 0.0339 / 0.0266 = 0.857 M'Star Cat. Avg. = 0.832 x 0.1672 / 0.1632 = 0.6889 * 0.0279 / 0.0266 = 0.723 Thus, the Russell 2000 index has the highest R2 (with the market) with R2 = 0.857. Note that the calculation for "coefficient of determination" (R2) is not on the CIMA Formula Sheet. You might want to commit this formula to memory in case you need it on the exam or you can derive it from the Sheet's Beta formula: βA = RA,M x SA/SM

Mean Variance Optimization (MVO) involves quadratic programming to optimize performance by minimizing risk and maximizing returns. MVO requires each of the following inputs with the exception of... A) expected correlations B) expected time horizon C) expected risk D) expected returns

ANSWER B The necessary inputs for developing a Mean Variance Optimization model include: expected returns, expected risk (e.g., standard deviations), and expected correlations.

Which of the following inaccurately describe tracking error ("TE")? I. TE is used in calculating Modigliani-squared (M2). II. TE is the difference between an investment's risk-adjusted performance and a benchmark. III. TE is the standard deviation of excess returns. IV. TE is also called "active risk." A) III and IV only B) I and II only C) IV and I only D) II and III only

ANSWER B Tracking error is used in the Information Ratio, not Modigliani-squared (M2). TE is the difference between an investment's performance and a benchmark.

An example of a ________________ strategy is the mispricing of a futures contract that must be corrected by contract expiration. A) relative value B) convergence​​​​​​​ C) divergence D) directional

ANSWER B CIMA Section II.D. Alternative Investments An example of a convergence strategy is the mispricing of a futures contract that must be corrected by contract expiration.

The following is a sample of quarterly returns (annualized) for portfolio A, portfolio B, and the index: Portfolio A. Portfolio B Index 3.6% 3.8% 4.6% 7.5% 7.0% 6.9% 6.3% 6.9% 7.4% 4.5% 4.2% 4.6% 5.4% 5.0% 5.2% Question: Which portfolio has the least tracking error to the index?

ANSWER B has the smaller TE Port A-B'mark (Port A-B'mark)^2 -1.0% 0.010% 0.6% 0.004% -1.1% 0.012% -0.1% 0.000% 0.2% 0.000% Port B- B'mark (Port B- B'mark)^2 -0.8% 0.006% 0.1% 0.000% -0.5% 0.002% -0.4% 0.002% -0.2% 0.000% Port A Port B Sum (^2) 0.026% 0.011% Divided by N-1 = 0.007% 0.003% TE = Square Root = 0.81% 0.52% Answer: Portfolio B has the smaller

Economists are concerned about deflation. Policy makers are evaluating different measures to combat that concern. Which of the following actions are they more likely to consider? I. increase taxes II. increase interest rates III. eliminate the Gold Standard IV. increase the money supply A) IV and I only B) II and III only C) III and IV only D) I and II only

ANSWER C CIMA Section I.B.2. Economics I. Increase Taxes - there could be more going on under the surface, but we want people to spend money to stimulate growth and prices; thus, raising taxes would reduce the amount of money individuals have to spend. Thus, this would not likely be recommended. In fact, one might argue for reducing certain taxes (e.g., personal income tax). II. Increase Interest Rates - raising rates will likely further reduce spending (as borrowing becomes more expensive) and thus compound the problem. We need to encourage growth, not dampen it. Thus, this is probably not a good choice. III. Eliminate the Gold Standard - the Gold Standard requires paper money (or other currencies) to be backed by gold, thus proving there is some stored, tangible value backing the currency being traded or used. By removing the Gold Standard, we are likely to be able to more freely control and increase money supply (having removed the need to prove it can be backed by gold), and thus could potentially stimulate the economy by doing so. IV. Increase the Money Supply - increasing the money supply could help encourage spending and growth. Of course, individuals and companies may choose to pay off debt or save the additional funds, but the hope would be that this extra liquidity would translate into spending, thus raising prices and ultimately growth. This is probably a good choice other things being held equal.

Historically, P/E ratios have tended to be __________________________. A) uncorrelated with any macroeconomic variables including inflation rates B) uncorrelated with inflation rates but correlated with other macroeconomic variables C) lower when inflation has been high D) higher when inflation has been high

ANSWER C CIMA Section I.C. Global Capital Markets History and Valuation P/E ratios have tended to be lower when inflation has been high, reflecting the market's assessment that earnings in these periods are of "lower quality," i.e., artificially distorted by inflation and warranting lower P/E ratios.

Golden Services, Inc. has a balance sheet which lists $85 million in assets, $40 million in liabilities, and $45 million in common shareholders' equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90. What is Golden Services, Inc.'s book value per share? A) $60.71 B) $1.68 C) $32.14 D) $2.60

ANSWER C CIMA Section II.B. Equity $45M/1.4M = $32.14

The Handsome Dan Corporation has earnings of $2.50 per share and pays out $.50 per share in dividends. The Return-on-Equity (ROE) is 18. Handsome Dan has a PE ratio of 14. What is the annual growth rate of this company? A) 2.80% B) 3.60% C) 14.40% D) 11.20%

ANSWER C CIMA Section II.B. Equity One method for calculating a company's growth rate is to use something called a retention rate (or ratio). Multiply the ROE x the retention rate. Retention rate is basically 1 minus the dividend rate paid out. So, the retention rate (i.e., amount used to keep growing the company - and is not paid out to shareholders) is calculated as follows: 1 - (dividend/earnings)1 - (0.50/2.50)1 - .20Retention Rate = 80% Growth = ROE x retention rate = 18% x 80%=14.40% (answer).

HNW Management, Inc. is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Analysts expect the price of HNW Management, Inc. shares to be $22 a year from now. The beta of HNW Management, Inc.'s stock is 1.25. If HNW Management, Inc.'s intrinsic value is $21.00 today, what must be its growth rate? A) 4% B) 10% C) 7% D) 6%

ANSWER C CIMA Section II.B. Equity k = .04 + 1.25 (.14 - .04); k = .165; .165 = 2/21 + g; g = .07 The HNW question involves using the required rate of return (as determined by CAPM) AND the Dividend Discount Model. In fact, this question coupled with the Yale Capital and Rocky Mountain Brewery Corp. form a trio of questions designed to illustrate CAPM and the Dividend Discount Model in different ways. All of them relate to "intrinsic value," a term broadly used and discussed in a few of the Section II.B. Equity Concepts slides (7, 19, 29, 31) and in the CIMA textbook. Calculating intrinsic value requires some valuation method, which includes the one we'll use here: the Dividend Discount Model. The phrasing "what must be its growth rate" is really asking what is the growth rate of the dividend.

_________________ bias arises because hedge funds only report returns to database publishers if they desire to do so. A) Incubation B) Omission C) Backfill​​​​​​​ D) Survivorship

ANSWER C CIMA Section II.D. Alternative Investments Backfill bias arises because hedge funds only report returns to database publishers if they want to.

Speculators may use futures markets rather than spot markets because... I. Transactions costs are lower in futures markets. II. Futures markets provide leverage. III. Spot markets are less efficient. IV. Futures markets are less efficient. A) I and III only B) II and III only C) I and II only D) IV and I only

ANSWER C CIMA Section II.E. Options, Futures, and Other Derivatives Futures markets allow speculators to benefit from leverage and minimize transactions costs. Both markets should be equally price efficient.

The Fama and French three factor model uses _________, _________, and __________ as factors. A) growth / market index / equity premium B) size / book-to-market ratio / default spread C) size / book-to-market ratio / equity premium D) size / value or growth / default spread

ANSWER C CIMA Section III.C. Investment Philosophies and Styles The Fama and French three factor model uses firm size, book-to-market ratio, and market index as factors. Fama and French later added momentum as a fourth factor.

Which of the following are accurate as they relate to technical analysis? I. A golden cross describes when a short-term average crosses up and through a longer-term average. II. A continuation pattern indicates a price trend is moving strongly toward/with its longer term trend. III. A dead cross describes when a long-term average crosses down and through a shorter-term average. IV. A corrective pattern indicates a price trend is moving against the larger or more important trend. A) II and III only B) I and II only C) IV and I only D) III and IV only

ANSWER C CIMA Section III.D. Tools and Strategies A golden cross describes when a short-term average crosses up and through a longer-term average. A continuation pattern indicates a price trend is experiencing a temporary diversion from its longer-term trend. A dead cross describes when a short-term average crosses down and through a longer-term average. A corrective pattern indicates a price trend is moving against the larger or more important trend.

Suppose you held a well-diversified portfolio with a very large number of securities. If the standard deviation of your portfolio was 0.25 and standard deviation of the market was 0.21, the beta of the portfolio would be approximately ________. A) 0.64 B) 1.25 C) 1.19 D) 1.56

ANSWER C CIMA Section IV.B. Risk Measurements standard deviation of portfolio / standard deviation of the market = betabeta = (0.25) / (0.21) = 1.19. The key to this problem lies in the language that it's a well-diversified portfolio with a large number of securities. As such, we can expect the portfolio to correlate closely with the market with a correlation coefficient of about 1.00. So, when the question asks about the approximate value of beta, it's referencing this assumed (high positive) correlation. Note: A similar question has surfaced on the certification exam through the years, so it should not be surprising for you to see something like this on that test (i.e., where you have to draw the conclusion that beta is 1.00).

The Value Line Index is an equally weighted geometric average of the returns of about 1,700 firms. The value of an index based on the geometric average returns of 3 stocks where the returns on the 3 stocks during a given period were 32%, 5%, and -10%, respectively, is __________. A) 9.0% B) 5.0% C) 7.6% D) 4.3%

ANSWER C CIMA Section IV.C. Performance Measurement and Attribution ((1.32)(1.05)(0.90))1/3 - 1.0 = 7.6%

Which of the following activities is not specifically included in IWI's Disciplinary Rules and Procedures document as potential "grounds for discipline"? A) Violation of the rules of FINRA or other financial services self-regulatory organization B) Violation of the criminal statutes of any state or the United States for commission of a serious crime. Conviction of a crime shall not be a prerequisite for the filing of a disciplinary petition C) Violation of an employer agreement or client agreement including policies and procedures outlined in an Investment Policy Statement D) Violation of the License Agreement between IWI and the licensee

ANSWER C CIMA Section V.A. IWI Code of Professional Responsibility Reference - IWI's Disciplinary Rules and Procedures (page 3

Your client believes that certain markets are relatively efficient and that optimizing risk adjusted returns is a priority in building an investment portfolio. She also believes that some markets and asset classes are much less efficient, and she believes active management could be used to enhance returns or lower risk. As an economist, she follows global economies and markets closely, as do you. She would like for the two of you to be able to input your own expectations about interest rates, inflation, currency risk, etc. into the portfolio model as an overlay to the fundamental allocation recommendation. What type of investment management methodology would likely best suit her needs as described? A) market timing B) dynamic asset allocation C) Black-Litterman model D) risk factor investing

ANSWER C CIMA Section V.D. Portfolio Construction The Black-Litterman investment portfolio model allows one to add his or her expectations about numerous factors as an overlay to more traditional methods such as strategic asset allocations.

Your client is 62 years old and expects to retire at age 65. His life expectancy is well into his 90's. You manage your client's retirement account assets using a strategic asset allocation strategy and the equity/fixed income mix is 60%/40%. The market has declined 40% over the last 18 months and you both expect to see further significant market declines. Your client would like for you to sell stock funds and go to cash as a defensive move as he would like to protect what he has left in hopes of retiring on time. What actions would be appropriate based on this information? A) Discuss the significance of the current market activity to determine whether this is something more than a traditional sell-off (i.e., is this the beginning of a long-term secular bear market as opposed to a correction within a secular bull market?). If you both agree this is a more significant downturn, sell equities as a defensive strategy B) Discuss the psychological stress that he and you are feeling to make sure neither of you makes mistakes based on emotional reactions to the bear market. After a lengthy discussion, you both agree to buy put protection on the remainder of the equities positions. C) Remind your client of the investment strategy he agreed upon and that you will be raising equity positions during the upcoming periodic rebalancing window as these allocations are well under the target allocation. D) Take this as an opportunity to review your client's portfolio and situation. Discuss whether or not the strategic asset allocation should be replaced with a more appropriate strategy such as tactical or dynamic asset allocation.

ANSWER C CIMA Section V.F. Portfolio Review and Revisions Given your client's long life expectancy, and your initial conclusion that a 60%/40% equity to fixed income allocation mix is appropriate, making significant changes would not likely be the most prudent decision, especially under duress. Buying put options to protect the downside after such a significant market correction would be expensive and perhaps not even appropriate given a "strategic asset allocation" mandate. The best course of action given the fact pattern is to reaffirm the long-term strategy and buy more equities during the regularly scheduled rebalancing period or when allocation boundaries have been breached per the mutually agreed upon investment policy statement.

Which of the following is NOT true regarding the uncertainty of and/or sequence of returns in retirement planning? A) If an individual is making contributions to his portfolio, it is generally more desirable to experience declines in the early years. B) Over the long run, if there are no cash flows in or out of a portfolio, the sequence of returns generally does not matter. C) The sequence of investment returns does not generally affect the outcome of retirement distribution if average annual returns are consistently above the discount rate plus inflation. D) If John is taking distributions from his portfolio, it is generally more desirable to experience declines in the later years.

ANSWER C For investors taking distributions from accounts, it is better to experience bad markets in the later years. For investors making contributions, it is better to experience bad markets in the earlier years. The sequence of returns generally does not matter over time "IF" the investor is not making contributions or taking distributions. There is no basis for the statement that sequence of returns does not matter if the returns are higher than some discount rate plus inflation.

From the following data, choose the manager with the most impressive skill as represented by the information ratio. The annual market return over this period was 10% and the risk-free rate was 4%. Fund A Fund B. Fund C. Annual Return 12% 15% 9% Residual SDEV. 15% 18% 11% Beta 1.1 1.5 1.25 Excess Return 2% 5% -1% A) cannot determine based on data given B) Fund A C) Fund B D) Fund C

ANSWER C Information Ratio is the average excess return of a portfolio over a benchmark divided by the standard deviation of excess returns. This measures the ability to select securities relative to a benchmark. It captures both the size of the excess return and the ability to do so consistently. "Math for Investment Consultants" Information Ratio is calculated by dividing excess return (or alpha) by tracking error. Remember that you are looking for the fund manager with the "highest" information ratio as that should indicate which of the managers is likely demonstrating more skill (rather than luck). Note: Based on the data given, you might have to calculate alpha or tracking error (or both) in different ways. We recommend you use the shortest path possible for the sake of time on your exam. For example, if they don't give you a number for "alpha" or "excess return" then you'll have to calculate using the CAPM formula. Step 1: Calculate alpha (excess return): With the data given, you could choose to calculate Jensen's alpha (using the CAPM formula); but since they give you the portfolio return, the market return, and indicate excess return (portfolio return - market return), we recommend you use what is given (i.e., excess return). Either process should eventually rank the funds in the same order. Fund A = 12% - 10% = 2% Fund B = 15% - 10% = 5% Fund C = 9% - 10% = -1% Step 2: Calculate tracking error: Again, depending on the data they give you, this can be done different ways. You might be asked to calculate standard deviation manually in this step on your exam, but here they give it to you, so just plug in standard deviation. If, however, they give you a number for tracking error or residual standard deviation, then you would use that number. Fund A = 15% (given) Fund B = 18% (given) Fund C = 11% (given) Note that the term "residual standard deviation" can also be a substitute for the term "tracking error" in case you see that on your exam. Step 3: Divide alpha by tracking error. Fund A = 2%/15% = .1333 Fund B = 5%/18% = .2778 Fund C = -1%/11% = -.0909 Thus, Fund B has the highest information ratio. Reference: Math for Investment Consultants page 6-16. Key Concepts Slides Section IV.C.

The table below classifies macro-economic measurements as leading, coincident, and lagging indicators. Which of the following is not accurate? Leading Coincident Lagging a. stock market personal income duration of unemployment b. M2-money supply retail sales prime rate c. construct permits industrial production interest rate spread d. consumer expects trade sales consumer credit A) consumer expectations, trade sales, consumer credit B) stock market, personal income, duration of unemployment C) construction permits, industrial production, interest rate spread D) money supply (M2), retail sales, prime rate

ANSWER C Interest rate spreads are considered a leading indicator. See CIMA textbook, chapter four, part IV "The Trader's Guide to Key Economic Indicators: Indexes of Leading, Lagging, and Coincident Indicators" (complete list can be found on page 108 of the CIMA text).

Using the data below, calculate the total value created by this manager's overall active management, and whether she added more value through market timing or asset selection. Asset Class. Fund Weight Fund Return. Target Weight Bench Ret. Cash 5% 1.89% 5% 1.22% Bonds 20% 2.24% 35% 3.01% Stocks 75% 19.19% 60% 16.20% A) 2.09%, asset selection B) 4.10%, asset selection C) 4.10%, market timing D) 2.09%, market timing

ANSWER C Use the formulas from the CIMA Formula Sheet. Calculate the value added for active management: sum (actual weight x actual return) - sum (target weight x benchmark return): = [(.05 x 0.0189) + (.20 x 0.0224) + (.75 x 0.1919)] - [(.05 x 0.0122) + (.35 x 0.0301) + (.60 x 0.1620)] = .1494 - .1083 = +.0410 (thus, the manager added value from engaging in active management since the result of the calculation is greater than zero). Next, calculate the value added for active asset allocation ("timing"): cash = [(.05 x 0.0122) - (.05 x 0.0122)] = .0000 bonds = [(.20 x 0.0301) - (.35 x 0.0301)] = -.0045 stocks = [(.75 x 0.1620) - (.60 x 0.1620] = +.0243 add them all up = +.0198 value added from timing . Next, calculate the value added for active asset selection: cash = [(.05 x 0.0189) - (.05 x 0.0122)] = +.0003 bonds = [(.35 x 0.0224) - (.35 x 0.0301)] = -.0027stocks = [(.60 x 0.1919) - (.60 x 0.1620] = +.0179 add them all up = +.0155 value added from asset selection Thus, this manager added slightly more value through market timing. Note: using these formulae from IWI's CIMA Formula Sheet (the same used in the original Brinson Beebower and Hood study), the value added by the two components (timing and selection) do not always add up to equal the exact value of the active management. This is due to unexplained variables. That being said, these differences are usually relatively small in such calculations. So, if the net value (positive or negative) from those two components does not equal the exact amount of value added from overall active management, that's ok for testing purposes. Lastly, students often report that some form of attribution analysis is tested on the CIMA cert-exam. You may have to calculate value from overall active management or calculate the value from timing or asset selection. But it's been a long time since students reported having to do the entire set of calculations like you were asked to do above.

Which of the following statements are accurate regarding hedge fund performance? I. Hedge fund performance for the industry (i.e., as a whole) appears better than it actually is due to survivorship bias. II. Hedge fund performance for the industry (i.e., as a whole) appears worse than it actually is due to survivorship bias. III. Individual hedge fund manager performance appears better than it actually is in relation to the existing hedge fund universe due to survivorship bias. IV. Individual hedge fund manager performance appears worse than it actually is in relation to the existing hedge fund universe due to survivorship bias. A) I and III only B) II and IV only C) II and III only D) I and IV only

ANSWER D CIMA Section II.D. Alternative Investments Hedge fund performance for the industry (i.e., as a whole) appears better than it actually is due to survivorship bias given that only the surviving funds are accounted for. Thus, the funds with worse performance dropped out of the listing which raises the aggregate performance of the surviving universe. Individual hedge fund managers' performance however appears worse than it actually is in relation to the existing hedge fund universe due to survivorship bias. Example: a fund manager ranks 10th out of 100 funds in the universe; 5 years later he is still ranked 10th but there are only 50 funds left in the universe. Consequently, he falls from the top 10% in performance to the top 20% in performance

Each of the following are often traced back to an "anchoring" with the exception of which below? A) sunk-cost fallacy B) get-even-itis C) snake-bit effect D) ambiguity bias

ANSWER D CIMA Section III.B. Behavioral Finance Theory Anchoring and Adjustment Bias Described:A cognitive bias occurs where investors are influenced by purchase point or arbitrary price levels and cling to these numbers when deciding to buy or sell. Bias Type: Information ProcessingIndividuals often rely too heavily on certain information (often the first data points received) when making decisions. The "snake-bit effect" occurs when investors experience losses and then become more risk-adverse, even to the extent of not wanting to invest in the same investment or even asset class, based on their painful experience in the past. Emotions and behavior are thus anchored to the past loss. "Get-even-itis" can be seen when investors will often hold onto losing investments, hoping that the value will rise back up to the point at which they purchased the asset at which time they would plan to sell. They do so in an effort to prevent realizing a loss and the negative feelings or pain associated with losses. Emotions and behavior are thus anchored to the purchase price. Investors suffering from the "sunk-cost fallacy" may continue to hold an investment and even invest more (e.g., double down) in large part because of the time, effort, and energy they have already invested in the idea behind the investment. Thus, they are emotionally tied to the initial choice. Emotions and behavior are thus anchored to all that was behind the initial purchase or commitment. Even when investors feel skillful or knowledgeable, they may not be willing to stake claims on "ambiguous" investments like stocks, even when they believe they can predict these outcomes based on their own judgment. Note: This is an example of where you may be asked to choose "which one of these is 'less' like the other?" on the CIMA certification exam.

Which of the following statements is not accurate? A) Wash-sale rules in the U.S. disallow investors from claiming taxable losses when selling an asset at a loss and buying it back within 30 days. B) Tax-loss harvesting is when an investor sells an asset at a loss for the primary purpose of using the loss to offset gains for tax purposes. C) Tax-gain harvesting is when an investor sells an asset at a gain in order to pay less tax now as opposed to more tax later. D) Pair-wise trades include selling an asset at a loss for tax purposes and buying another asset with the identical characteristics to replace it.

ANSWER D CIMA Section III.C. Investment Philosophies and Styles Pair-wise trades include selling an asset at a loss for tax purposes and buying another asset with the "similar" characteristics to replace it. Wash-sale rules in the U.S. disallow investors from taking taxable losses when selling an asset at a loss and buying it back within 30 days. Tax-loss harvesting is when an investor sells an asset at a loss for the primary purpose of using the loss to offset gains for tax purposes. Tax-gain harvesting is when an investor sells an asset at a gain in order to pay less tax now as opposed to more tax later.

Given the following two stocks A and B: Security Expected Rate of Return Beta A 0.12 1.2 B 0.14 1.8 If the expected market rate of return is 0.09 and the risk-free rate is 0.05, which security would be considered the better buy and why? A) B because it offers an expected excess return of 5.0%. B) A because it offers an expected excess return of 3.0%. C) B because it offers an expected excess return of 1.8%. D) A because it offers an expected excess return of 2.2%.

ANSWER D CIMA Section IV.C. Performance Measurement and Attribution A's excess return (i.e., alpha) is expected to be 12% - [5% + 1.2(9% - 5%)] = 2.2%. B's excess return is expected to be 14% - [5% + 1.8(9% - 5%)] = 1.8%.

Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50. At the end of year 1, you receive a $1 dividend, and buy one more share for $72. At the end of year 2, you receive total dividends of $2 (i.e., $1 for each share), and sell the shares for $67.20 each. The time-weighted return on your investment is __________. A) 8.7% B) 10.0% C) 19.7% D) 17.6%

ANSWER D CIMA Section IV.C. Performance Measurement and Attribution Time-Weighted Return refers to the geometric average return, weighting each time period equally (i.e., ignoring different amounts invested at different times). Thus, the return for each time period must be calculated: Year 1: ($72 + $1 - $50)/$50 = 46% Year 2: ($67.20 + $1 - $72)/$72 = -5.28% (return shown on a per share basis, could also be based on amounts invested that year) Time-weighted average = [(1+0.46) * (1+ -0.0528)]1/2 -1 = 1.176 -1 = 0.1760 = 17.6%

The following data are available relating to the performance of Seminole Fund and the market portfolio: SeminoleMarket Portfolio Average Return 18% 14% Standard Deviation 30% 22% Beta 1.4 1.0 Residual SDEV 4.0% 0.0% The risk-free return during the sample period was 6%. Calculate the M2 measure for the Seminole Fund. A) 0.36% B) 0.13% C) 0.40% D) 0.80%

ANSWER D CIMA Section IV.C. Performance Measurement and Attribution M2 = [((1 - (SDEVm/SDEVp))*(Rf)) + ((SDEVm/SDEVp)*(Rp))] - (Rm) M2 = [((1 - (22/30))*(6%)) + ((22/30)*(18%))] - (14%) M2 = [((.2667))*(6%)) + ((.7333)*(18%))] - (14%)M2 = (1.6% + 13.2%) - (14%) M2 = 14.8% - 14% M2 = 0.80%

The following traits are associated with Value-at-Risk (VaR): I. VaR requires the assumption that returns are normally distributed. II. VaR provides a metric that measures how much a portfolio will lose over a year. III. VaR often ignores that returns may not be normally distributed (e.g., could exhibit kurtosis/fat tails). IV. VaR metrics may be calculated using the delta-normal method, simulations based on sufficient historical data, or Monte Carlo simulation. V. A 95% VaR informs portfolio managers how much can be expected to be lost 5% of the time. A) II, III, and V only B) V and II only C) I, II, and IV only D) III and IV only

ANSWER D CIMA Section V.D. Portfolio Construction; see Shein Investment Planning Answer Book, pg. 7-23. (I.) is false because the normal distribution assumption depends on the method used to calculate VaR. (II.) is false because VaR represents the amount a portfolio may lose over time. (III.) is true because the delta normal method of calculating VaR assumes a normal distribution though other methods (e.g., based on historical data or Monte Carlo analysis) do not. (IV.) is true and other methods exist as well (e.g., Delta Gamma). (V.) is false because a 95% VaR metric reflects the maximum amount the portfolio could be expected to lose 95% of the time. It does not indicate how much would be lost the other 5% of the time when an extreme tail event occurs.

Hillary is 75 years old and has a retirement portfolio of $5 million. The investment policy you and Hillary agreed to allows an allocation of up to 15% in non-liquid alternative investments based on an expected safe withdrawal rate of 5% of total liquid assets in her portfolio. She needs cash each year of roughly $225,000. Hillary's current allocation to non-liquid alternative investments is $500,000. These are the only non-liquid assets she holds. She would like to raise her investment in venture capital funds to $1 million. What would be most appropriate based on the facts above? A) Allow an additional $500,000 investment. B) Allow an additional $25,000 investment. C) Allow an additional $250,000 investment. D) Do not allow any additional funds to be invested in non-liquid alternative investments.

ANSWER D CIMA Section V.F. Portfolio Review and Revisions The investment policy is designed to predetermine allocations to various asset classes and strategies. This policy allows an allocation of up to $750,000 to non-liquid alternative investments as long as a withdrawal rate of 5% can be used against the liquid portfolio to generate her income need of $225k each year. Her total liquid portfolio is currently $4.5 million ($5 million minus the $500k already invested in non-liquid alternative investments) and 5% of $4.5 million = $225,000 (her cash-flow need). Thus, no additional investment should be made.

What is the likely net result when an investor borrows money and invests this money in the risk-free rate while determining his next purchase? A) portfolio return increases B) portfolio risk decreases C) portfolio risk increases D) portfolio return remains the same

ANSWER D CIMA Section V.F. Portfolio Review and Revisions When an investor borrows money but does not immediately invest the money in a risky asset, the portfolio return is typically unaffected. The gains made from holding the additional funds is offset by the interest she has to pay for the right to hold those funds. Risk does not typically increase, at least not materially (until those funds are invested).

The individual investor's optimal portfolio is designated by: A) the point of the highest reward to variability ratio in the indifference curve. B) the point of highest reward to variability ratio in the opportunity set. C) the point of tangency with the opportunity set and the capital allocation line. D) the point of tangency with the indifference curve and the capital allocation line.

ANSWER D Section III.A. Portfolio Theories and Models The indifference curve represents what is acceptable to the investor; the capital allocation line represents what is available in the market. The point of tangency represents where the investor can obtain the greatest utility from what is available.

Your client, Sue, is happy with the returns in her portfolio. Her portfolio's beginning balance was $476,507 and the balance at year's end was $551,062. She made no contributions to, nor distributions from the account during that time. Over the past year, her portfolio had long-term recognized gains of $36,771; realized but unrecognized long-term gains of $22,800; and non-qualified dividends of $14,984. Sue pays 20% tax on capital gains and qualified income and 40% tax on ordinary income. What is Sue's after-tax total return for last year? A) 11.93% B) 15.65% C) 11.89% D) 12.84%

ANSWER D Sue's before-tax return is 15.65% ($551,062 - $476,507 = 74,555/$476,507). Recognized long-term gains are taxed at 20%, leaving $29,416.80. Unrecognized gains of $22,800 are not currently taxed. Non-qualified dividends are taxed at 40%, leaving an after-tax gain of $8,990.40. After-tax gains total $61,207.20 /$476,507 = 12.84%.

Given only the following information below, which of the following investments would likely be best to add to a portfolio if the primary goal in adding another asset is to reduce risk? A) investment "B" w/ correlation +0.35 and standard deviation of 15% B) investment "D" w/ correlation +0.75 and standard deviation of 13% C) investment "A" w/ correlation -0.25 and standard deviation of 17% D) investment "C"w/ correlation -0.50 and standard deviation of 19%

ANSWER D While standard deviation is, by definition, a measure of total (or overall) risk, we're actually looking for low correlations to lower the overall "portfolio risk" when considering adding any new asset or investment to such a portfolio.

_____________________ support(s) the possibility that funds that invest in companies that are heavily weighted in an index will underperform their peers, and funds that invest in more companies not well represented in the index will outperform their peers. A) Dynamic asset allocation B) Active-share research C) Core and satellite strategies D) Risk-parity investing Active-share research supports the possibility that funds that invest in companies that are heavily weighted in an index will underperform their peers, and funds that invest in more companies not well represented in the index will outperform their peers. See Key Concepts slides for Section 20: Manager Search and Selection.

Active-share research supports the possibility that funds that invest in companies that are heavily weighted in an index will underperform their peers, and funds that invest in more companies not well represented in the index will outperform their peers. See Key Concepts slides for Section 20: Manager Search and Selection.

A Unit Investment Trust (UIT) includes which of the following characteristics? I. Offers a fixed, managed portfolio of stocks and/or bonds II. Usually issued in increments of $10,000 III. Cannot be traded on a secondary over the counter market IV. Every trust has an expiration date V. May be a registered investment corporation where investors are joint owners, or a grantor trust offering proportional ownership A) III, IV, and V only B) IV and V only C) I and III only D) I, II, and V only

Answer B CIMA Section II.A. Investment Vehicles I. Offers a fixed, unmanaged portfolio of stocks and/or bonds II. Usually issued in increments of $1,000 III. Can be traded on a secondary over the counter market IV. Every trust has an expiration date V. May be a registered investment corporation where investors are joint owners, or a grantor trust offering proportional ownership

Question: What amount of loss should not be exceeded in a thirty-day period of time? Assume the portfolio is valued at $6,000,000 and has a standard deviation of 18%. Use a 99% confidence level. a. $90,000 b. $614,790 c. $868,158 d. $1,080,000

Answer: c. $868,158 CIMA Section IV.B. Risk Measurements VaR = [(portfolio value) x (SDEV) x ((square root of (value / days)) x confidence level] VaR = [($6m) x (18%) x (square root of 30/252) x (2.33)] VaR = [($6m) x (18%) x (.3450) x (2.33)]VaR = $868,158 Remember the confidence levels: 95% = -1.65, 99% = -2.33 Remember there are 252 trading days in the year.