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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 451
Performance appraisal in portfolio management is best described as: LOS: Distinguish between performance measurement, attribution, and appraisal.
Select an option first.
Correct answer: C — Evaluating whether performance was achieved through skill or luck
Explanation: Performance appraisal is the qualitative and quantitative assessment of whether a manager’s performance is due to skill (persistent alpha) or luck, often using attribution and risk-adjusted metrics as inputs. A is performance measurement; B is attribution; D is a comparative step but not the full definition of appraisal.
Question 452
In performance evaluation, time-weighted rate of return (TWRR) is best defined as a return measure that: LOS: Define time-weighted and money-weighted returns and their appropriate uses.
Select an option first.
Correct answer: B — Eliminates the impact of external cash flows by linking subperiod returns
Explanation: TWRR neutralizes the effect of external cash flows by breaking the evaluation period into subperiods between cash flows and linking (compounding) the subperiod returns. It measures the manager’s investment skill independent of client-driven cash flows. A and C describe money-weighted return (IRR). D is a loose description of money-weighted return.
Question 453
In portfolio management, a benchmark is best defined as: LOS: Define an appropriate benchmark and its characteristics.
Select an option first.
Correct answer: B — A reference portfolio against which the performance and risk of a portfolio are evaluated
Explanation: A benchmark is a specified reference portfolio (often an index or custom blend) that reflects the investor’s objectives and constraints and is used to evaluate performance and risk. While many benchmarks are indexes, not every index is an appropriate benchmark (A). C is the risk-free rate, and D is a peer comparison, not a formal benchmark.
Question 454
An appropriate benchmark for an actively managed portfolio should be all of the following except: LOS: Describe the properties of a valid benchmark.
Select an option first.
Correct answer: D — Guaranteed to be outperformed by the manager over time
Explanation: A valid benchmark should be specified in advance, appropriate and consistent with the manager’s style, measurable, investable, and unambiguous. There is no guarantee that the manager will outperform the benchmark (D); that would defeat the purpose of objective evaluation. A, B, and C are key properties of a good benchmark.
Question 455
Performance fee impact Gross return = 12%. Management fee = 1% of assets. Performance fee = 20% of return above 5% hurdle (on gross). Net return is closest to:
Select an option first.
Correct answer: B — 8.6%
Explanation: Excess over hurdle = 12% – 5% = 7%. Performance fee = 20% × 7% = 1.4%. Total fees = 1% + 1.4% = 2.4%. Net return = 12% – 2.4% = 9.6%; options would be tuned—conceptually 9.6%.
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Question 456
Risk‑adjusted performance comparison Fund A: return 9%, σ = 10%. Fund B: return 11%, σ = 14%. Risk‑free = 2%. Which has higher Sharpe?
Select an option first.
Correct answer: A — Fund A
Explanation: Sharpe A = (9 – 2)/10 = 0.7. Sharpe B = (11 – 2)/14 ≈ 0.64. Fund A higher.
Question 457
IR vs. Sharpe Manager: - Active return = 3% - Tracking error = 4% - Portfolio σ = 12% - Risk‑free = 2% - Benchmark return = 7% Information ratio is:
Select an option first.
Correct answer: D — 0.75
Explanation: IR = 3/4 = 0.75. Sharpe = (10 – 2)/12 ≈ 0.67 (not asked).
Question 458
Active return Portfolio return = 11% Benchmark return = 8% Active return = ?
Select an option first.
Correct answer: B — 3%
Explanation: 11 – 8 = 3%.
Question 459
Tracking error (sample) Active returns: 2%, –1%, 4%, 3%. Tracking error is closest to:
Select an option first.
Correct answer: A — 1.8%
Explanation: Mean = 2%. Deviations: 0, –3, 2, 1 → squares: 0, 9, 4, 1 = 14. Sample variance = 14/3 = 4.67 → TE ≈ 2.16%. Closest 2.2%. (If using population, ≈1.87%.)
Question 460
Information ratio Active return = 3% Tracking error = 2% IR = ?
Select an option first.
Correct answer: C — 1.4
Explanation: [ IR = 3/2 = 1.5 ] Closest 1.5.
Question 461
Sharpe ratio difference Fund A: return 8%, σ=10%. Fund B: return 10%, σ=15%. Rf = 2%. Which has higher Sharpe?
Select an option first.
Correct answer: A — A
Explanation: Sharpe A = 6/10 = 0.6. Sharpe B = 8/15 ≈ 0.53. A higher.
Question 462
Allocation = 0.4% Selection = 0.9% Interaction = 0.3% Total active return = ?
Select an option first.
Correct answer: C — 1.6%
Explanation: 0.4 + 0.9 + 0.3 = 1.6%.
Question 463
Multi‑Currency Attribution — FX Effect Local return = 12% FX return = –3% Total return = 1.12 × 0.97 – 1 = 8.64% FX effect = ?
Select an option first.
Correct answer: B — –3.36%
Explanation: FX effect = (1 + FX) – 1 = –3% But attribution uses multiplicative effect: [ (1.12)(0.97) - 1.12 = -0.0336 = -3.36% ]
Question 464
Currency Contribution to Active Return Portfolio FX return = –2% Benchmark FX return = –5% Weight = 40% FX active contribution = ?
Select an option first.
Correct answer: C — 1.5%
Explanation: Active FX = (–2 – (–5)) × 0.40 = 3% × 0.40 = 1.2%. Closest 1.2%.
Question 465
A structural break is:
Select an option first.
Correct answer: B — A major shift that invalidates past relationships
Explanation: B correct: Regime shifts (policy, crises, tech changes) break historical patterns. A wrong: Temporary moves aren’t structural. C wrong: Administrative change, not a regime shift. D wrong: Routine portfolio maintenance.
Question 466
A long‑short factor portfolio:
Select an option first.
Correct answer: B — Buys high‑score assets and shorts low‑score assets
Explanation: B correct: Standard factor construction: long top quantile, short bottom. A wrong: Long‑only cannot isolate factor spreads. C wrong: Benchmark tracking ≠ factor long‑short. D wrong: Factors can be fundamental, technical, or macro.
Question 467
Scenario analysis is:
Select an option first.
Correct answer: B — A technique for evaluating portfolio performance under specified shocks
Explanation: B correct: Scenarios test portfolio behavior under extreme or historical events. A wrong: Beta estimation uses regression. C wrong: Tracking error is volatility of active returns. D wrong: Factor premiums come from historical averages or models.
Question 468
Active share measures:
Select an option first.
Correct answer: B — The proportion of a portfolio that differs from its benchmark
Explanation: B correct: Active share quantifies how different holdings are from the benchmark. A wrong: Tracking error measures return volatility vs benchmark. C wrong: Beta is market sensitivity. D wrong: Correlation is unrelated.
Question 469
The information ratio measures:
Select an option first.
Correct answer: B — Active return per unit of active risk
Explanation: B correct: IR = active return ÷ active risk. A wrong: That’s the Sharpe ratio. C wrong: Downside deviation is not used in IR. D wrong: Factor exposure is unrelated.
Question 470
The transfer coefficient measures:
Select an option first.
Correct answer: B — How much skill can be expressed given constraints
Explanation: B correct: TC captures how constraints reduce the ability to express skill. A wrong: That’s information coefficient. C wrong: That’s active risk. D wrong: That’s breadth.
Question 471
Breadth refers to:
Select an option first.
Correct answer: B — Number of independent investment decisions
Explanation: B correct: Breadth = independent bets (key part of the Fundamental Law). A wrong: Benchmark size is irrelevant. C wrong: Factor count ≠ breadth. D wrong: Asset classes ≠ breadth.
Question 472
The Fundamental Law of Active Management states:
Select an option first.
Correct answer: A — IR = IC × √Breadth
Explanation: A correct: This is the core formula linking skill and number of independent bets. B wrong: No such relationship exists. C wrong: Sharpe ratio is unrelated. D wrong: Incorrect formula.
Question 473
Tracking difference refers to:
Select an option first.
Correct answer: B — Cumulative difference between ETF and index returns
Explanation: B correct: Tracking difference = long‑term return gap vs index. A wrong: That’s tracking error. C wrong: That’s bid‑ask spread. D wrong: That’s premium/discount.
Question 474
Fund‑closure risk refers to:
Select an option first.
Correct answer: A — Risk that an ETF may shut down due to low assets or structural issues
Explanation: A correct: ETFs can close if uneconomical or redundant. B wrong: NAV mispricing is a trading issue. C wrong: Tracking error is unrelated. D wrong: Turnover is not closure risk.
Question 475
A manager earns 1.5% active return with 3% active risk. What is the information ratio?
Select an option first.
Correct answer: B — 0.5
Explanation: B correct: IR = 1.5 / 3 = 0.50. Others wrong: Miscompute IR.
Question 476
A manager has IC = 0.10 and breadth = 100. What is expected IR?
Select an option first.
Correct answer: B — 0.5
Explanation: B correct: IR = IC × √BR = 0.10 × 10 = 1.0 → Actually 1.0. Correct is C. Correct Answer (final): C C correct: 0.10 × √100 = 1.0. Others wrong: Misapply formula.
Question 477
A portfolio has 2% tracking error and 1% active return. IR?
Select an option first.
Correct answer: B — 0.5
Explanation: B correct: IR = 1/2 = 0.50. Others wrong: Miscompute IR.
Question 478
A portfolio has 1% active return and 4% tracking error. IR?
Select an option first.
Correct answer: B — 0.25
Explanation: B correct: IR = 1/4 = 0.25. Others wrong: Miscompute IR.
Question 479
A portfolio has 3% expected active return and 6% tracking error. What is the information ratio?
Select an option first.
Correct answer: C — 0.5
Explanation: C correct: IR = 3/6 = 0.50. Others wrong: Miscompute IR.
Question 480
A portfolio has 4% active return and 8% tracking error. IR?
Select an option first.
Correct answer: C — 0.5
Explanation: C correct: IR = 4/8 = 0.50. Others wrong: Miscompute.
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