CFA Portfolio Management 3

Question 1

Which performance attribution method decomposes active return into allocation, selection, and interaction effects?

Accepted Answer

Brinson-Hood-Beebower (BHB) attribution

Answer

The Brinson-Hood-Beebower model decomposes active return into allocation effect, selection effect, and interaction effect.

Question 2

A pension fund has a liability duration of 12 years. To immunize against interest rate risk, the portfolio's asset duration should be:

Accepted Answer

Equal to 12 years

Answer

Classical immunization requires matching asset duration to liability duration so that interest rate changes affect both equally.

Question 3

What does a high information ratio (IR) indicate about a portfolio manager?

Accepted Answer

The manager consistently generates alpha per unit of active risk

Answer

The information ratio measures alpha generated per unit of tracking error; a higher IR indicates superior active management skill.

Question 4

In a liability-driven investing (LDI) framework, the primary goal is to:

Accepted Answer

Match or exceed the growth of liabilities

Answer

LDI focuses on managing assets relative to liabilities, ensuring that asset growth keeps pace with or exceeds liability growth.

Question 5

Which of the following is an example of a tactical asset allocation (TAA) decision?

Accepted Answer

Temporarily overweighting equities due to a near-term bullish outlook

Answer

TAA involves short-term deviations from the strategic asset allocation to exploit perceived market opportunities.

CFA Practice Test