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.
Read the first 7 Portfolio Management flashcards as text
A portfolio manager calculates the M² (Modigliani-Modigliani) measure. What does this metric compare?
Answer: The risk-adjusted return of the portfolio scaled to match the market's total risk
M² adjusts the portfolio to have the same total risk as the market portfolio using leverage or de-levering, then compares the resulting return to the market return.
In a goals-based investing framework, which of the following best describes the approach to portfolio construction?
Answer: Creating separate sub-portfolios ('mental accounts') mapped to specific client goals with different risk tolerances
Goals-based investing organizes assets into distinct sub-portfolios, each matched to a specific goal (e.g., retirement, education) with an appropriate risk level.
Which rebalancing strategy involves selling assets that have exceeded their target weight and buying those that have fallen below, only when weights breach predefined threshold bands?
Answer: Percentage-of-portfolio (corridor) rebalancing
Percentage-of-portfolio or corridor rebalancing triggers trades only when asset weights drift outside predetermined tolerance bands around their targets.
What is the primary risk associated with a 'cash drag' in an actively managed equity fund?
Answer: Underperformance relative to the benchmark when markets rise due to uninvested cash
Cash drag occurs when uninvested cash earns a lower return than equities during rising markets, causing the fund to underperform its equity benchmark.
A manager implementing a 130/30 strategy holds 130% long positions and 30% short positions. What is the net market exposure?
Answer: 100%
Net exposure = 130% long − 30% short = 100%, providing market-neutral net beta exposure while allowing both long and short active bets.
Under the Global Investment Performance Standards (GIPS), composites must include:
Answer: All fee-paying, discretionary portfolios managed in accordance with a similar investment mandate
GIPS requires that composites include all actual, fee-paying, discretionary portfolios managed to a similar strategy or objective, preventing cherry-picking.
Which factor explains why small-cap value stocks have historically generated higher returns than predicted by CAPM alone, according to the Fama-French three-factor model?
Answer: They load positively on the SMB (small minus big) and HML (high minus low) risk factors
The Fama-French model attributes small-cap value outperformance to positive exposures to the SMB (size) and HML (value) factors, representing compensation for additional risks.