QFC QFC Portfolio Management & Asset Allocation 2 — Questions and Answers
Question 1: What does the information ratio measure in active portfolio management?
- Correlation between portfolio and benchmark returns
- Active return divided by tracking error (Correct answer)
- Portfolio beta relative to the S&P 500
- The Sharpe ratio of the benchmark
Correct answer: Active return divided by tracking error
The information ratio quantifies how much active return a manager generates per unit of active risk (tracking error).
Question 2: In a risk-parity portfolio, how are asset weights typically determined?
- Equal dollar weighting across all assets
- Each asset contributes equally to total portfolio risk (Correct answer)
- Weights proportional to expected returns
- Weights determined by market capitalization
Correct answer: Each asset contributes equally to total portfolio risk
Risk parity allocates capital so that each asset class contributes the same amount of risk to the overall portfolio.
Question 3: Which factor in the Fama-French three-factor model captures the return premium of small-cap stocks over large-cap stocks?
- HML (High Minus Low)
- SMB (Small Minus Big) (Correct answer)
- MKT (Market excess return)
- MOM (Momentum)
Correct answer: SMB (Small Minus Big)
SMB (Small Minus Big) represents the size premium, the historic tendency for small-cap stocks to outperform large-cap stocks.
Question 4: What is the primary purpose of tactical asset allocation (TAA) relative to strategic asset allocation (SAA)?
- Setting the long-run target weights for the portfolio
- Making short-term deviations from SAA to exploit market opportunities (Correct answer)
- Replacing SAA when market conditions are volatile
- Eliminating the need for periodic rebalancing
Correct answer: Making short-term deviations from SAA to exploit market opportunities
TAA temporarily shifts portfolio weights away from the strategic target to capitalize on near-term market mispricing or trends.
Question 5: What is 'alpha' in the context of portfolio performance evaluation?
- The portfolio's total return
- Return in excess of what is predicted by the benchmark and factor exposures (Correct answer)
- The slope of the security market line
- The ratio of portfolio variance to market variance
Correct answer: Return in excess of what is predicted by the benchmark and factor exposures
Alpha measures the portfolio's abnormal return after adjusting for systematic risk factors, indicating manager skill.
Question 6: Which concept describes the benefit of combining assets with low or negative return correlations in a portfolio?
- Leverage effect
- Diversification (Correct answer)
- Concentration risk
- Basis risk
Correct answer: Diversification
Diversification reduces portfolio volatility when assets are imperfectly correlated because losses in one asset may be offset by gains in another.
QFC QFC Portfolio Management & Asset Allocation 2
What does the information ratio measure in active portfolio management?