Return Risk Optimization Exam

An investment portfolio has an expected return of 10% and risk of 10% (based on some arbitrary confidence level), for an expected portfolio sharpe ratio of 1. The risk appetite for this portfolio is 15% of capital, based on the confidence level used.

The portfolio is presented with 2 investment choices.

Investment choice 1 is expected to boost the current portfolio’s return by 20% (i.e. from 10% expected return to 12% expected return) and its risk by 35%, on a correlated risk measurement basis.

Investment choice 2 is expected to boost the current portfolio’s return by 10% and its risk by 25%, on a correlated risk measurement basis.

Which one of the following investment decisions is most optimal, given the set of expectations presented?

Which of the following statements is most accurate as it relates to portfolio leverage?

Why are Hedge Funds perceived as more risky than Banks, even though bank leverage is, on average, 15-20 times capital, whereas a hedge fund’s leverage is, on average, 2-5 times capital?

A Portfolio’s Efficient Frontier is best described as:

Non-traded asset classes such as infrastructure, utilities, and private equity are generally excluded from an optimization exercise, because they provide no historical data to analyze expected return, risk, and correlation with other asset classes.

Modeling asset class expected return information is mostly affected by which of the following considerations?

Optimization works exclusively for long-only portfolios.

Using EWMA instead of Standard Deviation to calculate volatility always to leads to a higher risk measure, which lowers the measured Sharpe ratio.

What is the percent return equivalent of a 25 basis point move on a fixed income asset whose DV01 is $100 per $1 million invested?

The inclusion of Kurtosis in risk measurement generally reduces a portfolio’s Sharpe ratio.