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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 541
Which of the following best defines capital market expectations in portfolio management? LOS: Define capital market expectations and their role in asset allocation.
Select an option first.
Correct answer: C — Forecasts of risk, return, and correlations for asset classes used in portfolio construction
Explanation: Capital market expectations are forward-looking estimates of expected returns, volatilities, and correlations for asset classes (and sometimes factors) used to design strategic asset allocations and evaluate active strategies. Historical data (A) may inform them but are not the expectations themselves. Security-level views only (B) are too narrow, and regulatory limits (D) are constraints, not expectations.
Question 542
In portfolio construction, core–satellite investing is best described as: LOS: Describe core–satellite structures and their rationale.
Select an option first.
Correct answer: B — Combining a passive core portfolio with smaller active or alternative “satellite” positions
Explanation: Core–satellite investing involves a low-cost, diversified core (often indexed or enhanced index) that provides broad market exposure, combined with satellite positions in active strategies, sectors, or alternatives to seek alpha. This structure balances cost, diversification, and active opportunity. A is purely passive, C is concentrated active, and D is a technique, not the structure itself.
Question 543
Liability-driven investing (LDI) is best defined as an approach that: LOS: Define liability-driven investing and its applications.
Select an option first.
Correct answer: B — Focuses on matching the characteristics of assets to the investor’s liabilities
Explanation: LDI is an investment approach where asset allocation and strategy are designed primarily to meet or hedge specific liabilities, such as pension obligations. It emphasizes duration, cash flow, and inflation matching. Option A ignores liabilities, C is about leverage, and D describes risk parity, not LDI.
Question 544
In behavioral finance, loss aversion is best defined as the tendency of investors to: LOS: Define loss aversion and its impact on investment decisions.
Select an option first.
Correct answer: B — Weigh losses more heavily than gains of the same magnitude
Explanation: Loss aversion refers to investors’ tendency to experience the disutility of losses more intensely than the utility of equivalent gains, often leading to risk-averse behavior in gains and risk-seeking behavior in losses. A is risk aversion, C is overreaction, and D is anchoring.
Question 545
Mental accounting in behavioral finance is best described as: LOS: Define mental accounting and its implications for portfolio construction.
Select an option first.
Correct answer: B — The tendency to treat money differently depending on arbitrary “accounts” or labels
Explanation: Mental accounting is the behavioral tendency to segregate wealth into separate “accounts” (e.g., current income, savings, speculative funds) and treat them differently, even though money is fungible. This can lead to suboptimal, non-integrated portfolios. A, C, and D are standard practices, not mental accounting.
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Question 546
In behavioral portfolio theory, a layered portfolio is best defined as a portfolio that: LOS: Describe the concept of layered portfolios in behavioral finance.
Select an option first.
Correct answer: B — Is constructed as layers corresponding to different goals and risk levels
Explanation: Behavioral portfolio theory suggests investors build layered portfolios, where each layer corresponds to specific goals and risk tolerances (e.g., a safe layer for essential needs and a risky layer for aspirational goals). This reflects mental accounting and loss aversion. A is generic diversification; C and D are implementation details, not the core definition.
Question 547
In portfolio management, rebalancing is best defined as: LOS: Define rebalancing and its purpose in portfolio management.
Select an option first.
Correct answer: B — Adjusting portfolio holdings to restore target asset allocation weights
Explanation: Rebalancing involves buying and selling assets to bring the portfolio’s actual weights back to target weights specified by the strategic asset allocation or IPS. It controls risk drift and maintains the intended risk–return profile. A, C, and D are not the standard definition of rebalancing.
Question 548
A rebalancing corridor is best described as: LOS: Explain rebalancing corridor strategies and their trade-offs.
Select an option first.
Correct answer: B — The range of acceptable deviations from target weights before rebalancing is triggered
Explanation: A rebalancing corridor defines upper and lower bounds around target asset weights. When an asset’s weight moves outside this corridor, rebalancing is triggered. This approach balances transaction costs against risk control. A is calendar-based rebalancing; C and D are unrelated.
Question 549
Rebalancing to target weights Portfolio value = $1,000,000. Current weights: 70% equity, 30% bonds. Target weights: 60% equity, 40% bonds. Dollar amount of equity to sell is:
Select an option first.
Correct answer: C — $100,000
Explanation: Current equity = 0.70 × 1,000,000 = 700,000. Target equity = 0.60 × 1,000,000 = 600,000. Sell = 700,000 – 600,000 = 100,000.
Question 550
Rebalancing corridor breach Target equity weight = 60%, corridor ±5%. Current equity weight = 67%. Action:
Select an option first.
Correct answer: B — Rebalance back to 60%
Explanation: Corridor: 55%–65%. Current 67% exceeds upper bound → rebalance to target 60%.
Question 551
ETF premium/discount ETF NAV = $100. Market price = $98. The ETF trades at:
Select an option first.
Correct answer: B — 2% discount
Explanation: Discount = (Price – NAV) / NAV = (98 – 100)/100 = –2% → 2% discount.
Question 552
Look‑ahead bias occurs when:
Select an option first.
Correct answer: B — Future information is used in a backtest
Explanation: B correct: Using information not available at the time invalidates the test. A wrong: Missing data ≠ look‑ahead bias. C wrong: Lagged variables prevent look‑ahead bias. D wrong: Inflation adjustments don’t cause it.
Question 553
Survivorship bias means:
Select an option first.
Correct answer: B — Keeping only securities that survived
Explanation: B correct: Excluding failed/delisted firms inflates historical results. A wrong: Removing delisted firms creates the bias. C wrong: Opposite direction of bias. D wrong: Inflation is unrelated.
Question 554
A stop‑loss limit requires:
Select an option first.
Correct answer: B — Reducing or closing positions once losses exceed a threshold
Explanation: B correct: Stop‑loss rules force risk reduction when losses breach a preset level. A wrong: Increasing exposure would magnify losses. C wrong: Rebalancing is routine, not loss‑triggered. D wrong: Gains do not trigger stop‑loss actions.
Question 555
Consumption‑hedging properties refer to:
Select an option first.
Correct answer: B — Assets that perform well when consumption is low
Explanation: B correct: Assets that pay off in “bad times” hedge consumption risk. A wrong: Expansion‑sensitive assets do the opposite. C wrong: Inflation hedging ≠ consumption hedging. D wrong: GDP tracking is not the same as hedging consumption drops.
Question 556
Expectation‑related risk in ETFs refers to:
Select an option first.
Correct answer: B — Investors misunderstanding how an ETF behaves
Explanation: B correct: Expectation‑related risk = investor misunderstanding of ETF mechanics. A wrong: That’s counterparty risk. C wrong: Liquidity risk is separate. D wrong: Index changes are not expectation‑related.
Question 557
A creation basket in an ETF is:
Select an option first.
Correct answer: B — Securities APs deliver to create new ETF shares
Explanation: B correct: APs deliver the creation basket to the ETF issuer to receive new shares. A wrong: Retail investors never receive baskets. C wrong: Tax reporting uses separate data. D wrong: Rebalancing uses portfolio holdings, not creation baskets.
Question 558
A redemption basket is:
Select an option first.
Correct answer: A — Securities APs receive when redeeming ETF shares
Explanation: A correct: APs exchange ETF shares for the redemption basket. B wrong: Retail investors transact only in ETF shares. C wrong: Index replication uses the ETF portfolio, not redemption baskets. D wrong: Hedging is unrelated.
Question 559
A bid‑ask spread in ETFs compensates market makers for:
Select an option first.
Correct answer: B — Hedging costs, inventory risk, and execution risk
Explanation: B correct: Market makers widen spreads to cover risk and costs of providing liquidity. A wrong: Rebalancing does not determine spreads. C wrong: Tax effects are irrelevant. D wrong: Dividend reinvestment does not affect spreads.
Question 560
A portfolio has 2% currency return and 6% local return. Total return?
Select an option first.
Correct answer: C — 8%
Explanation: C correct: (1.06)(1.02)−1 ≈ 8.12%. Others wrong: Additive instead of multiplicative.
Question 561
A currency forward has spot 1.20 USD/EUR, domestic rate 2%, foreign rate 1%. Forward price?
Select an option first.
Correct answer: C — 1.212
Explanation: C correct: F = S×(1+rd)/(1+rf)=1.20×1.02/1.01=1.212. Others wrong: Misapply IRP.
Question 562
FX return decomposition for a foreign asset is:
Select an option first.
Correct answer: A — Local return + currency return + cross term
Explanation: A correct: Exact decomposition includes cross term: ( (1+R_L)(1+R_C)-1). B wrong: Approximation only. C/D wrong: Incomplete.
Question 563
A commercial real estate property has NOI of $1.2M and cap rate of 6%. Estimated value is:
Select an option first.
Correct answer: C — $18M
Explanation: Value = NOI / cap rate = 1.2 / 0.06 = 20 → actually $20M. Correct Answer (final): D Others wrong: Misapply cap rate.
Question 564
A CRE property has NOI of $800k, value $16M. Implied cap rate is:
Select an option first.
Correct answer: B — 5%
Explanation: Cap rate = 0.8 / 16 = 0.05 = 5%. Others wrong: Arithmetic.
Question 565
A CRE investment has purchase price $10M, NOI year 1 = $700k, expected growth 2% per year, required return 8%. Using a growing perpetuity, value is:
Select an option first.
Correct answer: C — $11.7M
Explanation: Value = NOI₁ / (r − g) = 0.7 / (0.08−0.02) = 0.7 / 0.06 ≈ 11.67M. C correct, others off.
Question 566
The optimal hedge ratio for currency exposure is:
Select an option first.
Correct answer: C — (\rho \frac{\sigma_S}{\sigma_F})
Explanation: C correct: Minimum‑variance hedge ratio. Others wrong: Incorrect or trivial hedges.
Question 567
A synthetic ETF uses:
Select an option first.
Correct answer: C — Swaps to replicate index exposure
Explanation: C correct: Synthetic ETFs use total‑return swaps. Others wrong: Not synthetic structure.
Question 568
ETF tax efficiency primarily comes from:
Select an option first.
Correct answer: B — In‑kind redemptions
Explanation: B correct: In‑kind redemptions avoid capital gains. Others wrong: Do not create tax efficiency.
Question 569
ETF implied liquidity depends on:
Select an option first.
Correct answer: B — Underlying asset liquidity
Explanation: B correct: ETF liquidity = liquidity of underlying basket. Others wrong: Partial or irrelevant.
Question 570
A minimum‑variance hedge ratio for currency exposure is 0.6. If exposure is $20M, the hedge size is:
Select an option first.
Correct answer: C — $12M
Explanation: C correct: 0.6 × 20M = 12M. Others wrong: Misapply ratio.
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