[WMCP] Wealth Management Certified Professional Practice Exam
1. Which statistical measure indicates the degree of variation or dispersion of a set of
investment returns?
A) Mean
B) Median
C) Variance
D) Mode
Answer: C) Variance
Explanation: Variance measures the dispersion of investment returns around the mean,
indicating the volatility of the portfolio.
2. What does the covariance between two assets signify in portfolio theory?
A) The average return of the two assets
B) The degree to which two assets move in relation to each other
C) The risk-free rate of return
D) The total return of the portfolio
Answer: B) The degree to which two assets move in relation to each other
Explanation: Covariance indicates how two assets' returns move together, which is
crucial for diversification benefits.
3. The Sharpe Ratio is used to assess what aspect of an investment portfolio?
A) Total return
B) Risk-adjusted return
C) Market risk
D) Liquidity
Answer: B) Risk-adjusted return
, [WMCP] Wealth Management Certified Professional Practice Exam
Explanation: The Sharpe Ratio measures the excess return per unit of risk, helping
investors understand the return relative to volatility.
4. Which of the following best describes 'beta' in the context of modern investment
theory?
A) Total portfolio return
B) Systematic risk relative to the market
C) Unsystematic risk of a single asset
D) Average return over a period
Answer: B) Systematic risk relative to the market
Explanation: Beta measures an asset's sensitivity to market movements, indicating its
systematic risk.
5. In the Capital Asset Pricing Model (CAPM), which component represents the
expected return of the asset?
A) Risk-free rate
B) Beta
C) Market risk premium
D) All of the above
Answer: D) All of the above
Explanation: CAPM formula: Expected Return = Risk-free rate + Beta * (Market Return
- Risk-free rate), incorporating all listed components.
2. Applying modern investment theory to portfolio construction and wealth
management
6. According to Modern Portfolio Theory (MPT), an efficient portfolio is one that:
A) Maximizes returns for a given level of risk
B) Minimizes risk regardless of return
C) Maximizes the number of assets
,[WMCP] Wealth Management Certified Professional Practice Exam
D) Matches the market portfolio
Answer: A) Maximizes returns for a given level of risk
Explanation: MPT defines efficient portfolios as those offering the highest expected
return for a specific level of risk.
7. Diversification primarily helps in reducing which type of risk?
A) Systematic risk
B) Unsystematic risk
C) Market risk
D) Inflation risk
Answer: B) Unsystematic risk
Explanation: Diversification reduces unsystematic (specific) risk by spreading
investments across various assets.
8. The Efficient Frontier represents:
A) All possible portfolios with the highest return
B) Portfolios that offer the maximum expected return for a given level of risk
C) The minimum risk portfolios
D) Portfolios with zero risk
Answer: B) Portfolios that offer the maximum expected return for a given level of risk
Explanation: The Efficient Frontier is the set of optimal portfolios offering the highest
expected return for a defined level of risk.
9. Which of the following assumptions is NOT part of Modern Portfolio Theory?
A) Investors are rational and risk-averse
B) Markets are efficient
C) Investors have heterogeneous expectations
D) There are no taxes or transaction costs
, [WMCP] Wealth Management Certified Professional Practice Exam
Answer: C) Investors have heterogeneous expectations
Explanation: MPT assumes homogeneous expectations, meaning all investors have the
same expectations regarding returns and risks.
10. In portfolio optimization, the 'risk-free asset' is typically represented by:
A) Corporate bonds
B) Stocks
C) Treasury bills
D) Real estate
Answer: C) Treasury bills
Explanation: Treasury bills are considered risk-free as they are backed by the
government with minimal default risk.
3. Constructing an efficient household portfolio
11. When constructing a household portfolio, which factor is most critical to determine
the appropriate asset allocation?
A) Current income level
B) Investment horizon and risk tolerance
C) Number of dependents
D) Geographic location
Answer: B) Investment horizon and risk tolerance
Explanation: Investment horizon and risk tolerance are essential in determining the
suitable mix of assets to balance risk and return.
12. A household with a long investment horizon and high risk tolerance is likely to
allocate more to:
A) Fixed-income securities
B) Equities
C) Cash equivalents
1. Which statistical measure indicates the degree of variation or dispersion of a set of
investment returns?
A) Mean
B) Median
C) Variance
D) Mode
Answer: C) Variance
Explanation: Variance measures the dispersion of investment returns around the mean,
indicating the volatility of the portfolio.
2. What does the covariance between two assets signify in portfolio theory?
A) The average return of the two assets
B) The degree to which two assets move in relation to each other
C) The risk-free rate of return
D) The total return of the portfolio
Answer: B) The degree to which two assets move in relation to each other
Explanation: Covariance indicates how two assets' returns move together, which is
crucial for diversification benefits.
3. The Sharpe Ratio is used to assess what aspect of an investment portfolio?
A) Total return
B) Risk-adjusted return
C) Market risk
D) Liquidity
Answer: B) Risk-adjusted return
, [WMCP] Wealth Management Certified Professional Practice Exam
Explanation: The Sharpe Ratio measures the excess return per unit of risk, helping
investors understand the return relative to volatility.
4. Which of the following best describes 'beta' in the context of modern investment
theory?
A) Total portfolio return
B) Systematic risk relative to the market
C) Unsystematic risk of a single asset
D) Average return over a period
Answer: B) Systematic risk relative to the market
Explanation: Beta measures an asset's sensitivity to market movements, indicating its
systematic risk.
5. In the Capital Asset Pricing Model (CAPM), which component represents the
expected return of the asset?
A) Risk-free rate
B) Beta
C) Market risk premium
D) All of the above
Answer: D) All of the above
Explanation: CAPM formula: Expected Return = Risk-free rate + Beta * (Market Return
- Risk-free rate), incorporating all listed components.
2. Applying modern investment theory to portfolio construction and wealth
management
6. According to Modern Portfolio Theory (MPT), an efficient portfolio is one that:
A) Maximizes returns for a given level of risk
B) Minimizes risk regardless of return
C) Maximizes the number of assets
,[WMCP] Wealth Management Certified Professional Practice Exam
D) Matches the market portfolio
Answer: A) Maximizes returns for a given level of risk
Explanation: MPT defines efficient portfolios as those offering the highest expected
return for a specific level of risk.
7. Diversification primarily helps in reducing which type of risk?
A) Systematic risk
B) Unsystematic risk
C) Market risk
D) Inflation risk
Answer: B) Unsystematic risk
Explanation: Diversification reduces unsystematic (specific) risk by spreading
investments across various assets.
8. The Efficient Frontier represents:
A) All possible portfolios with the highest return
B) Portfolios that offer the maximum expected return for a given level of risk
C) The minimum risk portfolios
D) Portfolios with zero risk
Answer: B) Portfolios that offer the maximum expected return for a given level of risk
Explanation: The Efficient Frontier is the set of optimal portfolios offering the highest
expected return for a defined level of risk.
9. Which of the following assumptions is NOT part of Modern Portfolio Theory?
A) Investors are rational and risk-averse
B) Markets are efficient
C) Investors have heterogeneous expectations
D) There are no taxes or transaction costs
, [WMCP] Wealth Management Certified Professional Practice Exam
Answer: C) Investors have heterogeneous expectations
Explanation: MPT assumes homogeneous expectations, meaning all investors have the
same expectations regarding returns and risks.
10. In portfolio optimization, the 'risk-free asset' is typically represented by:
A) Corporate bonds
B) Stocks
C) Treasury bills
D) Real estate
Answer: C) Treasury bills
Explanation: Treasury bills are considered risk-free as they are backed by the
government with minimal default risk.
3. Constructing an efficient household portfolio
11. When constructing a household portfolio, which factor is most critical to determine
the appropriate asset allocation?
A) Current income level
B) Investment horizon and risk tolerance
C) Number of dependents
D) Geographic location
Answer: B) Investment horizon and risk tolerance
Explanation: Investment horizon and risk tolerance are essential in determining the
suitable mix of assets to balance risk and return.
12. A household with a long investment horizon and high risk tolerance is likely to
allocate more to:
A) Fixed-income securities
B) Equities
C) Cash equivalents
