QFC QFC Portfolio Management & Asset Allocation 2

Question 1

What does the information ratio measure in active portfolio management?

Accepted Answer

Active return divided by tracking error

Answer

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?

Accepted Answer

Each asset contributes equally to total portfolio risk

Answer

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?

Accepted Answer

SMB (Small Minus Big)

Answer

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)?

Accepted Answer

Making short-term deviations from SAA to exploit market opportunities

Answer

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?

Accepted Answer

Return in excess of what is predicted by the benchmark and factor exposures

Answer

Alpha measures the portfolio's abnormal return after adjusting for systematic risk factors, indicating manager skill.

(QFC) Quantitative Finance Certification Practice Test