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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 961
Portfolio A earned 14%, has a beta of 1.2, risk-free rate is 3%, and market return is 10%. Jensen's alpha for Portfolio A is:
Select an option first.
Correct answer: A — +2.6%
Explanation: CAPM expected return = 3% + 1.2×(10%−3%) = 3% + 8.4% = 11.4%. Alpha = 14% − 11.4% = +2.6%. B, C, D are wrong.
Question 962
A portfolio returned 15%, has a standard deviation of 20%, and the risk-free rate is 4%. The Sharpe ratio is:
Select an option first.
Correct answer: A — 0.55
Explanation: Sharpe = (15%−4%) / 20% = 11%/20% = 0.55. B, C, D are wrong.
Question 963
A portfolio returned 15%, has a beta of 1.1, and the risk-free rate is 4%. The Treynor ratio is:
Select an option first.
Correct answer: A — 0.10
Explanation: Treynor = (15%−4%) / 1.1 = 11% / 1.1 = 10% = 0.10. B is just the excess return. C is wrong. D would be 15/1.1=13.6% (wrong — doesn't subtract Rf).
Question 964
Portfolio P has a Sharpe ratio of 0.50 and standard deviation 25%. Market σ=15%, risk-free rate=3%. What is M²?
Select an option first.
Correct answer: B — 10.5%
Explanation: M² = Rf + Sharpe_P × σ_market = 3% + 0.50 × 15% = 10.5%. Alternatively: weight in P = 15/25 = 0.60; Rp = 3%+0.50×25% = 15.5%; M² = 0.60×15.5% + 0.40×3% = 9.3%+1.2% = 10.5%. Answer is B.
Question 965
A stock has a beta of 1.5. If the market rises by 8%, the stock is expected to rise by:
Select an option first.
Correct answer: C — 12.0%
Explanation: Expected stock move = β × market move = 1.5 × 8% = 12%. Beta amplifies market movements. A is the market return. B would be β=1.25. D would be β=0.75.
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Question 966
Two stocks each have a weight of 50% in a portfolio. Stock A has β=0.8 and Stock B has β=1.4. The portfolio beta is:
Select an option first.
Correct answer: A — 1.10
Explanation: Portfolio beta = 0.50×0.8 + 0.50×1.4 = 0.40 + 0.70 = 1.10. Portfolio beta is the weighted average of individual betas. B, C, D are wrong.
Question 967
A stock's security characteristic line is: Ri = 0.5% + 1.3×Rm + εi. If the market return is 8%, the expected stock return is:
Select an option first.
Correct answer: C — 10.9%
Explanation: E(Ri) = α + β×Rm = 0.5% + 1.3×8% = 0.5% + 10.4% = 10.9%. A ignores alpha. B adds alpha twice. D is wrong.
Question 968
Beta can be calculated from which formula?
Select an option first.
Correct answer: B — β = Cov(Ri, Rm) / Var(Rm)
Explanation: β = Cov(Ri,Rm) / Var(Rm). Also equals ρ(i,m) × σi/σm. A is not beta — it's the ratio of standard deviations (related to beta only when ρ=1). C transposes σm and σi. D is wrong.
Question 969
Stock X has a correlation with the market of 0.6, a standard deviation of 25%, and the market standard deviation is 15%. Beta of Stock X is:
Select an option first.
Correct answer: A — 1.0
Explanation: β = ρ × σi / σm = 0.6 × 25/15 = 0.6 × 1.667 = 1.0. Exactly 1.0. B, C, D are wrong.
Question 970
Portfolio A returned 12%, has beta=0.9, Rf=3%, and market return=10%. What is Jensen's alpha?
Select an option first.
Correct answer: A — +2.7%
Explanation: CAPM expected = 3% + 0.9×(10%−3%) = 3% + 6.3% = 9.3%. Alpha = 12%−9.3% = +2.7%. B, C, D are wrong.
Question 971
Under CAPM, which of the following investors would hold a portfolio with a beta greater than 1?
Select an option first.
Correct answer: B — An investor who wants to earn more than the market return and is willing to take greater systematic risk
Explanation: To earn more than the market, an investor must take more systematic risk (β > 1). This involves investing 100%+ of wealth in the market portfolio (leveraged position). A, C, D all describe low-risk profiles (β < 1 or β = 0).
Question 972
The market model (single-index model) separates a stock's return into:
Select an option first.
Correct answer: B — Systematic return (βRm) and firm-specific return (ε)
Explanation: The market model: Ri = αi + βiRm + εi. βiRm is the systematic (market-driven) component; εi is the unsystematic (firm-specific) residual. A is wrong. C splits along risk-free lines. D is a factor model distinction.
Question 973
Total risk in the single-index model can be decomposed into:
Select an option first.
Correct answer: C — Systematic risk (β²σm²) plus unsystematic risk (σε²)
Explanation: Total variance of a stock = systematic variance (β²σm²) + unsystematic variance (σε²). This decomposition is key: systematic risk = β² times market variance; the rest is diversifiable. A and B are each only half. D is wrong.
Question 974
A portfolio of 50 stocks has essentially zero unsystematic risk. The remaining portfolio variance is approximately:
Select an option first.
Correct answer: C — β²p × σ²m — the systematic variance driven by portfolio beta
Explanation: In a well-diversified portfolio, unsystematic risk is eliminated. Total risk ≈ β²p × σ²m (systematic variance). This is why the CAPM says only systematic risk (beta) is priced. A would require zero beta. B and D are wrong.
Question 975
Two portfolios have the same Sharpe ratio but different levels of total risk. Which portfolio would an investor prefer?
Select an option first.
Correct answer: C — Either — same utility if they can leverage/de-leverage to match risk preference
Explanation: Under the two-fund separation theorem, with a risk-free asset available, investors can combine any portfolio with the risk-free rate. If two portfolios have the same Sharpe ratio, investors can adjust leverage to achieve the same risk-return point from either. They are equivalent.
Question 976
A stock has systematic variance of 0.04 and unsystematic variance of 0.09. Total variance is 0.13. What percentage of total risk is systematic?
Select an option first.
Correct answer: A — 30.8%
Explanation: Systematic % = 0.04 / 0.13 = 30.77% ≈ 30.8%. The remaining 69.2% is unsystematic (diversifiable). B is unsystematic. C and D are wrong.
Question 977
A portfolio earned 15%, has beta=1.0, Rf=3%, Rm=11%. Jensen's alpha is:
Select an option first.
Correct answer: A — +4%
Explanation: CAPM expected = 3+1.0×(11−3) = 3+8 = 11%. Alpha = 15−11 = +4%. A is correct. B would mean return = 11%. C would mean return = 13%. D is wrong.
Question 978
Portfolio P has Sharpe ratio 0.6 and σ=25%. Market has σ=20% and Rf=3%. What is M² for Portfolio P?
Select an option first.
Correct answer: A — 15.0%
Explanation: M² = Rf + Sharpe_P × σ_market = 3% + 0.6 × 20% = 3% + 12% = 15.0%. B uses 0.5 Sharpe. C and D are wrong.
Question 979
If the market return is 10% and M² for Portfolio P is 12%, the portfolio:
Select an option first.
Correct answer: B — Outperformed the market on a risk-adjusted basis by 2%
Explanation: M² > market return implies risk-adjusted outperformance. At the same risk level as the market, Portfolio P would have earned 12% vs. the market's 10%, a 2% advantage. A is wrong. C and D are wrong.
Question 980
A defensive stock has a beta of 0.4. If the market falls by 10%, the stock is expected to:
Select an option first.
Correct answer: B — Fall 4%
Explanation: Expected stock move = β × market move = 0.4 × (−10%) = −4%. The stock falls less than the market. A ignores beta. C reverses direction. D misplaces the decimal.
Question 981
The Capital Market Line (CML) is relevant only for:
Select an option first.
Correct answer: B — Efficient portfolios that are combinations of the risk-free asset and the market portfolio
Explanation: The CML applies specifically to efficient portfolios on the CAL from the risk-free rate through the market portfolio. For individual assets or inefficient portfolios, the SML (not CML) gives the correct expected return. A and C are wrong. D is wrong.
Question 982
Under CAPM, a portfolio with zero beta has an expected return equal to:
Select an option first.
Correct answer: C — The risk-free rate
Explanation: CAPM: E(R) = Rf + β(Rm − Rf). If β=0, E(R) = Rf + 0 = Rf. A zero-beta asset has no systematic risk, so investors earn only the risk-free rate. A, B, D are wrong.
Question 983
The 'market risk premium' in the CAPM represents the additional return an investor expects:
Select an option first.
Correct answer: B — For bearing one unit of systematic (market) risk
Explanation: Market risk premium = E(Rm) − Rf. In the CAPM, it is the extra return per unit of beta. A stock with β=1 earns exactly the market risk premium above Rf. A is vague. C is wrong — Rf earns zero premium. D is not market risk premium.
Question 984
An analyst finds that a stock plots BELOW the Security Market Line. This indicates the stock is:
Select an option first.
Correct answer: C — Overvalued — expected return is too low for its beta level
Explanation: Below the SML = lower actual expected return than CAPM requires for its beta. This means the stock is overpriced (high price → low expected return). Sell signal. Above SML = undervalued (A). On SML = fairly priced (B). D is wrong.
Question 985
Which of the following portfolios is most likely to plot on the Security Market Line?
Select an option first.
Correct answer: C — All portfolios and individual assets, whether efficient or not
Explanation: The SML applies to ALL assets and portfolios — efficient and inefficient — since it uses beta (systematic risk) on the x-axis. Unlike the CML (which applies only to efficient portfolios), the SML is universal under CAPM. A, B, D are too restrictive.
Question 986
The Information Ratio is defined as:
Select an option first.
Correct answer: A — Active return divided by tracking error
Explanation: Information ratio = (Portfolio return − Benchmark return) / Tracking error. It measures active return per unit of active risk. B is Sharpe. C is Treynor. D is wrong.
Question 987
A stock's R² from a regression of its returns against market returns equals 0.64. What percentage of its total variance is systematic?
Select an option first.
Correct answer: B — 64%
Explanation: R² from the market model regression equals the proportion of total variance explained by the market (systematic). R² = 0.64 = 64%. The remaining 36% is unsystematic. A is unsystematic. C and D are wrong.
Question 988
Beta of Stock A is 1.2, σA=30%, σm=20%. What is the correlation between Stock A and the market?
Select an option first.
Correct answer: A — 0.80
Explanation: β = ρ × σA/σm → 1.2 = ρ × 30/20 = ρ × 1.5 → ρ = 1.2/1.5 = 0.80. B, C, D are wrong.
Question 989
A stock has total variance of 0.25 and beta of 1.0. If market variance is 0.04, what is the unsystematic variance?
Select an option first.
Correct answer: A — 0.21
Explanation: Systematic variance = β² × σm² = 1.0² × 0.04 = 0.04. Unsystematic = total − systematic = 0.25 − 0.04 = 0.21. A and D both say 0.21 — A is the correct answer. B is total variance. C is market variance.
Question 990
If Rf=5%, Rm=12%, beta=0.9, and analyst alpha=+2%, the analyst's expected return for the stock is:
Select an option first.
Correct answer: B — 13.3%
Explanation: CAPM expected = 5+0.9×7% = 5+6.3 = 11.3%. With +2% alpha, analyst expects 11.3+2.0 = 13.3%. B is correct. A is CAPM only. C and D are wrong.
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