CFA Portfolio Management & Construction 3

Question 1

A portfolio manager wants to reduce systematic risk without selling equity holdings. The most appropriate strategy is to:

Accepted Answer

Short equity index futures

Answer

Shorting equity index futures reduces market exposure (beta) without liquidating the underlying equity positions.

Question 2

Factor-based investing (smart beta) primarily seeks to:

Accepted Answer

Systematically capture documented risk premia such as value, size, and momentum

Answer

Smart beta strategies systematically tilt portfolios toward factors (value, size, momentum, quality) that have historically provided return premia.

Question 3

The 'Black-Litterman' model improves on traditional MVO by:

Accepted Answer

Blending market equilibrium returns with investor views to generate stable return estimates

Answer

Black-Litterman starts from market equilibrium (implied returns) and then blends in the manager's subjective views, reducing input sensitivity.

Question 4

In a multi-asset portfolio, which correlation scenario provides the greatest diversification benefit?

Accepted Answer

Correlation of -1.0 between two assets

Answer

A perfect negative correlation of -1.0 between two assets allows complete risk elimination through proper weighting.

Question 5

Which of the following best describes 'tracking error' in portfolio management?

Accepted Answer

The standard deviation of the portfolio's active returns relative to its benchmark

Answer

Tracking error is the standard deviation of (portfolio return − benchmark return), measuring how closely a portfolio follows its benchmark.

CFA Practice Test