Portfolio Management Flashcards

In the Capital Market Line (CML), which portfolio lies at the tangency point with the efficient frontier?

Answer: The market portfolio

The market portfolio is the tangency point where the CML touches the efficient frontier of risky assets.

An investor's portfolio has a beta of 1.3 and the market returns 8% while the risk-free rate is 2%. What is the expected return per CAPM?

Answer: 11.8%

Expected return = 2% + 1.3 × (8% − 2%) = 2% + 7.8% = 9.8%... wait: 2 + 1.3×6 = 2 + 7.8 = 9.8%. Correct answer is 9.8%.

Which risk measure is most appropriate when a portfolio is not well-diversified?

Answer: Standard deviation

Standard deviation captures total risk (systematic + unsystematic), making it appropriate for undiversified portfolios.

A portfolio manager uses a core-satellite strategy. What is the primary purpose of the 'satellite' portion?

Answer: To generate alpha through active management

The satellite portion pursues active management to generate alpha above the benchmark return.

Which of the following best describes 'tracking error' in portfolio management?

Answer: The standard deviation of the portfolio's excess return over its benchmark

Tracking error is the standard deviation of active return (portfolio return minus benchmark return).

Under the Arbitrage Pricing Theory (APT), what is the primary assumption about a well-diversified portfolio?

Answer: Its idiosyncratic risk is eliminated

APT assumes that in a well-diversified portfolio, firm-specific (idiosyncratic) risk diversifies away, leaving only factor risks.

An investment policy statement (IPS) is LEAST likely to include which of the following?

Answer: Specific security selections

An IPS sets guidelines and objectives but does not typically specify individual security selections, which are left to the portfolio manager.