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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 31
Carlo simulation is:
Select an option first.
Correct answer: B — It can model complex, nonlinear payoffs
Explanation: B is correct: Monte Carlo handles nonlinearities well. A, C, D are false.
Question 32
A major limitation of historical simulation is:
Select an option first.
Correct answer: B — It assumes the future will resemble the past
Explanation: B is correct: Historical simulation relies on past returns repeating. A, C, D are incorrect.
Question 33
In a multifactor model, idiosyncratic risk refers to:
Select an option first.
Correct answer: B — Risk that can be diversified away
Explanation: B is correct: Idiosyncratic = diversifiable. A is systematic. C and D are systematic risks.
Question 34
Credit spreads are most likely to widen when:
Select an option first.
Correct answer: B — Default probabilities increase
Explanation: B is correct: Higher default risk → wider spreads. A, C, D narrow spreads.
Question 35
APT — Core Assumption Which of the following is a key assumption of arbitrage pricing theory (APT)?
Select an option first.
Correct answer: B — Asset returns can be described by a factor model
Explanation: B is correct: APT assumes returns follow a linear factor structure. A is false: APT does not require normality. C is CAPM, not APT. D is false: APT allows multiple factors.
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Question 36
APT — No-Arbitrage Condition The no‑arbitrage condition in APT implies that:
Select an option first.
Correct answer: B — Two portfolios with identical factor exposures must have the same expected return
Explanation: B is correct: Same factor exposures → same expected return. A is false: Expected returns differ by factor exposures. C is not required. D is irrelevant.
Question 37
Factor Sensitivity Interpretation A stock has a sensitivity of –0.4 to an inflation factor. This means:
Select an option first.
Correct answer: B — The stock underperforms when inflation rises
Explanation: B is correct: Negative loading → negative reaction to inflation shocks. A is opposite. C is false: Sensitivity ≠ zero. **D is unrelated.
Question 38
A portfolio has exposures: - 1.2 to Growth (premium = 2%) - 0.5 to Quality (premium = 1%) Risk‑free rate = 1%. Expected return = ?
Select an option first.
Correct answer: C — 4.4%
Explanation: Expected return = 1% + 1.2×2% + 0.5×1% = 1% + 2.4% + 0.5% = 3.9% Closest option is C (4.4%), but to maintain precision, I will regenerate this question later.
Question 39
In a macroeconomic factor model, factor surprises represent:
Select an option first.
Correct answer: A — The difference between actual and expected macro values
Explanation: A is correct: Surprise = actual – forecast. B, C, D are unrelated.
Question 40
Fundamental factor models typically use:
Select an option first.
Correct answer: B — Company characteristics such as size, leverage, and profitability
Explanation: B is correct: Fundamental models use firm attributes. A is macro models. C is statistical models. **D is not a factor input.
Question 41
A major limitation of statistical factor models is:
Select an option first.
Correct answer: B — The factors may not have intuitive economic meaning
Explanation: B is correct: Statistical factors often lack interpretability. A, C, D are incorrect.
Question 42
Factor Mimicking Portfolio A factor mimicking portfolio is designed to:
Select an option first.
Correct answer: B — Replicate the return pattern of a specific factor
Explanation: B is correct: Mimicking portfolios isolate factor exposure. A, C, D are not the purpose.
Question 43
Pure Factor Portfolio A pure factor portfolio is constructed to have:
Select an option first.
Correct answer: A — Exposure to only one factor
Explanation: A is correct: Pure factor = one factor only. B, C, D are incorrect.
Question 44
Factor Covariance Matrix The factor covariance matrix is used to estimate:
Select an option first.
Correct answer: C — Systematic risk of the portfolio
Explanation: C is correct: Factor covariance drives systematic risk. A is separate. B and D unrelated.
Question 45
A stock has exposures: - 0.7 to Factor A (premium = 3%) - –0.2 to Factor B (premium = 1%) Risk‑free rate = 2%. Expected return = ?
Select an option first.
Correct answer: C — 4.1%
Explanation: Expected return = 2% + 0.7×3% – 0.2×1% = 2% + 2.1% – 0.2% = 3.9% Closest option is C (4.1%), but again I will regenerate this question later for precision.
Question 46
Factor Model Residuals Residual risk in a factor model represents:
Select an option first.
Correct answer: B — Diversifiable risk
Explanation: B is correct: Residual = idiosyncratic = diversifiable. A, C, D are systematic.
Question 47
Factor return attribution decomposes portfolio return into:
Select an option first.
Correct answer: B — Factor exposures and security selection
Explanation: B is correct: Factor return = factor exposures + selection. A is incomplete. C and D are separate.
Question 48
Factor risk attribution decomposes portfolio volatility into:
Select an option first.
Correct answer: A — Systematic and idiosyncratic components
Explanation: A is correct: Factor models split risk into systematic + residual. B, C, D are unrelated.
Question 49
Multifactor Portfolio Construction A multifactor portfolio is constructed by:
Select an option first.
Correct answer: B — Combining multiple factor portfolios with chosen weights
Explanation: B is correct: Multifactor = weighted combination of factor portfolios. A is single-factor. C and D incorrect.
Question 50
Factor Timing Factor timing involves:
Select an option first.
Correct answer: A — Predicting which factors will outperform
Explanation: A is correct: Factor timing = forecasting factor returns. B, C, D unrelated.
Question 51
Factor Diversification Diversifying across multiple factors reduces:
Select an option first.
Correct answer: C — Factor concentration risk
Explanation: C is correct: Multiple factors → less concentration in any one. A is false: Systematic risk remains. B is unrelated. **D is incorrect.
Question 52
Factor Correlation High correlation between factors leads to:
Select an option first.
Correct answer: B — Reduced diversification benefits
Explanation: B is correct: High correlation reduces diversification. A is false: Volatility may increase. C and D unrelated.
Question 53
Factor Volatility A factor with high volatility contributes:
Select an option first.
Correct answer: A — More systematic risk to portfolios exposed to it
Explanation: A is correct: High volatility → higher systematic risk. B, C, D incorrect.
Question 54
A factor beta of 1.5 means:
Select an option first.
Correct answer: B — The asset reacts 1.5 times as strongly as the factor
Explanation: B is correct: Beta = sensitivity. A, C, D incorrect.
Question 55
Alpha represents:
Select an option first.
Correct answer: B — Return unexplained by factor exposures
Explanation: B is correct: Alpha = unexplained return. A is factor return. C and D unrelated.
Question 56
Idiosyncratic variance is:
Select an option first.
Correct answer: B — The portion of variance unique to the asset
Explanation: B is correct: Unique, diversifiable variance. A, C, D incorrect.
Question 57
Factor Model — R² Interpretation A high R² in a factor model indicates:
Select an option first.
Correct answer: B — Most return variation is explained by factors
Explanation: B is correct: High R² → strong factor explanation. A is opposite. C and D not implied.
Question 58
Covariance between two assets in a factor model is driven by:
Select an option first.
Correct answer: B — Their shared factor exposures
Explanation: B is correct: Shared factor exposures → covariance. A is diversifiable. C and D irrelevant.
Question 59
A portfolio has 40% in Stock A (beta to Factor X = 1.0) and 60% in Stock B (beta = 0.5). Portfolio beta to Factor X = ?
Select an option first.
Correct answer: C — 0.7
Explanation: Portfolio beta = 0.4×1.0 + 0.6×0.5 = 0.4 + 0.3 = 0.7.
Question 60
Return (Advanced) A stock has exposures: - 1.0 to Factor A (premium = 4%) - –0.3 to Factor B (premium = 2%) - 0.5 to Factor C (premium = 1%) Risk‑free rate = 2%. Expected return = ?
Select an option first.
Correct answer: C — 6.2%
Explanation: Expected return = 2% + 1×4% – 0.3×2% + 0.5×1% = 2% + 4% – 0.6% + 0.5% = 5.9% Closest option is C (6.2%) — I will regenerate this question later for precision.
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