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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 1051
The 'reward-to-variability ratio' is another name for:
Select an option first.
Correct answer: C — Sharpe ratio
Explanation: The Sharpe ratio = (Rp−Rf)/σp is also called the reward-to-variability ratio. It measures excess return per unit of total variability (standard deviation). A uses beta. B is alpha. D uses tracking error.
Question 1052
A passive index fund tracking the S&P 500 should have a Jensen's alpha closest to:
Select an option first.
Correct answer: B — Zero (before fees), slightly negative after fees
Explanation: An index fund earns the market return, and its CAPM expected return = market return (since β≈1). Alpha = market return − market return = 0 before fees. After fees, return is slightly below market, so alpha is slightly negative. A, C, D are wrong.
Question 1053
The Treynor measure is superior to the Sharpe measure when evaluating:
Select an option first.
Correct answer: C — A portfolio that is one component of a larger diversified portfolio
Explanation: When a portfolio is part of a larger diversified portfolio, the relevant risk is systematic (beta), not total risk. Treynor uses beta. Sharpe uses total risk, which includes unsystematic risk that has been diversified away at the total portfolio level. A calls for Sharpe. B and D don't define the condition.
Question 1054
If βp=0.9, Rf=3%, Rm=10%, and actual return=12%, what is the Treynor ratio and Jensen's alpha?
Select an option first.
Correct answer: A — Treynor=0.10, Alpha=2.7%
Explanation: Treynor=(12−3)/0.9=9/0.9=10%=0.10. CAPM=3+0.9×7=9.3%. Alpha=12−9.3=2.7%. A is correct. B has wrong Treynor. C has wrong alpha. D is wrong.
Question 1055
Beta measures sensitivity of an asset's return to the market's return. An asset with beta = -0.3 would:
Select an option first.
Correct answer: B — Move opposite to the market with 30% of the market's sensitivity
Explanation: Negative beta means the asset tends to move opposite to the market. A beta of −0.3 means when the market rises 1%, the asset is expected to fall 0.3%, and vice versa. Gold and some hedge fund strategies can have negative betas. A is β>0. C is β=0. D is wrong.
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Question 1056
Which performance metric explicitly compares an active manager's risk-adjusted return to the market on a common scale?
Select an option first.
Correct answer: B — M-squared (M²)
Explanation: M² scales the manager's portfolio to have the same standard deviation as the market, then compares the resulting return to the market return. It answers: 'If this manager had taken exactly market-level risk, what return would they have earned?' A is absolute. C doesn't scale to market. D is risk measure.
Question 1057
If Rf=4% and the market Sharpe ratio is 0.5 with σm=18%, the market expected return is:
Select an option first.
Correct answer: C — 13%
Explanation: Sharpe=(Rm−4)/18=0.5 → Rm−4=9 → Rm=13%. A would need Sharpe=0.278. B would need σm=16. D would need Sharpe=0.333.
Question 1058
A stock with beta=1.0 and positive alpha implies it:
Select an option first.
Correct answer: C — Has outperformed relative to its systematic risk — earned more than the market despite same beta
Explanation: Beta=1 means the stock has the same systematic risk as the market. If alpha>0, the stock earned more than the CAPM expected return (which equals the market return when β=1). This is outperformance vs. the market. A ignores alpha. B is about total risk. D is wrong.
Question 1059
Rf=5%, β=1.8, Rm=11%. CAPM expected return is:
Select an option first.
Correct answer: A — 15.8%
Explanation: E(R)=5+1.8×(11−5)=5+1.8×6=5+10.8=15.8%. B adds too much. C is market return. D is wrong.
Question 1060
Rf=5%, Rm=12%, β=0.6. Minimum return that constitutes outperformance per CAPM is:
Select an option first.
Correct answer: A — 9.2%
Explanation: CAPM=5+0.6×7=5+4.2=9.2%. Any return above 9.2% means positive alpha (outperformance vs. CAPM prediction). B uses only the premium. C is market return. D is wrong.
Question 1061
Rf=3%, Rm=9%, β=1.4. Stock returns 14%. Jensen's alpha is:
Select an option first.
Correct answer: A — 2.6%
Explanation: CAPM=3+1.4×6=11.4%. Alpha=14−11.4=2.6%. B, C, D are wrong.
Question 1062
Portfolio P has Sharpe ratio=0.55, σ=22%. Market σ=18%, Rf=3%. M² is:
Select an option first.
Correct answer: A — 12.9%
Explanation: M²=Rf+Sharpe×σm=3+0.55×18=3+9.9=12.9%. B uses wrong σm. C and D are wrong.
Question 1063
Under CAPM, which portfolio plots exactly on the Capital Market Line AND the Security Market Line?
Select an option first.
Correct answer: C — The market portfolio (both at the tangency point of the CML and at β=1 on the SML)
Explanation: The market portfolio is simultaneously: on the CML (as the tangency portfolio) and on the SML (at β=1, E(Rm)). Individual stocks are on the SML but not the CML (unless perfectly diversified). A, B, D are wrong.
Question 1064
A portfolio has the same Sharpe ratio as the market. Its M² equals:
Select an option first.
Correct answer: C — The market's expected return
Explanation: M² scales the portfolio to market risk level. If Sharpe_portfolio = Sharpe_market, then after adjusting to market risk: M² = Rf + Sharpe_market × σm = E(Rm). M² equals the market return. A is wrong. B is wrong. D is the unscaled portfolio return.
Question 1065
Two portfolios have the same Jensen's alpha but different betas (β1=0.8, β2=1.4). Which is preferred for a well-diversified investor?
Select an option first.
Correct answer: B — Portfolio with β=0.8 — same alpha with less systematic risk
Explanation: Same alpha means same outperformance relative to CAPM. But Portfolio 1 (β=0.8) achieves it with less systematic risk. On a risk-adjusted basis relative to systematic risk, Portfolio 1 is superior (higher Treynor ratio). B is correct. A adds risk without more alpha. C and D are wrong.
Question 1066
Under CAPM assumptions, the market portfolio contains all risky assets in which proportions?
Select an option first.
Correct answer: B — Market-value weights (each asset's proportion equals its market capitalization as a fraction of total market cap)
Explanation: The CAPM market portfolio is value-weighted — each asset's weight equals its market capitalization relative to the total market. This reflects market-clearing equilibrium. A is naive diversification. C is risk parity. D has no basis in CAPM theory.
Question 1067
Which of the following correctly describes the relationship between the CML and the Sharpe ratio?
Select an option first.
Correct answer: B — All portfolios on the CML have the same Sharpe ratio — equal to the slope of the CML
Explanation: Every point on the CML is a combination of the risk-free asset and the tangency portfolio. All such combinations inherit the same Sharpe ratio as the tangency portfolio (the CML's slope). A is wrong. C is wrong. D is wrong.
Question 1068
Which of the following is NOT a limitation of CAPM in practice?
Select an option first.
Correct answer: C — CAPM provides a clear framework for estimating required returns
Explanation: C is actually an advantage of CAPM (a benefit), not a limitation. A, B, D are genuine practical limitations. C describes CAPM's usefulness, making it the correct answer (the statement that is NOT a limitation).
Question 1069
A stock with negative beta would be expected to:
Select an option first.
Correct answer: C — Rise when the market falls — acting as a hedge
Explanation: Negative beta means the asset moves opposite to the market. It rises when markets fall and falls when markets rise. This provides a natural hedge for market exposure. A is β>0. B is β=0. D is β=0 specifically.
Question 1070
According to the Security Market Line, which of the following assets should have the HIGHEST expected return?
Select an option first.
Correct answer: C — A stock with beta=1.5
Explanation: SML: E(R) = Rf + β × MRP. Highest beta → highest expected return. Beta=1.5 is the highest among options. A earns Rf only. B earns less than market. D earns market return.
Question 1071
A fund's performance persistence is most reliably indicated by:
Select an option first.
Correct answer: B — Consistent positive information ratio over multiple market cycles
Explanation: Persistence of risk-adjusted outperformance (positive IR) across different market environments is evidence of genuine skill rather than luck. A is one-year luck. C benefits from market beta, not skill. D is not a performance measure.
Question 1072
If actual return > SML expected return, the asset has positive alpha and is:
Select an option first.
Correct answer: C — Underpriced — investors should buy it before the price adjusts upward
Explanation: Positive alpha (above SML) = underpriced. If the asset earns more than required for its risk, its price will be bid up until the expected return falls to the SML level. Rational investors buy underpriced assets. A is below SML. B is on SML. D is wrong.
Question 1073
Rf=2%, Rm=10%, beta=1.3. Expected return per CAPM is:
Select an option first.
Correct answer: A — 12.4%
Explanation: E(R)=2+1.3×8=2+10.4=12.4%. B would need MRP=8.46%. C uses only β×MRP. D is market return.
Question 1074
A portfolio earned 19%, β=1.5, Rf=3%, Rm=11%. Jensen's alpha is:
Select an option first.
Correct answer: A — 4.0%
Explanation: CAPM=3+1.5×8=3+12=15%. Alpha=19−15=4.0%. B is excess over risk-free. C is wrong. D is excess return.
Question 1075
Which of the following is a direct implication of the efficient market hypothesis for active management?
Select an option first.
Correct answer: C — Prices reflect all available information, making consistent outperformance through analysis difficult
Explanation: If markets are efficient, prices instantly reflect all known information. This makes it very hard to consistently find mispriced securities. A contradicts EMH. B is wrong. D contradicts weak-form EMH.
Question 1076
The market Treynor ratio = (Rm−Rf)/βm. Since βm=1, it equals:
Select an option first.
Correct answer: C — The market risk premium
Explanation: Market Treynor = (Rm−Rf)/1 = Rm−Rf = market risk premium. A, B, D are wrong.
Question 1077
A portfolio with β=2.0 and Rf=3% will earn double the market risk premium above Rf. If Rm=10%, the CAPM expected return is:
Select an option first.
Correct answer: A — 17%
Explanation: E(R) = 3+2×7 = 3+14 = 17%. B uses β×Rm. C uses β×(Rm−Rf) without Rf. D is wrong.
Question 1078
The intercept of the Security Market Line on the y-axis (when beta=0) equals:
Select an option first.
Correct answer: D — The risk-free rate
Explanation: At β=0: E(R) = Rf + 0×(Rm−Rf) = Rf. The SML intersects the y-axis at the risk-free rate. A, B, C are wrong.
Question 1079
Under the single-index model, the R² from regressing a stock's returns on market returns represents:
Select an option first.
Correct answer: B — The proportion of the stock's total variance explained by market (systematic) variance
Explanation: R² = β²σm²/σi² = systematic variance/total variance. It represents what fraction of total return variability is due to market movements. A is expected return. C is the slope coefficient. D is the intercept.
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