Module 2: Investment Risk, Return & Performance – AWMA Study
Guide + Key Concepts
George's bonds fell in price on news of higher interest rates. To which one of the following risks
are George's bonds most likely to be subject?
A) Interest rate risk
B) Reinvestment risk
C) Financial risk
D) Default risk - correct answer ✔✔A) Interest rate risk
Interest rate risk centers on the inverse relationship of interest rate changes and bond prices, so,
in this situation, if interest rates go up, the price of George's bonds go down.
What is the key to building efficient portfolios in traditional-based investing?
A) Diversifying across multiple asset classes
B) Decreasing market beta exposure
C) Decreasing exposure to risk factors
D) Maximizing expected returns - correct answer ✔✔A) Diversifying across multiple asset
classes
Diversifying across multiple asset classes is the key to building efficient portfolios in traditional-
based investing.
Which of the following are characteristics of the Sharpe ratio?
I. It adjusts the return for variability by using standard deviation as the measure of risk.
, II. It assumes that the portfolio being evaluated is well diversified.
III. Both alpha and beta appear in the ratio formula.
IV. It indicates by how much the realized return differs from the return required by the capital
asset pricing model.
A) III and IV
B) I and II
C) I, II, and IV
D) I only - correct answer ✔✔D) I only
Options II, III, and IV are true of Jensen's alpha; option II is true of the Treynor ratio.
Bill is highly confident, strong willed, and difficult to advise. Which one of the following best
describes Bill's investor personality?
A) Individualist
B) Celebrity
C) Adventurer
D) Guardian - correct answer ✔✔C) Adventurer
An adventurer is impetuous, confident, strong willed, and difficult to advise.
Assume a growth stock mutual fund has a beta of 1.3. If the stock market increases by 9%, you
would expect this mutual fund to
A) decrease by 11.7%.
B) decrease by 9%.
Guide + Key Concepts
George's bonds fell in price on news of higher interest rates. To which one of the following risks
are George's bonds most likely to be subject?
A) Interest rate risk
B) Reinvestment risk
C) Financial risk
D) Default risk - correct answer ✔✔A) Interest rate risk
Interest rate risk centers on the inverse relationship of interest rate changes and bond prices, so,
in this situation, if interest rates go up, the price of George's bonds go down.
What is the key to building efficient portfolios in traditional-based investing?
A) Diversifying across multiple asset classes
B) Decreasing market beta exposure
C) Decreasing exposure to risk factors
D) Maximizing expected returns - correct answer ✔✔A) Diversifying across multiple asset
classes
Diversifying across multiple asset classes is the key to building efficient portfolios in traditional-
based investing.
Which of the following are characteristics of the Sharpe ratio?
I. It adjusts the return for variability by using standard deviation as the measure of risk.
, II. It assumes that the portfolio being evaluated is well diversified.
III. Both alpha and beta appear in the ratio formula.
IV. It indicates by how much the realized return differs from the return required by the capital
asset pricing model.
A) III and IV
B) I and II
C) I, II, and IV
D) I only - correct answer ✔✔D) I only
Options II, III, and IV are true of Jensen's alpha; option II is true of the Treynor ratio.
Bill is highly confident, strong willed, and difficult to advise. Which one of the following best
describes Bill's investor personality?
A) Individualist
B) Celebrity
C) Adventurer
D) Guardian - correct answer ✔✔C) Adventurer
An adventurer is impetuous, confident, strong willed, and difficult to advise.
Assume a growth stock mutual fund has a beta of 1.3. If the stock market increases by 9%, you
would expect this mutual fund to
A) decrease by 11.7%.
B) decrease by 9%.
