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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 61
Diversification across factors is most effective when:
Select an option first.
Correct answer: B — Factors are uncorrelated
Explanation: B is correct: Low correlation → diversification. A is opposite. C and D irrelevant.
Question 62
Residuals in a factor model should ideally be:
Select an option first.
Correct answer: B — Uncorrelated
Explanation: B is correct: Residuals should be independent. A, C, D indicate model misspecification.
Question 63
Estimation error in factor loadings is most likely caused by:
Select an option first.
Correct answer: A — Short sample periods
Explanation: A is correct: Short samples → noisy estimates. B, C, D reduce error.
Question 64
Multicollinearity occurs when:
Select an option first.
Correct answer: A — Factors are highly correlated
Explanation: A is correct: High correlation → unstable estimates. B, C, D unrelated.
Question 65
A positive factor surprise means:
Select an option first.
Correct answer: C — The factor outperformed expectations
Explanation: C is correct: Surprise = actual – expected. A and B incorrect. D false.
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Question 66
A statistically significant positive alpha indicates:
Select an option first.
Correct answer: C — The manager took excessive risk
Explanation: orrect Answer: B B is correct: Alpha = value added. A, C, D not implied.
Question 67
Under the pure expectations hypothesis (no term premium), the current 1‑year spot rate is ( 3% ), and the 1‑year forward rate one year from now is ( 4% ). The implied 2‑year spot rate is closest to:
Select an option first.
Correct answer: B — ( 3.5% )
Explanation: Under pure expectations, the 2‑year spot rate ( s_2 ) satisfies: [ (1 + s_2)^2 = (1 + s_1)(1 + 1f_1) = 1.03 \times 1.04 = 1.0712 ] [ s_2 = \sqrt{1.0712} - 1 \approx 3.5% ] So the 2‑year spot rate is about ( 3.5% ).
Question 68
Which bond is least appropriately risk‑measured using effective duration?
Select an option first.
Correct answer: C — A non‑callable, non‑putable bullet bond.
Explanation: Effective duration is designed to capture interest rate sensitivity when cash flows change with interest rates, as in bonds with embedded options or prepayment risk. A straight bullet bond with fixed cash flows is adequately measured by modified duration; effective duration is not necessary and adds little value. Thus, C is least appropriate.
Question 69
Which bond is most likely to have concentrated key rate duration at the short end of the curve?
Select an option first.
Correct answer: B — A 10‑year amortizing bond with high coupon and rapid principal repayment.
Explanation: An amortizing bond with high coupons and rapid principal repayment returns much of its cash flow early. Its price sensitivity is therefore concentrated at shorter maturities, so its key rate duration is skewed toward the short end. Long‑maturity zeros or balloon structures concentrate duration at the long end.
Question 70
If an economy’s long‑term real growth rate declines, the equilibrium real interest rate will most likely:
Select an option first.
Correct answer: B — Decrease
Explanation: B is correct: Lower long‑term growth → lower demand for investment → lower real rates. A contradicts theory. C unlikely unless growth is unchanged. D is possible only in extreme cases, not implied here.
Question 71
A manager’s active return is primarily driven by:
Select an option first.
Correct answer: B — Security selection and factor tilts
Explanation: B is correct: Active return = selection + factor exposures. A, C, D do not generate active return.
Question 72
Risk budgeting allocates:
Select an option first.
Correct answer: B — Risk across portfolio components
Explanation: B is correct: Risk budgeting = allocating risk, not capital. A, C, D incorrect.
Question 73
Position limits are used to:
Select an option first.
Correct answer: B — Prevent excessive concentration
Explanation: B is correct: Limits prevent concentration risk. A, C, D not the purpose.
Question 74
Scenario limits restrict:
Select an option first.
Correct answer: A — Maximum loss under extreme conditions
Explanation: A is correct: Scenario limits cap losses under stress. B, C, D unrelated.
Question 75
A stock with a sensitivity of 1.4 to a profitability factor will:
Select an option first.
Correct answer: A — React strongly to profitability shocks
Explanation: A is correct: Sensitivity = responsiveness. B, C, D incorrect.
Question 76
A portfolio has exposures: - 0.8 to Value (premium = 3%) - 1.1 to Momentum (premium = 2%) Risk-free = 1%. Expected return = ?
Select an option first.
Correct answer: C — 6.0%
Explanation: Return = 1% + 0.8×3% + 1.1×2% = 1% + 2.4% + 2.2% = 5.6% Closest = 6.0%.
Question 77
Residual risk represents:
Select an option first.
Correct answer: B — Diversifiable risk
Explanation: B is correct: Residual = idiosyncratic. A, C, D systematic.
Question 78
Alpha represents:
Select an option first.
Correct answer: B — Return unexplained by factors
Explanation: B is correct: Alpha = unexplained return. A, C, D incorrect.
Question 79
A 1‑day 5% VaR of $4 million means:
Select an option first.
Correct answer: B — There is a 5% chance of losing at least $4 million in one day
Explanation: B is correct: VaR = minimum loss at a given probability. A, C, D incorrect.
Question 80
Mean daily return = 0.02% Daily volatility = 1.2% z-score (5%) = 1.65 VaR = ?
Select an option first.
Correct answer: A — –1.8%
Explanation: VaR = μ – zσ = 0.02% – 1.65×1.2% ≈ –1.95% Closest = –1.8%.
Question 81
Historical simulation assumes:
Select an option first.
Correct answer: B — Past return patterns resemble future risks
Explanation: B is correct: Historical VaR replays past returns. A, C, D not required.
Question 82
Carlo simulation is most useful when:
Select an option first.
Correct answer: A — Portfolio contains nonlinear instruments
Explanation: A is correct: Monte Carlo handles nonlinear payoffs. B, C, D irrelevant.
Question 83
Hypothetical scenarios are used when:
Select an option first.
Correct answer: B — The analyst wants to test a never‑seen shock
Explanation: B is correct: Hypothetical = imagined but plausible. A is historical. C, D irrelevant.
Question 84
A portfolio with duration 5 will:
Select an option first.
Correct answer: B — Lose 5% if yields rise 1%
Explanation: B is correct: Duration = negative relationship. A, C, D incorrect.
Question 85
A beta of 1.3 means:
Select an option first.
Correct answer: B — The asset moves 1.3× the market
Explanation: B is correct: Beta = sensitivity to market. A, C, D incorrect.
Question 86
Backtesting — 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 correct: Using unavailable data biases results. B, C, D unrelated.
Question 87
Survivorship bias occurs when:
Select an option first.
Correct answer: A — Only surviving securities are included in the sample
Explanation: A is correct: Excluding failures inflates performance. B, C, D incorrect.
Question 88
Data snooping occurs when:
Select an option first.
Correct answer: A — Too many models are tested on the same dataset
Explanation: A is correct: Excessive testing → false discoveries. B, C, D unrelated.
Question 89
If a manager picked outperforming stocks within a sector, this is:
Select an option first.
Correct answer: B — Selection
Explanation: B is correct: Stock picking = selection. A, C, D incorrect.
Question 90
Risk attribution decomposes:
Select an option first.
Correct answer: B — Volatility into factor and residual components
Explanation: B is correct: Risk attribution = factor vs. idiosyncratic. A, C, D unrelated.
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