CEBS - RPA 2 EXAM Questions and
Answers 100% correct
Types of investment risk - correct answerPurchasing power, business, interest rate,
market, specific
purchasing power risk - correct answerreflects the relationship between the nominal rate
of return on an investment and the increase in the rate of inflation
Business risk - correct answerthe 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 - correct answerthe 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 - correct answeran 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 - correct answerthe 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 - correct answerrisk that is intrinsic to a particular firm
Tax aspect of an investment importance - correct answerBecause of the tax-exempt
status of the pension fund. Investment income of qualified retirement plans is tax-
exempt, so certain types of investments may not be as attractive to pension funds as
they would be for other types of investors.
Liquidity - correct answerrefers 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 - correct answerDefinition. Input.
Processing. Output
Performance Measurement definition - correct answerEstablishment of investment
objectives and, to the extent practical, a clearly formulated portfolio strategy
, Performance Measurement Input - correct answerAvailability of reliable and timely data.
Incorrect and tardy data will render the most sophisticated system ineffective.
Performance Measurement Processing - correct answerUse 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 - correct answerAnalysis 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 - correct answer1. 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.
Internal rate of return - correct answerAllows 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 - correct answerComputed 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 - correct answerUses 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 - correct answerthe level of return contributed because of the
skill of the investment manager that is managing the portfolio
Portfolio's Beta Value - correct answerthe 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 - correct answercan be used to
measure risk-adjusted performance and to compare portfolios with different risk levels
developed by actual portfolio decisions.
Answers 100% correct
Types of investment risk - correct answerPurchasing power, business, interest rate,
market, specific
purchasing power risk - correct answerreflects the relationship between the nominal rate
of return on an investment and the increase in the rate of inflation
Business risk - correct answerthe 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 - correct answerthe 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 - correct answeran 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 - correct answerthe 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 - correct answerrisk that is intrinsic to a particular firm
Tax aspect of an investment importance - correct answerBecause of the tax-exempt
status of the pension fund. Investment income of qualified retirement plans is tax-
exempt, so certain types of investments may not be as attractive to pension funds as
they would be for other types of investors.
Liquidity - correct answerrefers 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 - correct answerDefinition. Input.
Processing. Output
Performance Measurement definition - correct answerEstablishment of investment
objectives and, to the extent practical, a clearly formulated portfolio strategy
, Performance Measurement Input - correct answerAvailability of reliable and timely data.
Incorrect and tardy data will render the most sophisticated system ineffective.
Performance Measurement Processing - correct answerUse 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 - correct answerAnalysis 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 - correct answer1. 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.
Internal rate of return - correct answerAllows 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 - correct answerComputed 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 - correct answerUses 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 - correct answerthe level of return contributed because of the
skill of the investment manager that is managing the portfolio
Portfolio's Beta Value - correct answerthe 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 - correct answercan be used to
measure risk-adjusted performance and to compare portfolios with different risk levels
developed by actual portfolio decisions.
