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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.

Read the first 7 Portfolio Management & Construction flashcards as text

  1. Which of the following asset classes typically has the lowest correlation with global equities, making it most useful for portfolio diversification?

    Answer: Infrastructure and commodities

    Infrastructure and commodities tend to have low correlations with equities (and inflation-hedging properties), enhancing diversification.

  2. The 'policy portfolio' (strategic asset allocation) of an institutional investor is best described as:

    Answer: The long-term target mix of asset classes reflecting the investor's risk tolerance and return objectives

    The policy portfolio represents the long-run benchmark allocation aligned with the institution's Investment Policy Statement objectives.

  3. In portfolio construction, 'risk budgeting' involves:

    Answer: Allocating the total portfolio risk across asset classes, factors, or strategies

    Risk budgeting distributes the total portfolio risk (e.g., volatility or VaR) across components so each contributes a defined portion of total risk.

  4. Which of the following statements about the Capital Market Line (CML) is correct?

    Answer: The CML represents the efficient frontier when a risk-free asset is available

    When a risk-free asset exists, the CML extends from the risk-free rate and is tangent to the risky asset efficient frontier at the market portfolio.

  5. A portfolio manager increases the portfolio's equity weight from 60% to 80% because she believes equities are undervalued. This is an example of:

    Answer: Tactical asset allocation

    Tactical asset allocation (TAA) involves short-term deviations from the strategic (policy) portfolio to exploit perceived market mispricings.

  6. What is the primary purpose of a 'completion portfolio' in institutional investment management?

    Answer: To fill gaps between the current portfolio and the policy benchmark after accounting for active mandates

    A completion portfolio adjusts the aggregate exposures of a multi-manager portfolio so the total fund aligns with its benchmark.

  7. Under the CFA Institute's GIPS standards, firms must present at least how many years of compliant performance history (or since inception if less)?

    Answer: 5 years

    GIPS requires a minimum five-year compliant track record (or since inception if less), building toward a 10-year record.