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Portfolio Management & Construction 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. A portfolio manager wants to reduce systematic risk without selling equity holdings. The most appropriate strategy is to:

    Answer: Short equity index futures

    Shorting equity index futures reduces market exposure (beta) without liquidating the underlying equity positions.

  2. Factor-based investing (smart beta) primarily seeks to:

    Answer: Systematically capture documented risk premia such as value, size, and momentum

    Smart beta strategies systematically tilt portfolios toward factors (value, size, momentum, quality) that have historically provided return premia.

  3. The 'Black-Litterman' model improves on traditional MVO by:

    Answer: Blending market equilibrium returns with investor views to generate stable return estimates

    Black-Litterman starts from market equilibrium (implied returns) and then blends in the manager's subjective views, reducing input sensitivity.

  4. In a multi-asset portfolio, which correlation scenario provides the greatest diversification benefit?

    Answer: Correlation of -1.0 between two assets

    A perfect negative correlation of -1.0 between two assets allows complete risk elimination through proper weighting.

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

    Answer: The standard deviation of the portfolio's active returns relative to its benchmark

    Tracking error is the standard deviation of (portfolio return − benchmark return), measuring how closely a portfolio follows its benchmark.

  6. When an endowment adopts the 'Yale Model' of portfolio management, it typically emphasizes:

    Answer: Broad diversification into alternative assets including private equity, hedge funds, and real assets

    The Yale Model (pioneered by David Swensen) favors illiquid alternative assets for their diversification and return premium over traditional stocks and bonds.

  7. A portfolio's beta is 1.3 and the market rises by 10%. Using the CAPM, the portfolio's expected excess return above the risk-free rate is approximately:

    Answer: 13%

    Expected excess return = beta × market excess return = 1.3 × 10% = 13%.