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Portfolio Management Flashcards

7 cards from real CFA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. Which performance attribution method decomposes active return into allocation, selection, and interaction effects?

    Answer: Brinson-Hood-Beebower (BHB) attribution

    The Brinson-Hood-Beebower model decomposes active return into allocation effect, selection effect, and interaction effect.

  2. A pension fund has a liability duration of 12 years. To immunize against interest rate risk, the portfolio's asset duration should be:

    Answer: Equal to 12 years

    Classical immunization requires matching asset duration to liability duration so that interest rate changes affect both equally.

  3. What does a high information ratio (IR) indicate about a portfolio manager?

    Answer: The manager consistently generates alpha per unit of active risk

    The information ratio measures alpha generated per unit of tracking error; a higher IR indicates superior active management skill.

  4. In a liability-driven investing (LDI) framework, the primary goal is to:

    Answer: Match or exceed the growth of liabilities

    LDI focuses on managing assets relative to liabilities, ensuring that asset growth keeps pace with or exceeds liability growth.

  5. Which of the following is an example of a tactical asset allocation (TAA) decision?

    Answer: Temporarily overweighting equities due to a near-term bullish outlook

    TAA involves short-term deviations from the strategic asset allocation to exploit perceived market opportunities.

  6. The Jensen's alpha of a portfolio is +1.5%. This means the portfolio:

    Answer: Earned 1.5% more than predicted by CAPM given its beta

    Jensen's alpha is the actual return minus the CAPM-predicted return; a positive alpha means the manager added value beyond systematic risk compensation.

  7. Which concept explains why combining two risky assets with a correlation of -1.0 can theoretically eliminate all portfolio risk?

    Answer: Perfect negative correlation allows complete offset of price movements

    When two assets have a correlation of -1.0, their price movements perfectly offset each other, allowing construction of a zero-variance portfolio.