CFA Portfolio Management

Question 1

In Modern Portfolio Theory (MPT), the efficient frontier represents:

Accepted Answer

The set of portfolios offering the maximum return for each level of risk, or minimum risk for each level of return

Answer

The efficient frontier is the set of optimal portfolios that provide the highest expected return for a given level of risk or the lowest risk for a given expected return.

Question 2

The Capital Market Line (CML) differs from the Security Market Line (SML) in that the CML:

Accepted Answer

Uses total risk (standard deviation) as its risk measure, while the SML uses systematic risk (beta)

Answer

The CML applies to efficient portfolios and uses standard deviation (total risk), while the SML applies to any asset using beta (systematic risk).

Question 3

An investor's Investment Policy Statement (IPS) must include which of the following?

Accepted Answer

Return objectives and risk tolerance of the client

Answer

An IPS must document the client's return objectives, risk tolerance, time horizon, liquidity needs, tax situation, legal constraints, and unique preferences.

Question 4

Strategic asset allocation (SAA) is BEST described as:

Accepted Answer

Long-term target allocations across asset classes based on the investor's IPS

Answer

SAA establishes long-term target weights for asset classes (equities, bonds, alternatives) aligned with the investor's objectives and risk tolerance, serving as the portfolio's policy benchmark.

Question 5

The Sharpe ratio measures:

Accepted Answer

Excess return per unit of total risk (standard deviation)

Answer

Sharpe ratio = (Portfolio return – Risk-free rate) / Portfolio standard deviation; it measures risk-adjusted excess return using total risk.

CFA Practice Test

CFA Practice Test

CFA Portfolio Management