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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 511
Curve & Business Cycle A flattening yield curve most likely indicates:
Select an option first.
Correct answer: B — Expectations of slower future growth
Explanation: B is correct: Flattening often signals slowing growth expectations. A, C, D typically steepen the curve.
Question 512
ETFs — Premium/Discount An ETF trades at a discount when:
Select an option first.
Correct answer: A — Market price < NAV
Explanation: A is correct: Discount = price below NAV. B is premium. C, D unrelated.
Question 513
ETFs — Creation/Redemption Authorized participants help keep ETF prices aligned with NAV by:
Select an option first.
Correct answer: B — Arbitraging price deviations
Explanation: B is correct: APs arbitrage mispricing. A, C, D incorrect.
Question 514
Rebalancing most directly helps:
Select an option first.
Correct answer: B — Maintain target risk exposures
Explanation: B is correct: Rebalancing restores intended risk profile. A, C, D are not the primary purpose.
Question 515
Portfolio Construction — Strategic vs. Tactical Allocation Tactical asset allocation is best described as:
Select an option first.
Correct answer: B — Short‑term deviations based on market views
Explanation: B is correct: Tactical = short‑term, opportunistic shifts. A is strategic. C, D unrelated.
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Question 516
A manager who refuses to sell a losing position because “it will come back” is exhibiting:
Select an option first.
Correct answer: B — Loss aversion
Explanation: B is correct: Loss aversion → reluctance to realize losses. A, C, D do not match the behavior.
Question 517
Spreads & Business Cycle Credit spreads typically widen when:
Select an option first.
Correct answer: C — Recession risk increases
Explanation: Recession → higher default risk → wider spreads. A, B, D would narrow spreads.
Question 518
ETF liquidity is primarily driven by:
Select an option first.
Correct answer: B — Liquidity of underlying securities
Explanation: Underlying liquidity determines creation/redemption efficiency. A is secondary. C, D irrelevant.
Question 519
A manager who overestimates forecasting ability exhibits:
Select an option first.
Correct answer: B — Overconfidence
Explanation: Overconfidence = overestimating skill. A, C, D unrelated.
Question 520
Anchoring occurs when investors:
Select an option first.
Correct answer: A — Rely too heavily on initial information
Explanation: Anchoring = sticking to initial reference points. B, C, D incorrect.
Question 521
Mental accounting leads investors to:
Select an option first.
Correct answer: B — Treat money differently based on arbitrary labels
Explanation: Mental accounting = compartmentalizing wealth. A, C, D incorrect.
Question 522
Loss aversion implies investors:
Select an option first.
Correct answer: B — Dislike losses more than equivalent gains
Explanation: Loss aversion = losses hurt more than gains feel good. A, C incorrect. D is disposition effect, not loss aversion.
Question 523
Unhedged foreign investments expose investors to:
Select an option first.
Correct answer: C — Both asset and currency risk
Explanation: Unhedged = asset return + FX return. A, B, D incorrect.
Question 524
Portfolio Construction — Core-Satellite Approach In a core‑satellite portfolio, the “core” portion is typically:
Select an option first.
Correct answer: B — Low‑cost, broad market exposure
Explanation: B is correct: The core is stable, diversified, low‑cost market exposure. A, C, D describe satellite components.
Question 525
A creation unit is:
Select an option first.
Correct answer: B — A large block of ETF shares exchanged with the issuer
Explanation: B is the definition. A, C, D incorrect.
Question 526
Definition — Look-Ahead Bias Look‑ahead bias occurs when:
Select an option first.
Correct answer: A — Future information is used in historical testing
Explanation: A is the definition. B is data snooping. C is survivorship bias. D unrelated.
Question 527
Survivorship bias occurs when:
Select an option first.
Correct answer: A — Only surviving securities are included
Explanation: A is the definition. B, C, D incorrect.
Question 528
Overconfidence is:
Select an option first.
Correct answer: B — Overestimation of one’s forecasting ability
Explanation: B is the definition. A is loss aversion. C is anchoring. D is mental accounting.
Question 529
Anchoring occurs when investors:
Select an option first.
Correct answer: B — Rely too heavily on initial information
Explanation: B is the definition. A, C, D unrelated.
Question 530
Loss aversion means:
Select an option first.
Correct answer: A — Losses hurt more than equivalent gains feel good
Explanation: A is the definition. B, C, D incorrect.
Question 531
Mental accounting refers to:
Select an option first.
Correct answer: B — Treating money differently based on arbitrary categories
Explanation: B is the definition. A, C, D incorrect.
Question 532
Definition — Time-Weighted Return Time‑weighted return measures:
Select an option first.
Correct answer: B — Manager skill independent of cash flows
Explanation: B is the definition. A is money‑weighted return.
Question 533
Currency hedging is:
Select an option first.
Correct answer: B — Reducing FX risk using derivatives
Explanation: B is the definition. A is full hedge. C, D incorrect.
Question 534
FX exposure means:
Select an option first.
Correct answer: B — Both asset and currency returns matter
Explanation: B is the definition. A, C, D incorrect.
Question 535
Liquidity risk is best described as:
Select an option first.
Correct answer: B — The risk of not being able to transact at fair value when needed
Explanation: B is the definition: inability to trade quickly at a reasonable price. A is credit risk. C is inflation risk. D is FX risk.
Question 536
Definition — Core-Satellite Portfolio In a core‑satellite structure, the “satellite” portion is:
Select an option first.
Correct answer: B — High‑tracking‑error, high‑conviction strategies
Explanation: B is the definition: satellites = active, high‑alpha, higher‑risk positions. A describes the core. C, D not defining features.
Question 537
In the context of portfolio management, which of the following best defines investment policy statement (IPS)? LOS: Describe the contents and role of an investment policy statement in the portfolio management process.
Select an option first.
Correct answer: B — A written document that sets out objectives, constraints, and guidelines for managing a client’s portfolio
Explanation: The IPS is a formal, written document that articulates the client’s investment objectives (return and risk) and constraints (liquidity, time horizon, tax, legal/regulatory, and unique circumstances). It also specifies strategic asset allocation, permissible investments, performance benchmarks, and reporting requirements. It is the central governing document for the portfolio and a key reference for evaluating decisions and performance. Options A, C, and D are too narrow and do not capture the IPS’s comprehensive, client-specific role.
Question 538
Which of the following best defines strategic asset allocation (SAA)? LOS: Distinguish between strategic and tactical asset allocation.
Select an option first.
Correct answer: B — The long-term, policy-level mix of asset classes designed to meet the investor’s objectives and constraints
Explanation: Strategic asset allocation is the long-term, policy-level allocation across asset classes (e.g., equities, bonds, alternatives, cash) that is consistent with the investor’s risk and return objectives and constraints. It is typically derived from capital market expectations and optimization or heuristic processes and is documented in the IPS. Tactical asset allocation (A) refers to short-term deviations from SAA. Security selection (C) and peer-based tracking error (D) are not definitions of SAA.
Question 539
In portfolio management, tactical asset allocation (TAA) is best described as: LOS: Explain the role of tactical asset allocation in active portfolio management.
Select an option first.
Correct answer: B — A short-term, opportunistic deviation from strategic weights based on market views
Explanation: Tactical asset allocation involves temporary, active deviations from the strategic asset allocation to exploit perceived short-term mispricing or cyclical opportunities in asset classes, sectors, or regions. It is an overlay on the long-term policy portfolio, not a permanent change (A). Rebalancing (C) restores weights to SAA, and passive indexing (D) is the opposite of tactical positioning.
Question 540
Which of the following best defines risk tolerance in the context of an IPS? LOS: Distinguish between risk tolerance, risk capacity, and risk perception.
Select an option first.
Correct answer: B — The investor’s willingness and ability to bear risk in pursuit of return
Explanation: Risk tolerance reflects both willingness (psychological comfort with volatility and loss) and ability (financial capacity to absorb losses without jeopardizing goals). It is a qualitative and quantitative assessment used to shape asset allocation. Option A is too narrow, C refers to market risk, and D is closer to a return requirement than a definition of risk tolerance.
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Equity390
Performance Measurement295
Specialized Pathway - Portfolio Management253
Derivatives and Risk Management131
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