You’re on a roll
Create a free account to save your CFA progress, track your accuracy by topic, and pick up right where you left off.
Free Questions › CFA › Portfolio Management
Free CFA Portfolio Management Practice Questions & Answers
1,100 exam-style Portfolio Management questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 421
Performance Measurement — Money-Weighted Return Money‑weighted return is most appropriate when:
Select an option first.
Correct answer: B — Cash flows are controlled by the investor
Explanation: MWR reflects timing/size of cash flows → relevant when investor controls flows. A, C, D incorrect.
Question 422
A valid benchmark should be:
Select an option first.
Correct answer: B — Investable and measurable
Explanation: B is correct: A proper benchmark must be investable, measurable, transparent, and aligned with the manager’s style. A contradicts benchmark design principles. C is incorrect because benchmarks must match the strategy. D is not appropriate unless the manager runs a risk‑free strategy.
Question 423
Performance Measurement — Attribution vs. Appraisal Performance attribution explains:
Select an option first.
Correct answer: B — How returns were generated (allocation, selection, interaction)
Explanation: B is correct: Attribution decomposes sources of return. A is appraisal. C, D are not attribution functions.
Question 424
Illiquid assets typically offer:
Select an option first.
Correct answer: B — Higher expected returns as compensation for illiquidity
Explanation: B is correct: Investors demand an illiquidity premium. A is incorrect — higher risk → higher expected return. C contradicts empirical evidence. D is not guaranteed.
Question 425
Active return is:
Select an option first.
Correct answer: B — Portfolio return minus benchmark return
Explanation: B is the definition. A is excess return. C, D incorrect.
Get the full CFA question bank — free
Drop your email and we'll send you fresh CFA practice questions, fully worked solutions and exam-deadline reminders. No spam — unsubscribe in one click.
Want to save your score and take a full mock exam? Create a free account →
Question 426
Risk (Tracking Error) Active risk is:
Select an option first.
Correct answer: B — Volatility of active returns
Explanation: B is the definition. A, C, D are not active risk.
Question 427
The information ratio is:
Select an option first.
Correct answer: B — Active return divided by active risk
Explanation: B is the definition. A is Sharpe ratio. C, D unrelated.
Question 428
Coefficient (IC) The information coefficient measures:
Select an option first.
Correct answer: B — Correlation between forecasts and outcomes
Explanation: B is the definition. A, C, D are different metrics.
Question 429
Breadth refers to:
Select an option first.
Correct answer: B — Number of independent investment decisions
Explanation: B is the definition. A, C, D unrelated.
Question 430
Coefficient (TC) The transfer coefficient measures:
Select an option first.
Correct answer: B — Ability to express skill given constraints
Explanation: B is the definition. A is IC. C is breadth. D is appraisal ratio.
Question 431
Tracking difference is:
Select an option first.
Correct answer: B — Average return difference between ETF and index
Explanation: B is the definition. A is tracking error. C, D unrelated.
Question 432
Tracking error is:
Select an option first.
Correct answer: A — Standard deviation of active returns
Explanation: A is the definition. B, C, D incorrect.
Question 433
Scenario analysis evaluates:
Select an option first.
Correct answer: B — Portfolio behavior under specific hypothetical or historical conditions
Explanation: B is the definition. A, C, D incorrect.
Question 434
The allocation effect measures:
Select an option first.
Correct answer: B — Impact of sector weight deviations
Explanation: B is the definition. A is selection. C, D unrelated.
Question 435
Selection effect measures:
Select an option first.
Correct answer: B — Security selection within sectors
Explanation: B is the definition. A, C, D incorrect.
Question 436
Interaction effect arises when:
Select an option first.
Correct answer: A — Allocation and selection reinforce each other
Explanation: A is the definition. B, C, D incorrect.
Question 437
Style drift occurs when:
Select an option first.
Correct answer: A — Manager deviates from stated investment style
Explanation: A is the definition. B, C, D unrelated.
Question 438
The appraisal ratio is:
Select an option first.
Correct answer: A — Alpha per unit of residual risk
Explanation: A is the definition. B is information ratio. C is Sharpe ratio.
Question 439
Definition — Money-Weighted Return Money‑weighted return reflects:
Select an option first.
Correct answer: B — Impact of cash flow timing
Explanation: B is the definition. A is TWR.
Question 440
Which of the following best defines the investment time horizon constraint in an IPS? LOS: Describe the time horizon constraint and its implications for portfolio construction.
Select an option first.
Correct answer: C — The length and structure (single or multiple stages) of the investor’s investment period
Explanation: Time horizon refers to the length and structure of the period over which the investor’s assets will be invested and used—often single-stage or multi-stage (e.g., pre- and post-retirement). It affects risk capacity and asset allocation. Retirement date alone (A) is incomplete, performance measurement period (B) is a reporting choice, and bond maturity (D) is a portfolio characteristic, not the time horizon constraint.
Question 441
In active portfolio management, tracking error is best defined as: LOS: Define tracking error and its role in evaluating active strategies.
Select an option first.
Correct answer: B — The standard deviation of the portfolio’s excess return over the benchmark
Explanation: Tracking error (active risk) is the standard deviation of active returns: [ \sigma_{(p-b)} = \text{StdDev}(R_p - R_b) ] It measures how closely a portfolio tracks its benchmark. A is excess return over risk-free, C is not the standard definition, and D is systematic risk, not tracking error.
Question 442
In institutional portfolio management, a defined benefit (DB) pension plan is best defined as a plan in which: LOS: Distinguish between defined benefit and defined contribution plans.
Select an option first.
Correct answer: B — Benefits are specified by a formula, and the sponsor bears the investment risk
Explanation: In a DB plan, the benefit formula (often based on salary and years of service) is specified, and the plan sponsor bears the investment and longevity risk. In a defined contribution plan (A, C), contributions are specified and the participant bears investment risk. D is not necessarily true; many DB plans are under- or over-funded.
Question 443
A defined contribution (DC) plan is best described as a retirement plan in which: LOS: Explain the characteristics of defined contribution plans.
Select an option first.
Correct answer: C — Contributions are specified, and the participant bears the investment risk
Explanation: In a DC plan, contribution amounts (from employer, employee, or both) are specified, and the participant’s account value depends on investment performance, so the participant bears the investment risk. A and D describe DB plans; B is incorrect—contributions are not typically a function of performance.
Question 444
In portfolio management, style drift is best defined as: LOS: Define style drift and its implications for portfolio monitoring.
Select an option first.
Correct answer: B — The unintentional deviation of a manager’s portfolio from its stated investment style
Explanation: Style drift occurs when a manager’s actual holdings and exposures diverge from the stated style or mandate (e.g., a value manager holding growth stocks), often unintentionally. It complicates performance attribution and risk control. A, C, and D are not the standard definition of style drift.
Question 445
Style box analysis in equity portfolio management is best described as a tool that: LOS: Describe style box analysis and its use in monitoring equity portfolios.
Select an option first.
Correct answer: B — Classifies securities and portfolios by size and value–growth characteristics
Explanation: Style box analysis (e.g., Morningstar’s 3×3 grid) classifies equities and portfolios by market capitalization (small, mid, large) and value–growth orientation, helping monitor style consistency and diversification. C describes Brinson-type attribution, and D refers to factor regression, not style box analysis.
Question 446
In performance attribution, the allocation effect is best defined as the contribution to active return from: LOS: Distinguish between allocation and selection effects in performance attribution.
Select an option first.
Correct answer: C — Over- or underweighting asset classes or sectors relative to the benchmark
Explanation: The allocation effect measures the impact on active return of deviations in asset class or sector weights from the benchmark, holding benchmark returns constant. The selection effect (A) captures security-level decisions. B and D are other active decisions but not the standard definition of allocation effect.
Question 447
The selection effect in performance attribution is best described as the contribution to active return from: LOS: Explain the selection effect in performance attribution.
Select an option first.
Correct answer: A — Choosing securities that outperform or underperform their sector or asset-class benchmarks
Explanation: The selection effect isolates the impact of security selection—choosing securities that perform differently from the benchmark securities within the same sector or asset class. Allocation decisions (B) are captured by the allocation effect. C and D are timing and currency decisions, not selection effect.
Question 448
In portfolio risk management, tracking risk budget is best defined as: LOS: Describe risk budgeting and its application to active management.
Select an option first.
Correct answer: B — The allocation of total active risk across strategies or managers
Explanation: A tracking risk budget specifies how total active risk (tracking error) is allocated among active strategies, asset classes, or managers, ensuring that the overall active risk stays within the investor’s tolerance. A refers to total risk, not active risk. C and D are performance constraints, not risk budgets.
Question 449
Counterparty risk in portfolio management is best described as: LOS: Define counterparty risk and identify where it is most relevant.
Select an option first.
Correct answer: B — The risk that the other party in a financial contract will fail to perform its obligations
Explanation: Counterparty risk is the risk that the other party to a financial contract (e.g., derivative, repo, OTC trade) defaults or fails to honor its obligations. It is especially relevant in OTC derivatives and securities lending. A, C, and D are other types of risk.
Question 450
Soft dollars (or soft commissions) in portfolio management are best described as: LOS: Define soft dollars and discuss related ethical considerations.
Select an option first.
Correct answer: B — Brokerage commissions used to pay for research and other services rather than pure execution
Explanation: Soft dollars refer to brokerage commissions that are used to obtain research, data, or other services that may benefit the client, rather than solely paying for trade execution. They raise conflict-of-interest and disclosure issues. A, C, and D are unrelated to the definition of soft dollars.
More free CFA topics
Economics2,066
Quantitative Methods1,213
Fixed Income908
Financial Statement Analysis904
Corporate Issuers884
Portfolio Construction605
Alternative Investments540
Specialized Pathway - Private Markets500
Asset Allocation499
Derivatives498
Equity390
Performance Measurement295
Specialized Pathway - Portfolio Management253
Derivatives and Risk Management131
Ten questions in
- The ones you miss are saved as a drill you can repeat
- Your place is kept, on this device and any other
- A streak, if that is the thing that gets you back tomorrow
Every question on this page stays free and open either way.