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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 691
A client has just retired with $2 million in savings. They need $80,000/year for living expenses. An appropriate primary investment objective is:
Select an option first.
Correct answer: B — Capital preservation and income generation sufficient to maintain purchasing power and fund withdrawals
Explanation: A retiree needs their portfolio to last through retirement — capital preservation and generating sufficient income are paramount. A is too aggressive. C ignores income needs. D is too risky for a primary retiree objective.
Question 692
The concept of 'investor utility' in portfolio theory captures:
Select an option first.
Correct answer: B — The satisfaction or well-being an investor derives from a given portfolio's risk-return combination
Explanation: Utility theory formalizes investor preferences — combining expected return (positive) and variance (negative for risk-averse investors) into a single measure of well-being. This allows optimal portfolio selection. A, C, D are unrelated.
Question 693
A 'defined contribution' retirement plan differs from a 'defined benefit' plan in that:
Select an option first.
Correct answer: C — In a defined contribution plan, the employee bears the investment risk and the final balance depends on investment performance
Explanation: DC plans: the employer (and sometimes employee) contributes a set amount; the final balance depends on how investments perform — investment risk falls on the employee. DB plans guarantee a specific benefit (employer bears investment risk). A and B describe DB plans. D is wrong.
Question 694
Which of the following is a direct benefit of including real estate in a multi-asset portfolio?
Select an option first.
Correct answer: B — Real estate provides potential income, inflation hedge, and diversification via low correlation with stocks
Explanation: Real estate offers income (rental), inflation protection (rents and values tend to rise with inflation), and diversification (lower correlation with equities than most financial assets). A is wrong. C is wrong — real estate is illiquid. D is wrong.
Question 695
Which of the following is a key characteristic of mutual funds as opposed to ETFs?
Select an option first.
Correct answer: C — Mutual funds are priced once daily at end-of-day NAV and shares are bought/sold directly from the fund
Explanation: Traditional mutual funds price at end-of-day NAV; purchases and redemptions go through the fund company. ETFs trade on exchanges throughout the day at market prices. A and B describe ETFs. D is generally not true — passive ETFs often have lower fees.
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Question 696
Which of the following is the BEST example of risk avoidance?
Select an option first.
Correct answer: C — A company decides not to enter a market because regulatory risk is unacceptably high
Explanation: Risk avoidance means not taking the risk at all — declining to engage in an activity that carries unacceptable risk. Buying insurance (A) is risk transfer. Diversifying (B) is risk reduction. Holding cash (D) is risk acceptance/self-insurance.
Question 697
Which of the following behavioral biases might lead an investor to concentrate their portfolio in their home country's stocks?
Select an option first.
Correct answer: C — Home bias
Explanation: Home bias is the tendency to over-invest in domestic securities even when international diversification would improve the risk-return tradeoff. Familiarity with domestic stocks creates comfort. A is about how options are framed. B is about separate mental accounts. D is about control illusion.
Question 698
A sovereign wealth fund that invests oil revenue for future generations has which primary investment characteristic?
Select an option first.
Correct answer: B — Long investment horizon, high risk tolerance, and low immediate liquidity needs
Explanation: Sovereign wealth funds typically have very long horizons (future generations), high capacity for risk, and low near-term liquidity needs. This justifies higher allocations to equities, real assets, and illiquid alternatives. A, C, D are wrong.
Question 699
In a defined benefit pension plan, the plan sponsor's primary investment risk is:
Select an option first.
Correct answer: B — That asset returns fall short of the return needed to fund promised liabilities, creating an underfunding deficit
Explanation: The plan sponsor (employer) must ensure assets are sufficient to pay promised benefits. If asset returns fall short (market underperformance, low interest rates increasing PV of liabilities), the sponsor must make additional contributions. A is actuarial longevity risk. C and D are secondary concerns.
Question 700
Which of the following is NOT typically a component of portfolio management fees?
Select an option first.
Correct answer: C — Inflation adjustment fee
Explanation: Portfolio management fees typically include management fees, performance fees (for some strategies), and transaction costs. There is no standard 'inflation adjustment fee' — this is not an industry term. A, B, D are real fee components.
Question 701
Status quo bias and inertia in investing most commonly leads to:
Select an option first.
Correct answer: B — Failure to make necessary portfolio adjustments (rebalancing, reallocating, updating)
Explanation: Inertia and status quo bias cause investors to leave portfolios unchanged too long — failing to rebalance, update asset allocation for life changes, or harvest tax losses. A and C are excessive action behaviors. D is home bias in reverse.
Question 702
An investor who consistently takes the most popular investment view (consensus) even without conviction is exhibiting:
Select an option first.
Correct answer: C — Herding behavior
Explanation: Herding means following the crowd — adopting popular views without independent analysis. This can create momentum but also contributes to bubbles. A and B are independent approaches. D is a different emotional bias.
Question 703
Which of the following is most consistent with a conservative risk profile for an investor?
Select an option first.
Correct answer: C — 20% equity / 80% bonds and cash
Explanation: A conservative investor prioritizes capital preservation over growth. 20% equity with 80% bonds/cash maintains low volatility and low risk of large drawdowns. A and D are aggressive. B is moderate.
Question 704
Which of the following scenarios would most likely trigger a rebalancing of the portfolio?
Select an option first.
Correct answer: C — A significant market movement causes equity allocation to drift from 60% target to 72%
Explanation: Rebalancing is triggered by drift from target weights. If equity moves from 60% to 72%, the portfolio is overweight equities, taking more risk than intended. A and B don't necessarily trigger rebalancing. D is a minor change in Rf, not a rebalancing trigger.
Question 705
The primary advantage of an investment policy statement from the perspective of both client and manager is:
Select an option first.
Correct answer: C — It establishes shared expectations, reducing disputes and providing a clear framework for all investment decisions
Explanation: The IPS creates mutual understanding of goals, constraints, and decision-making guidelines, reducing misalignment and disputes. It is a living document for managing the relationship. A, B, D are wrong.
Question 706
An investor exhibits 'narrow framing' when they:
Select an option first.
Correct answer: B — Evaluate each investment in isolation rather than as part of a broader portfolio
Explanation: Narrow framing (a form of mental accounting) leads investors to evaluate each investment independently rather than in the context of how it affects total portfolio risk and return. This leads to suboptimal decisions. A is the rational approach. C and D are sound practices.
Question 707
The planning step of portfolio management does NOT include:
Select an option first.
Correct answer: C — Executing trades based on the asset allocation
Explanation: The planning step covers: developing the IPS, establishing objectives and constraints, forming capital market expectations, and determining strategic asset allocation. Actually executing trades is the execution step. A, B, D are planning activities.
Question 708
Which of the following institutional investors has investment objectives most directly tied to matching specific liability cash flows?
Select an option first.
Correct answer: C — Insurance company with known policy maturities
Explanation: Insurance companies know when policies mature and must pay claims. Matching assets to those liability cash flows is central to their investment strategy. Endowments (A) and sovereign wealth funds (B) have more flexibility. Hedge funds (D) seek absolute returns.
Question 709
Which of the following is a PRIMARY benefit of the Investment Policy Statement for a portfolio manager?
Select an option first.
Correct answer: B — It provides clear guidelines that allow the manager to make decisions consistent with the client's goals without constant check-ins
Explanation: The IPS empowers the manager with a clear decision framework. They can act within the defined guidelines without repeatedly seeking client approval for routine decisions. A overstates legal protection. C and D are wrong.
Question 710
Which of the following is an emotional bias rather than a cognitive error?
Select an option first.
Correct answer: D — Loss aversion
Explanation: Loss aversion (and other emotional biases like overconfidence, self-control, regret aversion) are rooted in feelings, not faulty reasoning. Anchoring (A), confirmation bias (B), and mental accounting (C) are cognitive errors — related to how information is processed or believed.
Question 711
Which of the following accurately describes 'self-attribution bias'?
Select an option first.
Correct answer: A — Taking credit for successes (attributing them to skill) while blaming failures on external factors
Explanation: Self-attribution bias means investors credit their own skill when investments succeed but blame bad luck, market conditions, or advisors when they fail. This reinforces overconfidence. B is pessimism. C is familiarity. D is conservatism.
Question 712
What is the primary difference between risk tolerance and risk capacity?
Select an option first.
Correct answer: B — Risk tolerance is the subjective willingness to bear risk; risk capacity is the objective financial ability to absorb losses
Explanation: Risk tolerance = psychological willingness (subjective). Risk capacity = financial ability to survive losses without compromising goals (objective). When they conflict, capacity typically sets the limit. A is wrong. C is not necessarily true. D is too narrow.
Question 713
Which of the following correctly describes the role of ESG in investment analysis?
Select an option first.
Correct answer: B — ESG considerations can identify risks and opportunities that traditional financial analysis may miss
Explanation: ESG analysis can reveal material risks (environmental liability, governance failures, social controversies) and opportunities that affect long-term value. A, C, D all understate or overstate ESG's role.
Question 714
Which behavioral bias might cause an investor to sell a high-performing stock simply because they are happy to lock in a gain?
Select an option first.
Correct answer: C — Disposition effect / regret aversion
Explanation: The disposition effect drives investors to realize gains quickly (to feel the positive emotion of success) and hold losses (to avoid realizing failure). Selling a winner too early is the gain-realization side of this bias. A is about avoiding loss recognition. B causes overtrading. D involves separate mental buckets.
Question 715
Which of the following is the MOST important reason for setting a clear risk objective in the IPS?
Select an option first.
Correct answer: C — It ensures the portfolio's risk level is consistent with what the investor can tolerate and afford, avoiding inappropriate risk-taking
Explanation: The risk objective ensures the portfolio's volatility, downside risk, and potential loss align with what the investor is both willing and able to bear. This is the foundation of sound portfolio construction. A, B, D are wrong.
Question 716
Which of the following is best described as an example of 'risk self-insurance'?
Select an option first.
Correct answer: C — Building a cash reserve to absorb potential losses internally rather than transferring risk to a third party
Explanation: Self-insurance means accepting and retaining risk rather than transferring it, and building reserves to cover potential losses internally. A is risk transfer. B is risk reduction. D is a strategy that modifies the return profile.
Question 717
The primary challenge of behavioral finance for professional portfolio managers is:
Select an option first.
Correct answer: B — Identifying which biases affect their own decisions and implementing processes to mitigate them
Explanation: Biases affect everyone — including professionals. The challenge is developing discipline, checklists, and processes to counteract emotional and cognitive errors. A is quantitative skill. C is market timing. D is a strategy choice.
Question 718
A mutual fund with a 12b-1 fee charges investors for:
Select an option first.
Correct answer: C — Marketing and distribution expenses
Explanation: 12b-1 fees in mutual funds specifically cover marketing, distribution, and sales activities. They are added to the fund's expense ratio. A and B are covered by management fees. D is a transaction cost.
Question 719
Which characteristic MOST differentiates hedge funds from traditional mutual funds for a sophisticated investor?
Select an option first.
Correct answer: C — Hedge funds can use leverage, short selling, and derivatives to generate absolute returns uncorrelated with the market
Explanation: Hedge funds use tools unavailable or restricted for mutual funds — leverage, short selling, derivatives — enabling absolute return strategies that may be uncorrelated with traditional benchmarks. A and B describe mutual funds. D is wrong — hedge funds typically charge higher fees (2&20).
Question 720
A $1 million portfolio needs to fund a $60,000 annual withdrawal. If returns are 7% nominal and inflation is 3%, the real return available for growth after withdrawals is approximately:
Select an option first.
Correct answer: B — 1%
Explanation: Nominal return = 7%. Withdrawal rate = 6%. After withdrawals, 1% nominal remains for portfolio growth. Inflation = 3%, so real growth = −2% (purchasing power erodes). But the question asks for real return available for growth = 7% − 6% withdrawal − 3% inflation ≈ −2% or approximately 1% nominal growth − 3% inflation ≈ −2% real. If question asks simply about what's left after 6% withdrawal: 7%−6% = 1% nominal. Answer B = 1% is the nominal growth remaining.
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