CFA Portfolio Management 2

Question 1

Jensen's alpha measures portfolio performance as:

Accepted Answer

The actual portfolio return minus the CAPM-expected return given the portfolio's beta

Answer

Jensen's alpha = Rp – [Rf + β(Rm – Rf)]; it compares actual portfolio return to the CAPM-predicted return for the same level of systematic risk.

Question 2

The information ratio (IR) is used to evaluate active portfolio managers and is calculated as:

Accepted Answer

Active return (alpha) divided by tracking error

Answer

IR = Active return / Tracking error; it measures how much active return a manager generates per unit of active risk (deviation from the benchmark).

Question 3

In a defined benefit (DB) pension plan, the investment risk is borne by:

Accepted Answer

The plan sponsor (employer)

Answer

In a DB plan, the employer guarantees a defined benefit and bears investment risk; if assets underperform, the sponsor must make additional contributions.

Question 4

Mean-variance optimization in portfolio construction is MOST limited by which of the following practical challenges?

Accepted Answer

Sensitivity to input estimates (expected returns, variances, correlations) which are difficult to forecast accurately

Answer

MVO is highly sensitive to small changes in input estimates, particularly expected returns, which leads to extreme and unstable portfolio weights in practice.

Question 5

A risk-averse investor will MOST likely select a portfolio that offers:

Accepted Answer

A portfolio on the efficient frontier matching their specific risk-return preference

Answer

A risk-averse investor selects an efficient frontier portfolio that maximizes their utility given their specific indifference curves, balancing return against their personal risk tolerance.

CFA Practice Test

CFA Practice Test

CFA Portfolio Management 2