CFA Portfolio Management & Construction 2

Question 1

An investor has a portfolio with expected return of 10% and standard deviation of 15%. The risk-free rate is 3%. What is the Sharpe ratio?

Accepted Answer

0.47

Answer

Sharpe ratio = (10% - 3%) / 15% = 7/15 ≈ 0.467.

Question 2

Which of the following best describes the 'core-satellite' portfolio construction approach?

Accepted Answer

A passive index core is supplemented by smaller active or alternative positions

Answer

Core-satellite combines a low-cost passive core (broad market exposure) with satellite positions seeking alpha or diversification.

Question 3

When constructing a portfolio, the 'information ratio' measures:

Accepted Answer

Active return divided by tracking error

Answer

The information ratio = active return (portfolio return minus benchmark return) divided by tracking error.

Question 4

A pension fund has a liability duration of 12 years. To implement liability-driven investing (LDI), the fund should:

Accepted Answer

Match the portfolio duration to the liability duration of 12 years

Answer

LDI aims to immunize liability risk by matching the duration of assets to the duration of liabilities.

Question 5

Which rebalancing strategy involves selling assets that have risen above their target weight and buying those below?

Accepted Answer

Threshold rebalancing

Answer

Threshold (or percentage-of-portfolio) rebalancing triggers trades when any asset class deviates from its target by a set percentage.

CFA Practice Test