Practice Test GeeksCFA Practice Test
← All CFA Flashcard Decks

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. A portfolio has a Treynor ratio of 0.08 and a beta of 1.2. If the risk-free rate is 2%, what is the portfolio's expected return?

    Answer: 11.6%

    Treynor = (Rp − Rf) / β → 0.08 = (Rp − 0.02) / 1.2 → Rp − 0.02 = 0.096 → Rp = 11.6%.

  2. Which portfolio construction technique explicitly accounts for the non-normality of asset return distributions (fat tails, skewness)?

    Answer: Monte Carlo simulation

    Monte Carlo simulation can model non-normal return distributions, capturing tail risks that MVO (which assumes normality) misses.

  3. In the context of fixed-income portfolio management, 'immunization' is best defined as:

    Answer: Structuring a bond portfolio so its value is protected against interest rate changes over a specific horizon

    Immunization matches a bond portfolio's duration (and convexity) to a specific liability horizon so that interest rate changes offset each other in reinvestment and price.

  4. Which of the following is NOT a recognized benefit of international diversification for a U.S. equity portfolio?

    Answer: Elimination of currency risk

    International diversification introduces currency risk rather than eliminating it; currency risk must be separately managed through hedging if desired.

  5. The 'portable alpha' strategy involves:

    Answer: Shifting alpha from one asset class to another using derivatives while maintaining beta exposure

    Portable alpha separates alpha generation (e.g., from a hedge fund) from beta exposure (obtained via derivatives), allowing alpha to be 'ported' to any desired market exposure.

  6. An investor's Investment Policy Statement (IPS) specifies a maximum drawdown of 15%. This constraint is best classified as a:

    Answer: Risk constraint

    A maximum drawdown limit is a risk constraint that bounds the acceptable loss from a portfolio peak to trough.

  7. When evaluating active managers, the 'fundamental law of active management' states that the information ratio is approximately equal to:

    Answer: Information coefficient multiplied by the square root of breadth

    IR ≈ IC × √BR, where IC is the information coefficient (skill per bet) and BR is the breadth (number of independent decisions per year).