You’re on a roll
Create a free account to save your CFA progress, track your accuracy by topic, and pick up right where you left off.
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 991
Three portfolios have Sharpe ratios: P1=0.55, P2=0.48, P3=0.62. Which should an investor prefer if they represent their entire portfolio?
Select an option first.
Correct answer: C — P3
Explanation: For a complete portfolio (where total risk matters), higher Sharpe ratio = better risk-adjusted performance. P3 (0.62) has the best risk-return tradeoff per unit of total risk. A and B have lower Sharpe. D is wrong.
Question 992
A portfolio has Jensen's alpha of +3%, Treynor ratio of 0.12, and Sharpe ratio of 0.45. The market Treynor ratio is 0.10. On a risk-adjusted basis, this portfolio:
Select an option first.
Correct answer: B — Outperformed on all three measures
Explanation: Positive Jensen's alpha (+3%) = outperformed. Treynor 0.12 > market 0.10 = outperformed. Sharpe 0.45 above any reasonable benchmark = outperformed. All three measures indicate outperformance. A and D are wrong. C is unnecessary.
Question 993
Stock has β=1.3, σ=35%, market σ=20%. What is systematic variance and unsystematic variance if total variance = 35²=1225(%²)?
Select an option first.
Correct answer: A — Systematic=676, Unsystematic=549
Explanation: Systematic variance = β²×σm² = (1.3)²×(20)² = 1.69×400 = 676 (%²). Unsystematic = 1225−676 = 549 (%²). A is correct. B uses β=1 for systematic. C implies fully systematic. D uses β=0.13.
Question 994
Risk-free rate = 3%, Market return = 9%. Stock beta = 1.5. What is the expected return from CAPM?
Select an option first.
Correct answer: B — 12.0%
Explanation: E(R) = 3 + 1.5×(9−3) = 3 + 1.5×6 = 3 + 9 = 12%. A would need beta=1.25. C is market return. D would need Rm=12%.
Question 995
A fund returned 16%, Rf=3%, market returned 11%, beta=1.2. Fund's Jensen's alpha is:
Select an option first.
Correct answer: A — +3.4%
Explanation: CAPM = 3 + 1.2×(11−3) = 3 + 9.6 = 12.6%. Alpha = 16 − 12.6 = +3.4%. B, C, D are wrong.
Get the full CFA question bank — free
Drop your email and we'll send you fresh CFA practice questions, fully worked solutions and exam-deadline reminders. No spam — unsubscribe in one click.
Want to save your score and take a full mock exam? Create a free account →
Question 996
Sharpe ratio for Portfolio X = 0.40. Market Sharpe ratio = 0.30. M² for Portfolio X if σm=15% and Rf=3% is:
Select an option first.
Correct answer: A — 9.0%
Explanation: M² = Rf + Sharpe_X × σm = 3% + 0.40×15% = 3% + 6% = 9%. B would use Sharpe 0.33. C is wrong. D is wrong.
Question 997
According to CAPM, an undiversified investor who holds only 5 stocks should expect:
Select an option first.
Correct answer: C — The same return as a well-diversified investor with the same beta
Explanation: CAPM says only systematic risk (beta) is priced — unsystematic risk receives no risk premium since it is diversifiable. An undiversified investor bears unsystematic risk but earns no extra return for it. A assumes β=1. B violates CAPM. D is the correct implication.
Question 998
Which factor does the Fama-French three-factor model add to the market beta factor?
Select an option first.
Correct answer: B — Size (small minus big) and value (high minus low book-to-market ratio)
Explanation: The Fama-French model adds: SMB (small minus big — size factor) and HML (high minus low book-to-market — value factor) to the market factor. A describes a 5-factor or momentum model. C and D are different factors.
Question 999
Which of the following conditions must hold for Jensen's alpha to be zero?
Select an option first.
Correct answer: B — The portfolio's return must exactly equal what CAPM predicts for its beta level
Explanation: Jensen's alpha = Actual return − CAPM expected return. Alpha = 0 when actual return = CAPM-predicted return. This means the portfolio is fairly priced for its beta exposure. A requires β=1. C is the condition for M² = market return. D requires β=0.
Question 1000
The Treynor ratio is particularly appropriate when:
Select an option first.
Correct answer: B — The portfolio is one component of a larger, well-diversified portfolio
Explanation: When a portfolio is just one piece of a larger diversified portfolio, the relevant risk is beta (systematic), not total standard deviation. The Treynor ratio is appropriate here. For the whole portfolio, Sharpe is better (A). C describes risk-free asset. D is a benchmark selection issue.
Question 1001
A fund has beta=0.7, Rf=3%, Rm=10%. CAPM predicts the fund should return:
Select an option first.
Correct answer: A — 7.9%
Explanation: E(R) = 3+0.7×(10−3) = 3+4.9 = 7.9%. B would need beta=0.87. C is Rm×beta. D is wrong.
Question 1002
Fund A: return=14%, beta=1.3. Fund B: return=12%, beta=0.9. Rf=3%, Rm=10%. Which fund has a higher Jensen's alpha?
Select an option first.
Correct answer: B — Fund B: alpha=2.7%
Explanation: CAPM_A = 3+1.3×7 = 12.1%; Alpha_A = 14-12.1 = +1.9%. CAPM_B = 3+0.9×7 = 9.3%; Alpha_B = 12-9.3 = +2.7%. Fund B has higher alpha. A states Fund A's alpha. C is wrong. D is wrong.
Question 1003
If Rf=4%, Rm=10%, beta=1.0, what is the required return for a stock according to CAPM?
Select an option first.
Correct answer: A — 10%
Explanation: E(R) = 4+1.0×(10−4) = 4+6 = 10%. When β=1, the required return equals the market return by definition. B is Rf. C is just the premium. D is wrong.
Question 1004
Stock Y has analyst expected return=15%, Rf=4%, beta=1.5, Rm=10%. Is Stock Y undervalued, overvalued, or fairly priced?
Select an option first.
Correct answer: A — Undervalued — plots above SML
Explanation: CAPM expected = 4+1.5×6 = 13%. Analyst forecasts 15% > 13%. Positive alpha = undervalued. Plots above SML. B would need analyst forecast < 13%. C would need forecast = 13%. D is wrong.
Question 1005
The Sharpe ratio for the market portfolio is 0.40 and Rf=3%. If σm=15%, what is the market's expected return?
Select an option first.
Correct answer: A — 9.0%
Explanation: Sharpe = (Rm−Rf)/σm → 0.40 = (Rm−3)/15 → Rm−3 = 6 → Rm = 9%. B is just the excess return. C is wrong. D is wrong.
Question 1006
The portfolio with the maximum Sharpe ratio on the efficient frontier is called the:
Select an option first.
Correct answer: C — Tangency portfolio
Explanation: The tangency portfolio has the maximum Sharpe ratio — it lies at the point where the CAL is tangent to the efficient frontier of risky assets. Under CAPM, this equals the market portfolio. A and B are the minimum-variance portfolio. D is separate from the risky frontier.
Question 1007
Market return=11%, Rf=3%. A stock with beta=2.0 is expected to return:
Select an option first.
Correct answer: A — 19%
Explanation: E(R) = 3+2.0×(11-3) = 3+16 = 19%. B uses Rm×beta. C would need beta=1.375. D would need beta=1.625.
Question 1008
Portfolio: Jensen's alpha=+4%, beta=1.2, Rf=3%, Rm=10%. What was the portfolio's actual return?
Select an option first.
Correct answer: A — 15.4%
Explanation: CAPM expected = 3+1.2×7 = 11.4%. Actual = 11.4+4 = 15.4%. B is CAPM only. C subtracts. D is wrong.
Question 1009
Portfolio P: return=20%, σ=30%. Portfolio Q: return=16%, σ=20%. Rf=4%. Which has a higher Sharpe ratio?
Select an option first.
Correct answer: B — Q (Sharpe=0.600)
Explanation: Sharpe_P = (20-4)/30 = 16/30 = 0.533. Sharpe_Q = (16-4)/20 = 12/20 = 0.600. Q has a higher Sharpe ratio. B is correct. A is P's Sharpe. C and D are wrong.
Question 1010
A stock's total variance is 0.36 and β=1.2. If market variance σm²=0.04, what is the R² (systematic proportion)?
Select an option first.
Correct answer: A — 0.16
Explanation: Systematic variance = β²×σm² = 1.44×0.04 = 0.0576. R² = 0.0576/0.36 = 0.16. 16% of total risk is systematic. B would need systematic=0.64×0.36=0.2304. C is total variance/total variance. D is wrong.
Question 1011
Under CAPM, if two stocks have the same beta but different standard deviations, they should have:
Select an option first.
Correct answer: B — The same expected return
Explanation: CAPM prices only systematic risk (beta). Two stocks with identical betas have the same required return regardless of total risk (standard deviation). The extra standard deviation is unsystematic risk that is not priced. A, C, D violate CAPM.
Question 1012
A fund manager's performance is most fairly evaluated using Jensen's alpha rather than raw return because Jensen's alpha:
Select an option first.
Correct answer: B — Adjusts for the amount of market risk (beta) taken to earn the return
Explanation: Jensen's alpha isolates the manager's value-add by removing the return attributable to beta (market) exposure. Raw return can be high simply by taking more beta risk. A is wrong. C is wrong — Rf is included in CAPM. D describes Sharpe ratio.
Question 1013
Under CAPM, the required return on the market portfolio equals:
Select an option first.
Correct answer: B — The risk-free rate plus the market risk premium
Explanation: E(Rm) = Rf + [E(Rm) − Rf]. By definition, the market's required return = Rf + market risk premium. A is the minimum (β=0). C is just the premium. D is a backward-looking estimate, not the CAPM formula.
Question 1014
Which measure would most directly tell an investor whether an active manager's value-add justifies the fees charged?
Select an option first.
Correct answer: C — Jensen's alpha or information ratio
Explanation: Alpha and the information ratio directly measure the manager's value-add above what beta alone would deliver. If alpha > management fee, the manager adds value net of fees. A doesn't adjust for risk. B measures risk, not value. D is just market exposure.
Question 1015
The primary theoretical reason that only systematic risk is priced in the CAPM is:
Select an option first.
Correct answer: B — Unsystematic risk can be eliminated for free through diversification, so the market offers no compensation for it
Explanation: Since diversification can eliminate idiosyncratic risk at no cost (adding more assets is costless in frictionless CAPM), rational investors will hold diversified portfolios and bear no unsystematic risk. The market only compensates what cannot be eliminated. A, C, D are wrong.
Question 1016
Under the Arbitrage Pricing Theory (APT), asset returns are determined by:
Select an option first.
Correct answer: B — Multiple factor sensitivities to systematic risk factors
Explanation: APT models expected return as a linear function of sensitivities to multiple systematic factors: E(Ri) = Rf + β1F1 + β2F2 + ... + βkFk. It is more flexible than CAPM. A describes CAPM. C and D are incomplete.
Question 1017
When a portfolio's Treynor ratio exceeds the market's Treynor ratio, the portfolio has:
Select an option first.
Correct answer: B — Outperformed on a per-unit-of-systematic-risk basis
Explanation: Market Treynor = (Rm−Rf)/1.0 = market risk premium. Portfolio Treynor > market Treynor means more excess return earned per unit of beta. This is outperformance on a systematic risk-adjusted basis. A, C, D are wrong.
Question 1018
A stock has beta of 0. According to CAPM, its expected return should be:
Select an option first.
Correct answer: C — Equal to the risk-free rate
Explanation: CAPM: E(R) = Rf + 0×(Rm−Rf) = Rf. A zero-beta stock has no sensitivity to market movements — it earns only the risk-free rate. A is wrong. B requires β=1. D would require negative beta.
Question 1019
Which of the following statements about beta is most accurate?
Select an option first.
Correct answer: B — Beta must be estimated and tends to revert toward 1.0 over time (mean reversion)
Explanation: Beta is estimated from historical data and tends to mean-revert toward 1 (the market average) over time. This is why adjusted beta is often used in practice. A is wrong — beta can exceed 1 or be negative. C is wrong. D describes standard deviation.
Question 1020
The CAPM Security Market Line is upward sloping because:
Select an option first.
Correct answer: B — Investors require higher expected return to hold assets with greater systematic risk
Explanation: The SML's positive slope reflects the risk-return tradeoff for systematic risk. More beta = more systematic risk = more required return. A and D are unrelated. C is not always true.
More free CFA topics
Economics2,066
Quantitative Methods1,213
Fixed Income908
Financial Statement Analysis904
Corporate Issuers884
Portfolio Construction605
Alternative Investments540
Specialized Pathway - Private Markets500
Asset Allocation499
Derivatives498
Equity390
Performance Measurement295
Specialized Pathway - Portfolio Management253
Derivatives and Risk Management131
Ten questions in
- The ones you miss are saved as a drill you can repeat
- Your place is kept, on this device and any other
- A streak, if that is the thing that gets you back tomorrow
Every question on this page stays free and open either way.