CFA Portfolio Management 2

Question 1

In the Capital Market Line (CML), which portfolio lies at the tangency point with the efficient frontier?

Accepted Answer

The market portfolio

Answer

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?

Accepted Answer

11.8%

Answer

Expected return = 2% + 1.3 × (8% − 2%) = 2% + 7.8% = 9.8%... wait: 2 + 1.3×6 = 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?

Accepted Answer

Standard deviation

Answer

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?

Accepted Answer

To generate alpha through active management

Answer

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?

Accepted Answer

The standard deviation of the portfolio's excess return over its benchmark

Answer

Tracking error is the standard deviation of active return (portfolio return minus benchmark return).

CFA Practice Test