CFA Portfolio Management

Question 1

In Modern Portfolio Theory (MPT), the efficient frontier represents:

Accepted Answer

The set of portfolios offering the maximum return for each level of risk, or minimum risk for each level of return

Answer

Portfolios with the highest return regardless of risk

Answer

Only the minimum variance portfolio

Answer

Portfolios composed entirely of risk-free assets

Question 2

The Capital Market Line (CML) differs from the Security Market Line (SML) in that the CML:

Accepted Answer

Uses total risk (standard deviation) as its risk measure, while the SML uses systematic risk (beta)

Answer

Uses beta as its measure of risk, while the SML uses standard deviation

Answer

Applies to individual securities, while the SML applies only to portfolios

Answer

Is only relevant for bonds, while the SML applies to equities

Question 3

An investor's Investment Policy Statement (IPS) must include which of the following?

Accepted Answer

Return objectives and risk tolerance of the client

Answer

Specific stock picks recommended by the manager

Answer

The manager's personal investment philosophy

Answer

Historical market performance benchmarks

Question 4

Strategic asset allocation (SAA) is BEST described as:

Accepted Answer

Long-term target allocations across asset classes based on the investor's IPS

Answer

Short-term tactical shifts based on market forecasts

Answer

The selection of individual securities within each asset class

Answer

Daily rebalancing to maintain target weights

Question 5

The Sharpe ratio measures:

Accepted Answer

Excess return per unit of total risk (standard deviation)

Answer

Excess return per unit of systematic risk (beta)

Answer

Absolute return relative to the risk-free rate

Answer

Portfolio return divided by portfolio volatility without adjusting for risk-free rate

Question 6

Which of the following is a characteristic of a liability-driven investment (LDI) strategy, as used by pension funds?

Accepted Answer

Matching asset duration and cash flows to the duration and timing of liabilities

Answer

Maximizing portfolio return without regard to liabilities

Answer

Investing only in equities for long-term growth

Answer

Minimizing portfolio volatility regardless of liability structure