EIF_Topic 1 _ Quiz

An investment analyst is evaluating different risk-adjusted performance measures. Which of the following metrics focuses specifically on downside volatility rather than total volatility?

• Sharpe ratio

• Treynor ratio

• Jensen's alpha

• Sortino ratio

Which of the following best describes the portfolios located on the Capital Market Line (CML) according to modern portfolio theory?

• Combinations of the risk-free asset and inefficient portfolios

• Portfolios composed of the risk-free asset and the market portfolio

• Portfolios combining the risk-free asset with individual equities

• Portfolios on both the efficient and inefficient frontier

An equity portfolio has a positive Jensen's alpha. This result most likely indicates that the portfolio:

• Is underperforming relative to the market index

• Is mispriced based on market expectations

• Is generating returns above the level predicted by its systematic risk exposure

• Is in equilibrium with the market

A financial institution is reviewing its model risk exposure. Which of the following best characterizes model risk?

• Risk of losses due to geopolitical instability

• Risk of valuation errors resulting from flawed pricing or forecasting models

• Risk arising from unanticipated changes in regulatory capital requirements

• Risk of increased trading costs due to illiquidity

Under the Capital Asset Pricing Model (CAPM), which type of risk is expected to be compensated by a risk premium in equilibrium?

• Total risk

• Credit risk

• Idiosyncratic risk

• Systematic risk

A bank experiences difficulty in meeting short-term funding needs due to an inability to liquidate assets at reasonable prices. This situation most likely reflects which type of risk?

• Market liquidity risk

• Funding liquidity risk

• Operational risk

• Credit risk

A security is observed to plot above the Security Market Line (SML). This suggests that the security is:

• Fairly valued based on its systematic risk

• Overvalued relative to market expectations

• Undervalued given its level of risk

• Not subject to diversification benefits

A firm is assessing factors that influence the effectiveness of its risk culture. Which of the following elements plays the most critical role in shaping and promoting a strong risk culture?

• Adoption of industry-standard benchmarks

• Outcomes from periodic regulatory audits

• Leadership's demonstrated commitment to risk governance ('tone at the top')

• Use of compensation structures tied solely to performance metrics

An internal audit team is reviewing components of the firm's ERM framework. Which of the following is least likely to be a core element of such a framework?

• Identification of risk exposures

• Development of a business continuity plan

• Design of performance-based incentive compensation

• Ongoing monitoring of risk metrics

An analyst is comparing performance metrics of two investment portfolios. Which of the following measures evaluates excess return per unit of total risk?

• Treynor ratio

• Sharpe ratio

• Jensen's alpha

• Beta