QFC QFC Portfolio Management & Asset Allocation 1 — Questions and Answers
Question 1: Which portfolio optimization technique minimizes portfolio variance for a given expected return?
- Mean-variance optimization (Correct answer)
- Capital Asset Pricing Model
- Arbitrage Pricing Theory
- Black-Litterman model
Correct answer: Mean-variance optimization
Mean-variance optimization, developed by Markowitz, minimizes portfolio variance for a specified expected return level.
Question 2: In the context of asset allocation, what does 'rebalancing' refer to?
- Selling all assets at year-end
- Realigning portfolio weights back to target allocations (Correct answer)
- Replacing underperforming assets with new ones
- Increasing equity exposure during bull markets
Correct answer: Realigning portfolio weights back to target allocations
Rebalancing restores portfolio weights to their strategic targets after market movements cause drift.
Question 3: What is the Sharpe ratio used to measure?
- Total portfolio risk
- Risk-adjusted return per unit of total risk (Correct answer)
- Return relative to a benchmark
- Portfolio beta vs. the market
Correct answer: Risk-adjusted return per unit of total risk
The Sharpe ratio divides excess return over the risk-free rate by the portfolio's standard deviation to measure risk-adjusted performance.
Question 4: Which allocation strategy systematically shifts from equities to bonds as an investor approaches retirement?
- Tactical asset allocation
- Dynamic asset allocation
- Glide path (lifecycle) allocation (Correct answer)
- Core-satellite allocation
Correct answer: Glide path (lifecycle) allocation
A glide path strategy gradually reduces equity exposure and increases fixed-income weight as the target date nears.
Question 5: In the Black-Litterman model, what inputs does the investor provide in addition to market equilibrium returns?
- Historical betas for all assets
- Proprietary views and confidence levels (Correct answer)
- Risk-free rate forecasts
- Dividend yield projections
Correct answer: Proprietary views and confidence levels
Black-Litterman blends equilibrium returns with investor-specified views and their confidence levels to produce adjusted expected returns.
Question 6: Which risk measure captures the expected loss in the worst percentage of scenarios beyond the VaR threshold?
- Standard deviation
- Beta
- Expected Shortfall (CVaR) (Correct answer)
- Tracking error
Correct answer: Expected Shortfall (CVaR)
Expected Shortfall (Conditional VaR) averages all losses that exceed the VaR cutoff, giving a fuller picture of tail risk.
QFC QFC Portfolio Management & Asset Allocation 1
Which portfolio optimization technique minimizes portfolio variance for a given expected return?