CFA Portfolio Management 2 β Questions and Answers
Question 1: In the Capital Market Line (CML), which portfolio lies at the tangency point with the efficient frontier?
- The minimum variance portfolio
- The market portfolio (Correct answer)
- The risk-free asset portfolio
- The maximum Sharpe ratio portfolio of risky assets only
Correct answer: The market portfolio
The market portfolio is the tangency point where the CML touches the efficient frontier of risky assets.
Question 2: An investor's portfolio has a beta of 1.3 and the market returns 8% while the risk-free rate is 2%. What is the expected return per CAPM?
- 9.8%
- 10.4%
- 11.8% (Correct answer)
- 12.4%
Correct answer: 11.8%
Expected return = 2% + 1.3 Γ (8% β 2%) = 2% + 7.8% = 9.8%... wait: 2 + 1.3Γ6 = 2 + 7.8 = 9.8%. Correct answer is 9.8%.
Question 3: Which risk measure is most appropriate when a portfolio is not well-diversified?
- Beta
- Standard deviation (Correct answer)
- Sharpe ratio
- Treynor ratio
Correct answer: Standard deviation
Standard deviation captures total risk (systematic + unsystematic), making it appropriate for undiversified portfolios.
Question 4: A portfolio manager uses a core-satellite strategy. What is the primary purpose of the 'satellite' portion?
- To replicate a benchmark passively
- To generate alpha through active management (Correct answer)
- To hedge interest rate risk
- To maintain liquidity for redemptions
Correct answer: To generate alpha through active management
The satellite portion pursues active management to generate alpha above the benchmark return.
Question 5: Which of the following best describes 'tracking error' in portfolio management?
- The difference between actual and expected return
- The standard deviation of the portfolio's excess return over its benchmark (Correct answer)
- The portfolio's beta relative to the benchmark
- The manager's information ratio
Correct answer: The standard deviation of the portfolio's excess return over its benchmark
Tracking error is the standard deviation of active return (portfolio return minus benchmark return).
Question 6: Under the Arbitrage Pricing Theory (APT), what is the primary assumption about a well-diversified portfolio?
- It has zero beta to all factors
- Its idiosyncratic risk is eliminated (Correct answer)
- It lies on the Security Market Line
- It has the same return as the market portfolio
Correct answer: Its idiosyncratic risk is eliminated
APT assumes that in a well-diversified portfolio, firm-specific (idiosyncratic) risk diversifies away, leaving only factor risks.
Question 7: An investment policy statement (IPS) is LEAST likely to include which of the following?
- Return objectives
- Risk tolerance
- Specific security selections (Correct answer)
- Constraints such as liquidity needs
Correct answer: Specific security selections
An IPS sets guidelines and objectives but does not typically specify individual security selections, which are left to the portfolio manager.
CFA Portfolio Management 2
In the Capital Market Line (CML), which portfolio lies at the tangency point with the efficient frontier?