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Two assets A and B have standard deviations 10% and 20% and correlation +1. A portfolio holds 50% in each. The portfolio standard deviation is:
A
B
C
D
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Key Facts: IAI CM2 Exam
2
Exam Components
IAI CM2 format
CM2A
Written Paper
IAI CM2 format
CM2B
Excel Exam
IAI CM2 format
Core
Principles Subject
IAI qualification
100
Practice Questions
OpenExamPrep
IFoA-aligned
Syllabus Basis
IAI CM2 syllabus
IAI Subject CM2 mirrors the IFoA CM2 Core Principles subject for the Indian jurisdiction and is assessed in two parts: CM2A, a paper-based written exam of roughly 3 hours 15-20 minutes, and CM2B, a computer-based Excel exam of roughly 1 hour 45-50 minutes, combined into one overall mark. The syllabus spans financial-market theory, stochastic asset-liability models, derivative valuation and loss reserving, with heavy weighting on derivatives pricing and stochastic calculus. IAI sets the pass mark each diet and does not publish a fixed question count, fee, or percentage cut score; candidates should confirm current logistics on the IAI website.
Sample IAI CM2 Practice Questions
Try these sample questions to test your IAI CM2 exam readiness. Each question includes a detailed explanation. Start the interactive quiz above for the full 100+ question experience with AI tutoring.
1Under the Efficient Markets Hypothesis, which form asserts that current prices reflect all publicly available information, including past prices, financial statements, and economic news?
A.Semi-strong form
B.Weak form
C.Strong form
D.Random-walk form
Explanation: The semi-strong form states that prices fully reflect all publicly available information, so neither technical nor fundamental analysis of public data can yield consistent excess returns. The weak form covers only past price information, and the strong form adds private (insider) information.
2An empirical study finds that share prices fully and instantaneously incorporate the information in published annual reports, so no trading rule based on those reports earns abnormal returns. This evidence is most directly consistent with which form of market efficiency?
A.Weak form only
B.Semi-strong form
C.Strong form only
D.No form of efficiency
Explanation: Annual reports are publicly available information. If prices instantly impound that information so no excess returns are possible, this supports the semi-strong form. The strong form would additionally require private information to be reflected, which this study does not test.
3Which of the following is commonly cited as evidence AGAINST the Efficient Markets Hypothesis (i.e., an anomaly)?
A.Prices adjusting rapidly to earnings announcements
B.Lack of profitable insider-trading opportunities
C.The January effect and momentum in returns
D.Random fluctuation of prices around fundamental value
Explanation: Calendar effects such as the January effect, and the persistence of momentum in returns, are anomalies that appear inconsistent with strict market efficiency because they suggest predictable patterns. Rapid price adjustment and randomness are consistent with the EMH.
4Behavioural finance challenges the EMH by documenting systematic biases. 'Anchoring' refers to which tendency?
A.Overweighting recent information when forecasting
B.Holding losing investments too long to avoid realising a loss
C.Following the actions of a crowd rather than independent analysis
D.Relying too heavily on an initial reference value when making estimates
Explanation: Anchoring is the tendency to rely too heavily on an initial piece of information (an 'anchor') when forming estimates, so subsequent adjustments are insufficient. The other options describe recency bias, the disposition effect, and herding respectively.
5In an informationally efficient market under the weak form, the best forecast of tomorrow's price (ignoring drift) given today's price is:
A.Today's price
B.The long-run average price
C.Zero
D.The discounted present value of future dividends only
Explanation: Weak-form efficiency implies prices follow (approximately) a martingale, so the expected future price equals the current price after allowing for any required return/drift. Past prices contain no exploitable information about future changes.
6Over- and under-reaction of prices to news are studied as departures from efficiency. Excessive volatility in market prices relative to the volatility of fundamentals was famously highlighted by which researcher?
A.Eugene Fama
B.Robert Shiller
C.Harry Markowitz
D.Fischer Black
Explanation: Robert Shiller's work on excess volatility argued that stock prices fluctuate far more than can be justified by subsequent changes in dividends, a challenge to the EMH. Fama is associated with the EMH itself, Markowitz with portfolio theory, and Black with option pricing.
7An investor has utility function U(w) = ln(w). This investor is best described as:
A.Risk-seeking with increasing absolute risk aversion
B.Risk-neutral
C.Risk-averse with decreasing absolute risk aversion
D.Risk-averse with constant absolute risk aversion
Explanation: For U(w)=ln(w), U'(w)=1/w>0 and U''(w)=-1/w^2<0, so the investor is risk-averse. The absolute risk aversion A(w)=-U''/U'=1/w decreases as wealth rises, giving decreasing absolute risk aversion (DARA).
8The coefficient of absolute risk aversion is defined as A(w) = -U''(w)/U'(w). For the exponential utility U(w) = -e^(-aw) with a>0, the absolute risk aversion equals:
A.1/a
B.aw
C.a/w
D.a
Explanation: For U(w)=-e^(-aw), U'(w)=a e^(-aw) and U''(w)=-a^2 e^(-aw). Thus A(w)=-U''/U'=a^2 e^(-aw)/(a e^(-aw))=a, a constant. Exponential utility therefore exhibits constant absolute risk aversion (CARA).
9The certainty equivalent of a risky prospect is defined as:
A.The amount of certain wealth giving the same expected utility as the prospect
B.The expected monetary value of the prospect
C.The variance of the prospect's payoffs
D.The risk-free rate times the prospect's expected value
Explanation: The certainty equivalent (CE) is the guaranteed amount of wealth that an investor would accept in exchange for the risky prospect, i.e. U(CE)=E[U(W)]. For a risk-averse investor the CE is below the expected monetary value; the difference is the risk premium.
10An investor with utility U(w)=ln(w) and current wealth 100 is offered a fair gamble that pays +50 or -50 each with probability 0.5. Which statement is correct?
A.The investor accepts because the gamble is actuarially fair
B.The investor rejects because expected utility falls below ln(100)
C.The investor is indifferent because expected wealth is unchanged
D.The investor accepts because log utility is risk-neutral
Explanation: Expected utility = 0.5 ln(150) + 0.5 ln(50) = 0.5(5.0106) + 0.5(3.9120) = 4.4613, while ln(100)=4.6052. Since expected utility after the gamble is lower, the risk-averse log investor rejects the fair gamble.
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