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Free CFA Portfolio Construction Practice Questions & Answers
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100% free · No login to startQuestion 1
Within a diversified portfolio, equity securities serve several beneficial roles. Which of the following BEST describes the role of equities as an inflation hedge?
Select an option first.
Correct answer: B — Equities have a mixed record as an inflation hedge — some commodity-producing companies or sectors can pass input cost increases through to customers, but equities and inflation can become negatively correlated during hyperinflation, and equity prices lead while inflation lags
Explanation: B is correct: The inflation-hedging record of equities is mixed. Individual companies that can raise prices to offset input cost increases (pricing power) or commodity producers that benefit directly from commodity price rises may provide some protection. However, studies show correlations vary by country and time period, and equities tend to be negatively correlated with inflation during hyperinflation. Also, equity prices are leading indicators while inflation is lagging, reducing the quality of the hedge. A is wrong: Equities are not a perfect inflation hedge. C is wrong: Dividends are not fixed. D is wrong: Equities can perform well during moderate inflation.
Question 2
An investor who applies 'negative screening' (exclusionary screening) to an equity portfolio would MOST likely:
Select an option first.
Correct answer: C — Exclude companies or entire sectors that fail to meet specified standards, such as removing all oil and gas companies from the investable universe
Explanation: C is correct: Negative screening (exclusionary screening) removes companies or sectors that do not meet the client's standards from the investment universe entirely. A tobacco-free mandate or an oil and gas exclusion are classic examples. A is wrong: Overweighting strong ESG companies is positive (best-in-class) screening. B is wrong: Theme-based investment is thematic investing. D is wrong: Active engagement with management is shareholder engagement or impact investing.
Question 3
What is the key distinction between 'positive screening' (best-in-class screening) and 'impact investing'?
Select an option first.
Correct answer: B — Positive screening selects the highest-ranking ESG companies within a sector to overweight; impact investing goes further by actively engaging with companies or directly investing in projects with the explicit intention of generating measurable positive social or environmental outcomes alongside a financial return
Explanation: B is correct: Best-in-class screening selects the top-ranked ESG companies within sectors — it still focuses primarily on return optimization with an ESG tilt. Impact investing is more intentional and direct: the investor actively seeks to generate a positive, measurable social or environmental impact through the investment itself (e.g., directly funding renewable energy infrastructure), not just by selecting better companies. A is wrong: Neither approach systematically produces higher or lower returns by definition. C is wrong: Impact investing is more limited to specific types of investments, while screening applies broadly.
Question 4
A portfolio manager categorizes equity investments by size (market cap) and style (growth vs. value). One important DISADVANTAGE of this segmentation approach is:
Select an option first.
Correct answer: B — Categories are not stable over time — a small-cap growth company may mature into mid-cap or shift from growth to blend, causing it to migrate between categories and complicating benchmark construction
Explanation: B is correct: The instability of size/style categories over time is a key disadvantage. A small-cap growth company can grow into a mid-cap company and/or shift in style characteristics as it matures. This migration means portfolio composition and benchmark relevance can drift over time, requiring periodic reconstitution. A is wrong: Risk/return analysis is actually an advantage of this approach. C is wrong: Relevant benchmarks (like Russell 2000 Growth) are a primary advantage. D is wrong: The approach is generally used to enhance diversification.
Question 5
A domestic investor in a developed market buys shares of large multinational companies listed in an emerging market index to diversify. What is the PRIMARY risk that may cause this investor to overestimate the diversification benefit?
Select an option first.
Correct answer: B — The large multinational companies may already have internationally diversified operations and may even derive significant revenue from the investor's home market, so buying their shares does not provide as much international economic diversification as the geographic label suggests
Explanation: B is correct: Large multinationals listed in an emerging market may conduct much of their business globally — including in the investor's home country. The company's share price may therefore be more correlated with the investor's domestic market than the geographic classification suggests, overstating diversification. A is wrong: Currency risk is a real risk, but the question asks about overestimating diversification. C is wrong: Regulatory restrictions are a constraint, not a diversification overestimation issue. D is wrong: Not all large EM companies have higher volatility.
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Question 6
The Global Industry Classification Standard (GICS) and the Industrial Classification Benchmark (ICB) differ in their primary classification approach. What is this key difference?
Select an option first.
Correct answer: B — GICS applies a market-oriented approach (how products are used and how cash flows are generated); ICB and others like TRBC apply a production-oriented approach (products manufactured and inputs used)
Explanation: B is correct: GICS applies a market-oriented approach, classifying companies by the markets they serve and how they generate cash flows (e.g., a coal company might be in energy). ICB, TRBC, and RGS use production-oriented approaches, classifying by what the company makes and the inputs it uses (e.g., the same coal company might be in basic materials). This can lead to different sector classifications for the same company. A is wrong: Both are global standards. C is wrong: The number of categories is not the key distinction. D is wrong: Both are used for active and passive strategies.
Question 7
An equity portfolio has the following securities and weights: Stock A (1.5%), Stock B (1.5%), and 498 other stocks each at 0.197%. If the HHI equals 0.004, what is the effective number of stocks?
Select an option first.
Correct answer: A — 250
Explanation: A is correct: Effective number of stocks = 1 / HHI = 1 / 0.004 = 250. Even though there are 500 stocks in the portfolio, the concentration in certain stocks (two stocks at 1.5% each compared to the equally-weighted amount of 0.2%) means the effective number is only 250 — reflecting that the portfolio is not as diversified as 500 equal positions would be. The HHI captures the disproportionate impact of the largest positions. B and C are wrong: The effective number is less than the actual number due to unequal weights. D is wrong: 1/0.004 = 250.
Question 8
What is the key purpose of 'buffering' in the reconstitution of an equity index?
Select an option first.
Correct answer: B — To establish a threshold that a company's capitalization rank must exceed before it migrates from one index to another, reducing unnecessary trading costs from stocks that are near a boundary but may cross back and forth
Explanation: B is correct: Buffering establishes a zone around index boundaries so that a company must move sufficiently deep into the next tier before it is officially migrated. For example, a mid-cap company must reach rank 150 (not just 200) before being moved to a large-cap index. This prevents excessive trading from stocks that hover near the threshold and cross back and forth. A is wrong: Buffering is about limiting reconstitution trading, not adding stocks. C is wrong: This is not related to cash reserves. D is wrong: Buffering is about reconstitution timing, not weighting.
Question 9
How does 'packeting' differ from 'buffering' as a method to reduce reconstitution trading costs?
Select an option first.
Correct answer: B — With packeting, when a company qualifies for migration to a new index, only HALF of the position is moved at the first reconstitution date, and the remainder is moved at the next date if it still qualifies — spreading the trade over two periods. Buffering requires exceeding a threshold before any migration occurs.
Explanation: B is correct: Packeting gradually transitions a position across two reconstitution dates — half moves first, and the rest follows at the next reconstitution if the company still qualifies. This reduces the market impact of large concentrated index rebalancing trades by spreading them over time. Buffering instead delays the trigger entirely until the company has moved sufficiently far past the boundary. A is wrong: Buffering is about thresholds, not gradual weight adjustments. C is wrong: Both apply across different index types.
Question 10
A momentum equity strategy systematically buys stocks in rising markets and sells stocks in falling markets. What type of market impact cost does this strategy tend to create, and why?
Select an option first.
Correct answer: B — High market impact costs because momentum strategies demand liquidity — buying when others are also buying (in a rising market) and selling when others are also selling (in a falling market) moves prices against the trader
Explanation: B is correct: Momentum strategies are liquidity-demanding — they buy into rising markets (when market impact from many buyers pushes prices up) and sell into falling markets (when selling pressure is high). These strategies trade in the same direction as the crowd, creating price impact costs. Contrarian strategies, by contrast, buy in falling markets (providing liquidity) and sell in rising markets, typically incurring low impact costs. A is wrong: Momentum is not contrarian. C is wrong: Market impact is explicitly discussed as being high. D is wrong: Momentum strategies consume, not provide, liquidity.
Question 11
Securities lending generates income for equity portfolio holders. What is the PRIMARY risk that an active manager (who expects their holdings to outperform) faces when lending securities?
Select an option first.
Correct answer: B — Short selling by the borrower may drive down the price of the lent security — the very security the active manager expects to outperform — and the lender retains ownership but sees the value of their position undermined by the short selling activity
Explanation: B is correct: When an active manager lends a stock they expect to outperform, the borrower typically uses it for short selling. Short selling puts downward pressure on the stock price, working against the manager's investment thesis. A passive index fund manager is less affected since they hold the stock regardless, but an active manager who has selected the stock for its expected outperformance faces this conflict. A is wrong: The borrower must compensate the lender for dividends paid during the loan period. C is wrong: The lender can recall the securities. D is wrong: Lending fees are income to the lender.
Question 12
What is a 'high-water mark' in the context of equity portfolio performance fees, and why does it protect investors?
Select an option first.
Correct answer: B — It prevents the manager from earning a performance fee on the same gains twice — the manager only earns an incentive fee on appreciation above the highest previously compensated NAV level, so if the portfolio declines and then recovers, the manager must recover prior losses before earning new performance fees
Explanation: B is correct: The high-water mark protects investors from paying for the same performance twice. If a fund earns a performance fee after reaching $100 NAV, then falls to $90 and rises back to $100, the manager earns no additional fee during the recovery — the previous $100 high-water mark must be exceeded before new incentive fees apply. This aligns manager incentives with investors, ensuring fees are only paid on net new value creation. A is wrong: A minimum required return is a hurdle rate, not a high-water mark. C is wrong: The 20% is a typical fee rate, not a cap. D is wrong: Outperforming a benchmark is an active return requirement.
Question 13
Why is 'dividend capture' as an income strategy potentially challenged by theoretical finance?
Select an option first.
Correct answer: B — Finance theory predicts that on the ex-dividend date, the stock price should decline by the full amount of the dividend — meaning the capital loss equals the dividend income, leaving no net profit. The strategy can be profitable only if the actual price decline is less than the dividend amount.
Explanation: B is correct: Theoretically, a stock's price declines by the amount of the dividend on the ex-dividend date, as the company is worth less by the amount paid out. If the stock drops by exactly the dividend, the investor nets zero (dividend income offset by capital loss). In practice, price movements deviate from theory due to market forces, supply and demand dynamics, and tax treatment differences between dividends and capital gains for different investor types. A is wrong: The strategy specifically targets stocks about to pay dividends. C is wrong: Tax treatment varies by jurisdiction and investor type. D is wrong: There is no such prohibition.
Question 14
A pension fund considers lending its equity securities to supplement portfolio income. The fund lender agrees to receive general collateral (government bonds) rather than cash. What is the PRIMARY income source in this arrangement?
Select an option first.
Correct answer: A — Earning the fee (securities lending rate) from the borrower, plus earning interest on the government bond collateral held
Explanation: A is correct: When cash is the collateral, the lender can reinvest cash at prevailing rates and net the reinvestment return above what it rebates to the borrower. When general collateral (government bonds) is received, the lender earns the interest on those bonds plus potentially an explicit lending fee. The income depends on how badly the borrower needs those specific securities ('specials' can command higher fees). B is wrong: The borrower must compensate the lender for dividends paid during the loan, but this is a make-whole payment, not net income. C is wrong: The lender does not trade the collateral. D is wrong: Securities lending is not fund management.
Question 15
An equity index benchmark must satisfy three requirements to be suitable for an equity portfolio. Which of the following is NOT one of these three requirements?
Select an option first.
Correct answer: D — Comprehensive (must include every stock in the market)
Explanation: D is correct: The three required characteristics of an equity benchmark are: (1) rules-based — objective, consistent, and predictable criteria for inclusion, weighting, and rebalancing; (2) transparent — rules are publicly available and clearly understood; and (3) investable — investors can replicate the index performance. 'Comprehensive' is not a required characteristic — selective indexes like the S&P 500 (a subset of the US market) are perfectly acceptable benchmarks as long as they are rules-based, transparent, and investable. A, B, and C are wrong because they ARE the three required characteristics.
Question 16
What is the fundamental difference between market-cap weighting and fundamental weighting in index construction?
Select an option first.
Correct answer: B — Market-cap weighting assigns weights based on each stock's total market capitalization as a share of total index capitalization; fundamental weighting assigns weights based on each stock's share of a fundamental factor (such as sales, dividends, or book value) across all index companies
Explanation: B is correct: Market-cap weighting naturally reflects market prices — larger companies get larger weights, and the portfolio self-rebalances as prices change. Fundamental weighting ignores price-based valuations and instead weights companies by economic fundamentals (e.g., a company that pays 3% of total index dividends gets a 3% weight in a dividend-weighted index). This can produce a value tilt since fundamentally cheap companies may have small market caps but large fundamental measures. A is wrong: Both approaches can include companies across market cap tiers. C is wrong: Neither systematically outperforms in all conditions. D is wrong: Rebalancing frequency is a separate policy decision.
Question 17
A portfolio manager notes that an equal-weighted index of 500 stocks has an HHI of 0.002, while the market-cap weighted version of the same 500 stocks has an HHI of 0.01. What does this tell us about concentration risk in each index?
Select an option first.
Correct answer: B — The equal-weighted index has lower concentration risk (HHI 0.002 → effective stocks = 500) compared to the market-cap weighted index (HHI 0.01 → effective stocks = 100), reflecting the disproportionate influence of the largest-cap stocks in the cap-weighted version
Explanation: B is correct: Effective number of stocks = 1/HHI. Equal-weighted: 1/0.002 = 500 — every stock has equal influence. Cap-weighted: 1/0.01 = 100 — despite holding 500 stocks, the effective concentration is as if only 100 stocks existed, because the top stocks by market cap dominate. In the S&P 500, the five largest stocks in 2018 had a combined weight exceeding the bottom 250 stocks. A is wrong: Higher HHI means more concentration. C is wrong: Concentration depends on weights, not just the number of holdings. D is wrong: HHI is specifically designed for this comparison.
Question 18
What is the PRIMARY advantage of equal weighting over market-cap weighting for an equity index?
Select an option first.
Correct answer: B — Equal weighting reduces concentration risk — particularly in large-cap segments where market caps vary widely — and is factor-indifferent, randomizing factor mispricing. It may produce marginally better returns when stock prices revert to intrinsic value.
Explanation: B is correct: Equal weighting spreads exposure evenly across all index constituents, avoiding the concentration problem of cap-weighting (where the five largest stocks can dominate). It introduces a small-cap bias relative to cap-weighting and is factor-indifferent — it doesn't systematically overweight or underweight any factor, potentially capturing returns when overpriced stocks mean-revert. The small-cap bias does mean higher return volatility. A is wrong: No weighting method systematically outperforms. C is wrong: Equal weighting requires frequent rebalancing as prices change. D is wrong: The global market portfolio is cap-weighted.
Question 19
A price-weighted index like the Dow Jones Industrial Average weights stocks by their share price. What is one significant distortion this creates?
Select an option first.
Correct answer: B — A high-priced stock will have a larger index weight regardless of the company's total market capitalization or economic significance — a $500 stock from a small company gets 10x the weight of a $50 stock from a much larger company
Explanation: B is correct: Price weighting means the index weight is entirely determined by the stock's nominal share price, which is an arbitrary number that can be changed through stock splits. A company with a $500/share price gets 10x the weight of a $50/share company regardless of their relative economic importance or total market value. This is why the DJIA is considered less representative of the economy than market-cap weighted indexes. A is wrong: Price weighting has no systematic relationship to market cap. C is wrong: Price weighting doesn't affect return correlations. D is wrong: Price-weighted indexes can be replicated (buy equal shares of each component).
Question 20
A client expresses a strong preference for a narrow benchmark consisting only of the 50 largest domestic stocks. How does this benchmark choice affect the case for active versus passive management?
Select an option first.
Correct answer: B — A narrow benchmark with limited components gives the active manager little room to deviate meaningfully from the benchmark, since individual stock deviations represent large percentage bets. This supports a more passive approach — any deviation is a large bet.
Explanation: B is correct: With only 50 stocks in the benchmark, a manager who deviates from any single stock is making a meaningful percentage bet — underweighting one stock might mean a 2% active bet. Limited breadth reduces the number of independent alpha-generating opportunities. Wide benchmarks (like a broad market index with hundreds of stocks) give active managers many opportunities to add small incremental value across many bets, supporting active management. A is wrong: Fewer securities mean fewer independent alpha opportunities. C is wrong: Narrow benchmarks don't inherently require active management for diversification. D is wrong: Benchmark breadth directly affects active management viability.
Question 21
Shareholder engagement can create a 'free rider' problem. What does this mean, and how does it affect the incentive to engage?
Select an option first.
Correct answer: B — Shareholders who do NOT engage still benefit from any stock price improvement resulting from successful engagement by other shareholders — they get the upside without paying the engagement costs. This reduces the economic incentive for any single investor to bear engagement costs alone.
Explanation: B is correct: Engagement requires significant time and resources. When one investor successfully pushes for corporate governance improvements that raise the stock price, ALL shareholders benefit equally through the price increase — including those who bore none of the engagement costs. This public-good characteristic of shareholder value creation means individual shareholders have an incentive to free ride on others' efforts. This is why larger investors are more likely to engage — they can spread fixed engagement costs over a larger position. A is wrong: Free riders don't engage — they benefit without engaging. C is wrong: Material nonpublic information is a separate legal concern. D is wrong: The free rider problem affects all shareholder types.
Question 22
An activist investor launches a proxy fight against a portfolio company's board. What does a proxy fight involve, and what is the activist's goal?
Select an option first.
Correct answer: B — Seeking to persuade other shareholders to vote for the activist's proposals by actively soliciting their proxy votes — effectively using shareholder democracy to force changes the target company's board resists, such as replacing board members, approving strategic changes, or modifying compensation structures
Explanation: B is correct: A proxy fight occurs when an activist shareholder solicits other shareholders' proxies (their voting rights) to achieve a sufficient vote to pass proposals that incumbent management opposes. This can include electing new board members, approving divestitures, changing compensation structures, or forcing strategic reviews. The activist needs a majority of voting shares, which requires persuading other shareholders — hence 'fighting' for proxies. A is wrong: Litigation is a separate action from proxy voting. C is wrong: The activist is using shareholder votes, not purchasing control outright. D is wrong: IPOs are separate corporate actions.
Question 23
Active management introduces risks beyond the potential to underperform a benchmark. Which of the following represents 'key person risk' for an active equity fund?
Select an option first.
Correct answer: B — The risk that one or more individuals essential to the fund's investment process (e.g., the lead portfolio manager whose skill is the basis for the fund's alpha) leave the firm, potentially impairing future performance
Explanation: B is correct: Key person risk arises when a fund's performance is significantly dependent on the skill of one or a few individuals. If the 'star manager' who built the track record leaves, the remaining team may not replicate that performance, and clients may redeem. This is particularly acute for boutique active managers and hedge funds. A is wrong: Concentration in a holding is position risk. C is wrong: Excess capital is a capacity risk. D is wrong: Fee erosion is a cost consideration.
Question 24
'Reputation risk' is cited as an additional risk of active management. What triggers reputation risk for an equity manager?
Select an option first.
Correct answer: B — Violations of rules, regulations, client agreements, or moral principles — any behavior that damages the public perception of the manager's integrity, competence, or ethical standards, potentially causing client redemptions and regulatory scrutiny
Explanation: B is correct: Reputation risk arises from actions or failures that damage trust — regulatory violations, misrepresentation of performance, breach of client mandates, insider trading allegations, or ethical lapses. Even unsubstantiated allegations can trigger client departures. Active managers are held to a higher standard because clients are paying for their judgment and integrity. A is wrong: Underperformance is investment risk, not reputation risk per se. C is wrong: Market-wide returns don't selectively damage one manager's reputation. D is wrong: Higher fees that are disclosed are not inherently a reputation risk.
Question 25
A client has multiple goals: preserving capital for retirement (high priority), funding a vacation home (medium priority), and leaving a charitable bequest (low priority). Under what investment approach would they typically be assigned different risk profiles across these goals?
Select an option first.
Correct answer: B — Goals-based investing, which assigns subportfolios to each goal with risk levels appropriate to the goal's priority — conservative for the high-priority retirement goal, and progressively more aggressive for lower-priority aspirational goals
Explanation: B is correct: Goals-based investing aligns with clients who have multiple goals with different priorities, time horizons, and risk tolerances. Each goal gets a dedicated subportfolio with a risk profile appropriate to the goal's importance — conservative assets for must-fund goals and more aggressive allocations for nice-to-have goals. This also helps mitigate loss aversion by framing performance in terms of goal progress rather than portfolio-level mark-to-market. A is wrong: Pure indexing provides no customization for goal priority. C is wrong: Single Sharpe ratio optimization ignores goal hierarchy. D is wrong: LDI matches duration to liabilities — different concept.
Question 26
Which type of equity manager is MOST likely to have low costs for shareholder engagement, and why?
Select an option first.
Correct answer: B — A passive large-scale index fund manager — but even they have engagement costs. The smallest investors have the most difficulty because engagement costs are roughly fixed regardless of position size, making the cost-per-dollar-invested ratio prohibitively high for small portfolios.
Explanation: B is correct: Engagement costs (research, calls, proxy voting infrastructure, specialist consultants) are largely fixed regardless of the position size. Large institutions can spread these fixed costs across billions of dollars of AUM, making the cost per dollar invested negligible. Smaller investors face a high engagement cost ratio and are more likely to free ride. Large passive managers engage for governance reasons despite low expected alpha benefit — because they hold every stock and cannot easily sell. A is wrong: Small managers bear high costs per dollar. C is wrong: Short sellers would not typically support the companies they are short. D is wrong: Growth company governance is unrelated to engagement costs.
Question 27
What does it mean for an equity strategy to 'demand liquidity' versus 'supply liquidity,' and what are the cost implications?
Select an option first.
Correct answer: B — A strategy demands liquidity when it needs to trade urgently and in large volume — this forces price concessions (market impact) as other market participants must be induced to take the other side. Supplying liquidity means the strategy is the patient counterparty, providing liquidity to urgent sellers or buyers and typically doing so at favorable prices, incurring lower market impact costs.
Explanation: B is correct: Momentum strategies demand liquidity by buying rising stocks (when everyone else is buying) and selling falling stocks (when everyone is selling). They pay high price impact costs because they need immediate execution on the same side as the market. Contrarian strategies supply liquidity by buying falling stocks (providing a bid to distressed sellers) and selling rising stocks (providing an offer to eager buyers). They are compensated for providing this liquidity service with favorable execution prices. A is wrong: Liquidity demand vs. supply is about urgency of trading, not stock liquidity characteristics. D is wrong: Transaction costs differ materially between the two approaches.
Question 28
In the context of equity portfolio income, what is a 'special' in securities lending, and why does it command a higher fee?
Select an option first.
Correct answer: B — A special is a specific security in high demand for borrowing — often because many short sellers want to borrow the same hard-to-find stock. When supply is scarce and demand is high, the security lending rate rises significantly above the typical 0.2%–0.5% range for common developed-market securities.
Explanation: B is correct: In securities lending, specials are individual stocks that are in particularly high demand for borrowing — typically heavily shorted stocks where borrowing supply is tight. When many short sellers compete to borrow the same stock, the lending fee rises sharply. This can provide substantial income for lenders who happen to hold the security. A is wrong: Transaction size does not define a special. C is wrong: General collateral refers to commonly acceptable bond collateral, not specials. D is wrong: Tax treatment is separate from the lending terminology.
Question 29
A passive equity index fund faces 'predatory trading' costs. What is this hidden cost, and how does it arise?
Select an option first.
Correct answer: B — Predatory traders anticipate which stocks will be added to or removed from an index during reconstitution and trade BEFORE the index fund must execute its required trades — buying (selling) stocks about to be added (removed), then selling (buying) back to the index fund at a worse price, profiting at the fund's expense
Explanation: B is correct: Because index reconstitution rules are publicly known and transparent, sophisticated traders can front-run the expected index changes. If a stock will be added to the S&P 500, predatory traders buy it before the index funds must purchase it (predictably on the reconstitution date), then sell it to the index fund at an inflated price. This is a hidden cost of passive investing that reduces the fund's return below the index return. A is wrong: License fees to index providers are explicit costs. C is wrong: Illiquidity is a portfolio construction consideration. D is wrong: Exchange fees are explicit trading costs.
Question 30
What is a 'covered call' strategy, and what is the PRIMARY cost of this income-generation approach?
Select an option first.
Correct answer: B — Writing (selling) a call option on a stock already held — earning the option premium as current income — but forfeiting any upside above the strike price if the stock appreciates significantly, capping the maximum gain from the position
Explanation: B is correct: In a covered call, the owner of a stock sells a call option, collecting the premium immediately. If the stock rises above the strike price, the call is exercised and the investor must sell the stock at the (below-market) strike price — capping gains. The investor keeps the premium but misses the full upside. If the stock stays flat or declines modestly, the premium provides cushion. The key cost is the surrender of upside potential — the strategy transforms the position from one with unlimited gain potential to one capped at the strike price plus premium received. A is wrong: Buying a call is a long option position, not a covered call. C is wrong: This describes an exercise, not a covered call. D is wrong: Selling both call and put is a short straddle.
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