CEBS - RPA 2 EXAM QUESTIONS &
ANSWERS(RATED A)
Types of investment risk - answer-Purchasing power, business, interest rate, market, specific
purchasing power risk - answer-reflects the relationship between the nominal rate of return on
an investment and the increase in the rate of inflation
Business risk - answer-the prospect of the corporation issuing the security suffering a decline in
earnings power that would adversely affect its ability to pay interest, principal or dividends.
Interest rate risk - answer-the well-known inverse relationship between interest rates and
(long-term) bond prices. That is to say, when interest rates increase, the value of long-term
bonds falls.
Market risk - answer-an individual stock's reaction to a change in the market. In general, most
stock prices will increase if the stock market increases appreciably and decrease if the market
decreases appreciably.
Risk measurement beta - answer-the price of one stock may change half as fast as the market,
on average, while another may change twice as fast. This relationship is quantified by a measure
known as beta.
Specific risk - answer-risk that is intrinsic to a particular firm
Tax aspect of an investment importance - answer-Because of the tax-exempt status of the
pension fund. Investment income of qualified retirement plans is tax-exempt, so certain types
1
,of investments may not be as attractive to pension funds as they would be for other types of
investors.
Liquidity - answer-refers to the ability to convert an investment into cash in a short time period
with little, if any, loss in principal.
Steps for effective performance measurement - answer-Definition. Input. Processing. Output
Performance Measurement definition - answer-Establishment of investment objectives and, to
the extent practical, a clearly formulated portfolio strategy
Performance Measurement Input - answer-Availability of reliable and timely data. Incorrect and
tardy data will render the most sophisticated system ineffective.
Performance Measurement Processing - answer-Use of appropriate statistical methods to
produce relevant measurements. The complex interaction of objectives, strategies and
managers' tactics cannot be understood if inappropriate statistical methods are used.
Performance Measurement Output - answer-Analysis of the process and results presented in a
useful format. Presentation should relate realized performance to objectives and pre-
established standards. Enough material should be available to understand and analyze the
process.
Caveats to performance measurement system - answer-1. A hastily chosen system, poorly
related to real needs, can rapidly degenerate into a mechanistic, pointless exercise.
2. System should fit the investment objectives.
3. Measuring the process may alter it.
4. To save time and cost, overmeasurement be avoided.
2
, Internal rate of return - answer-Allows the sponsor to determine whether the investment is
achieving the rate of return assumed for actuarial calculations. Largely ineffective as a means of
evaluating investment managers because it is contaminated by the effects of the timing of
investments and withdrawals.
Time weighted rate of return - answer-Computed by dividing the time interval under study into
subintervals whose boundaries are the dates of cash flows into and out of the fund and by
computing the internal rate of return for each subinterval. The geometric average for the rates
for these subintervals, with each rate having a weight proportional to the length of time in its
corresponding subinterval.
Capital Asset Pricing Model - answer-Uses standard statistical techniques simple linear
regression to analyze the relationship between the periodic returns of the portfolio and those
of the market.
Portfolio's Alpha Value - answer-the level of return contributed because of the skill of the
investment manager that is managing the portfolio
Portfolio's Beta Value - answer-the slope of the line measured as the change in vertical
movement per unit of change in the horizontal movement. This represents the average return
on the portfolio per 1% return on the market.
Risk adjusted rate of return in portfolio measurement - answer-can be used to measure risk-
adjusted performance and to compare portfolios with different risk levels developed by actual
portfolio decisions.
U.S. Treasury bills - answer-Treasury bills have maturities at issue ranging from 91 to 360 days.
There is almost no default risk on these investments.
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ANSWERS(RATED A)
Types of investment risk - answer-Purchasing power, business, interest rate, market, specific
purchasing power risk - answer-reflects the relationship between the nominal rate of return on
an investment and the increase in the rate of inflation
Business risk - answer-the prospect of the corporation issuing the security suffering a decline in
earnings power that would adversely affect its ability to pay interest, principal or dividends.
Interest rate risk - answer-the well-known inverse relationship between interest rates and
(long-term) bond prices. That is to say, when interest rates increase, the value of long-term
bonds falls.
Market risk - answer-an individual stock's reaction to a change in the market. In general, most
stock prices will increase if the stock market increases appreciably and decrease if the market
decreases appreciably.
Risk measurement beta - answer-the price of one stock may change half as fast as the market,
on average, while another may change twice as fast. This relationship is quantified by a measure
known as beta.
Specific risk - answer-risk that is intrinsic to a particular firm
Tax aspect of an investment importance - answer-Because of the tax-exempt status of the
pension fund. Investment income of qualified retirement plans is tax-exempt, so certain types
1
,of investments may not be as attractive to pension funds as they would be for other types of
investors.
Liquidity - answer-refers to the ability to convert an investment into cash in a short time period
with little, if any, loss in principal.
Steps for effective performance measurement - answer-Definition. Input. Processing. Output
Performance Measurement definition - answer-Establishment of investment objectives and, to
the extent practical, a clearly formulated portfolio strategy
Performance Measurement Input - answer-Availability of reliable and timely data. Incorrect and
tardy data will render the most sophisticated system ineffective.
Performance Measurement Processing - answer-Use of appropriate statistical methods to
produce relevant measurements. The complex interaction of objectives, strategies and
managers' tactics cannot be understood if inappropriate statistical methods are used.
Performance Measurement Output - answer-Analysis of the process and results presented in a
useful format. Presentation should relate realized performance to objectives and pre-
established standards. Enough material should be available to understand and analyze the
process.
Caveats to performance measurement system - answer-1. A hastily chosen system, poorly
related to real needs, can rapidly degenerate into a mechanistic, pointless exercise.
2. System should fit the investment objectives.
3. Measuring the process may alter it.
4. To save time and cost, overmeasurement be avoided.
2
, Internal rate of return - answer-Allows the sponsor to determine whether the investment is
achieving the rate of return assumed for actuarial calculations. Largely ineffective as a means of
evaluating investment managers because it is contaminated by the effects of the timing of
investments and withdrawals.
Time weighted rate of return - answer-Computed by dividing the time interval under study into
subintervals whose boundaries are the dates of cash flows into and out of the fund and by
computing the internal rate of return for each subinterval. The geometric average for the rates
for these subintervals, with each rate having a weight proportional to the length of time in its
corresponding subinterval.
Capital Asset Pricing Model - answer-Uses standard statistical techniques simple linear
regression to analyze the relationship between the periodic returns of the portfolio and those
of the market.
Portfolio's Alpha Value - answer-the level of return contributed because of the skill of the
investment manager that is managing the portfolio
Portfolio's Beta Value - answer-the slope of the line measured as the change in vertical
movement per unit of change in the horizontal movement. This represents the average return
on the portfolio per 1% return on the market.
Risk adjusted rate of return in portfolio measurement - answer-can be used to measure risk-
adjusted performance and to compare portfolios with different risk levels developed by actual
portfolio decisions.
U.S. Treasury bills - answer-Treasury bills have maturities at issue ranging from 91 to 360 days.
There is almost no default risk on these investments.
3
