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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 241
A sensitivity risk measure shows:
Select an option first.
Correct answer: B — How an asset responds to a small change in a risk factor
Explanation: B correct: Examples include duration, delta, beta. A wrong: PD is credit risk. C wrong: That’s scenario analysis. D wrong: Average return is unrelated.
Question 242
A historical scenario is:
Select an option first.
Correct answer: B — A scenario based on actual past market movements
Explanation: B correct: Historical scenarios replay real past events (e.g., 2008 crisis) on today’s portfolio. A wrong: Hypothetical ≠ historical. C wrong: Historical scenarios may include many asset classes, not just macro factors. D wrong: Simulation is different from historical replay.
Question 243
A hypothetical scenario is:
Select an option first.
Correct answer: B — A stress event constructed by analysts even if never observed
Explanation: B correct: Hypothetical scenarios test vulnerabilities under imagined but plausible shocks. A wrong: That describes historical scenarios. C wrong: Hypothetical scenarios can involve any risk factor. D wrong: Benchmarks are irrelevant to scenario construction.
Question 244
Reverse stress testing identifies:
Select an option first.
Correct answer: B — Conditions that would cause severe portfolio losses
Explanation: B correct: Reverse stress tests start with the loss outcome and work backward to find what could cause it. A wrong: It focuses on worst‑case, not best‑case. C wrong: Tracking error is unrelated. D wrong: Hedge ratios belong to currency/derivatives, not stress testing.
Question 245
Correlation stress refers to:
Select an option first.
Correct answer: C — Assuming normally uncorrelated assets move together during stress
Explanation: C correct: Stress periods often cause correlations to spike unexpectedly. A wrong: Stress testing intentionally changes correlations. B wrong: Zero correlation is not typical in crises. D wrong: Perfect negative correlation is unrealistic in stress.
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Question 246
A scenario limit is:
Select an option first.
Correct answer: B — A maximum allowable loss under a specific stress scenario
Explanation: B correct: Scenario limits restrict how much loss is acceptable under defined shocks. A wrong: Volatility limits are separate. C wrong: Number of scenarios is not constrained. D wrong: Factor limits are unrelated.
Question 247
Risk budgeting is:
Select an option first.
Correct answer: B — Allocating allowable risk across positions or strategies
Explanation: B correct: Risk budgeting assigns risk, not capital, to different components. A wrong: Equal capital ≠ equal risk. C wrong: Expected return is not the basis. D wrong: Liquidity may influence limits but is not the definition.
Question 248
A position limit is:
Select an option first.
Correct answer: B — A maximum allowable exposure to an asset or issuer
Explanation: B correct: Position limits prevent concentration risk. A wrong: Minimum holdings are unrelated. C wrong: Turnover limits are separate. D wrong: Factor limits are different constraints.
Question 249
A macroeconomic factor model explains returns using:
Select an option first.
Correct answer: B — Surprises in economic variables
Explanation: B correct: Macroeconomic models use unexpected changes in GDP, inflation, etc. A wrong: That’s fundamental factor modeling. C wrong: PCA belongs to statistical models. D wrong: Benchmarks are irrelevant.
Question 250
A fundamental factor model explains returns using:
Select an option first.
Correct answer: B — Company‑level characteristics such as size, leverage, or growth
Explanation: B correct: Fundamental models use firm attributes to explain returns. A wrong: GDP/inflation belong to macro models. C wrong: Random shocks are not factors. D wrong: Market return alone is a single‑factor CAPM.
Question 251
A statistical factor model identifies factors using:
Select an option first.
Correct answer: C — Statistical techniques such as principal components
Explanation: C correct: Statistical models extract factors mathematically (e.g., PCA). A wrong: Forecasts belong to fundamental/qualitative models. B wrong: Economic theory underlies macro models. D wrong: Benchmark weights are unrelated.
Question 252
A pure factor portfolio is:
Select an option first.
Correct answer: B — A portfolio with exposure of 1 to a single factor and 0 to others
Explanation: B correct: Pure factor portfolios isolate one factor completely. A wrong: Zero exposure means no factor exposure at all. C wrong: Equal exposure ≠ pure exposure. D wrong: Tracking error is unrelated.
Question 253
Factor timing refers to:
Select an option first.
Correct answer: B — Adjusting factor exposures based on expected factor performance
Explanation: B correct: Timing = increasing/decreasing factor exposure based on forecasts. A wrong: That’s security selection. C wrong: Beta estimation is model calibration. D wrong: Rebalancing is mechanical, not timing.
Question 254
Factor selection refers to:
Select an option first.
Correct answer: A — Choosing which factors to include in a model
Explanation: A correct: Factor selection = deciding which factors matter. B wrong: That’s factor timing. C wrong: That’s security selection. D wrong: Benchmarks are unrelated.
Question 255
Break‑even inflation is:
Select an option first.
Correct answer: B — The difference between nominal and real yields
Explanation: B correct: Break‑even inflation = nominal yield – real yield. A wrong: Not an optimization concept. C wrong: Duration is unrelated. D wrong: Credit spreads reflect credit risk, not inflation.
Question 256
A credit spread is:
Select an option first.
Correct answer: B — The yield difference between a corporate bond and a government bond
Explanation: B correct: Credit spread = compensation for credit risk (corporate vs sovereign). A wrong: Equity returns are unrelated. C wrong: Inflation differences are not credit spreads. D wrong: Factor returns are unrelated.
Question 257
Expected loss on a credit instrument equals:
Select an option first.
Correct answer: B — PD × (1 – Recovery)
Explanation: B correct: Expected loss = probability of default × loss given default. A wrong: PD × Recovery understates loss. C wrong: Duration × spread is a pricing approximation. D wrong: Spread × volatility is not a credit metric.
Question 258
Tracking error refers to:
Select an option first.
Correct answer: B — Standard deviation of active returns
Explanation: B correct: Tracking error = volatility of active returns. A wrong: Average difference is tracking difference. C wrong: NAV deviations are unrelated. D wrong: Comparing ETFs is not tracking error.
Question 259
A portfolio has a daily volatility of 1.2%. Assuming 252 trading days, what is the annualized volatility?
Select an option first.
Correct answer: C — 24.0%
Explanation: C correct: Annual vol = 1.2% × √252 ≈ 1.2% × 15.87 ≈ 19.04% → Oops, check: 1.2% × 15.87 = 19.04%. Actually 19.0%, so correct is B. Correct Answer (final): B B correct: 1.2% × √252 = 19.0%. A wrong: Ignores square‑root rule. C wrong: Double counting. D wrong: Overstates scaling.
Question 260
A portfolio has expected return 8%, risk‑free rate 2%, and volatility 10%. What is the Sharpe ratio?
Select an option first.
Correct answer: C — 0.6
Explanation: C correct: (8 − 2) / 10 = 6/10 = 0.60. A/B/D wrong: Incorrect arithmetic.
Question 261
A bond portfolio has duration 6. If yields rise 40 bps, approximate price change is:
Select an option first.
Correct answer: B — –2.4%
Explanation: B correct: –Duration × Δy = –6 × 0.004 = –2.4%. Others wrong: Wrong scaling.
Question 262
A portfolio has beta 1.2. Market return = 9%, risk‑free = 3%. CAPM expected return?
Select an option first.
Correct answer: C — 12.2%
Explanation: C correct: 3 + 1.2(9 − 3) = 3 + 7.2 = 10.2% → Actually 10.2%. Correct is B. Correct Answer (final): B B correct: 3 + 1.2×6 = 10.2%. Others wrong: Arithmetic errors.
Question 263
A portfolio has 60% in asset A (vol 12%) and 40% in B (vol 20%), correlation 0.3. Portfolio volatility?
Select an option first.
Correct answer: B — 14.4%
Explanation: B correct: Var = 0.6²(0.12²) + 0.4²(0.20²) + 2(0.6)(0.4)(0.12)(0.20)(0.3) = 0.005184 + 0.0064 + 0.003456 = 0.01504 Vol = √0.01504 ≈ 12.27% → Actually ≈ 12.3%, closest = A. Correct Answer (final): A A correct: Closest to computed 12.3%. Others wrong: Too high.
Question 264
A portfolio has expected return 7%, volatility 9%. Risk‑free = 2%. What is Sharpe?
Select an option first.
Correct answer: C — 0.55
Explanation: C correct: (7 − 2)/9 = 5/9 ≈ 0.56. Others wrong: Incorrect scaling.
Question 265
A portfolio has 30% in asset A (return 5%) and 70% in B (return 9%). Expected portfolio return?
Select an option first.
Correct answer: C — 8.2%
Explanation: C correct: 0.3×5 + 0.7×9 = 1.5 + 6.3 = 7.8% → closest = B. Correct is B. Correct Answer (final): B B correct: 7.8% ≈ 7.8%. Others wrong: Arithmetic errors.
Question 266
A portfolio has VaR(95%) = $2M. CVaR(95%) is typically:
Select an option first.
Correct answer: C — > $2M
Explanation: C correct: CVaR is average loss beyond VaR → always larger. Others wrong: Misinterpret tail metrics.
Question 267
A currency position of $10M has a 1‑day FX volatility of 0.8%. What is 1‑day FX VaR(95%) (z=1.65)?
Select an option first.
Correct answer: C — $132,000
Explanation: C correct: VaR = 10M × 0.008 × 1.65 = $132,000. Others wrong: Wrong scaling.
Question 268
A portfolio has duration 4 and convexity 30. Yield rises 1%. Approx price change?
Select an option first.
Correct answer: B — –4.3%
Explanation: B correct: ΔP ≈ –4×0.01 + 0.5×30×0.01² = –0.04 + 0.0015 = –0.0385 ≈ –3.85%. Closest = A. Correct is A. Correct Answer (final): A A correct: –4% is closest. Others wrong: Too large.
Question 269
A portfolio has 40% in asset A (beta 0.8) and 60% in B (beta 1.4). Portfolio beta?
Select an option first.
Correct answer: C — 1.2
Explanation: C correct: 0.4×0.8 + 0.6×1.4 = 0.32 + 0.84 = 1.16 → closest = C. Others wrong: Off from computed value.
Question 270
A portfolio has expected return 10%, volatility 15%. Market return 8%, vol 12%, correlation 0.6. Beta?
Select an option first.
Correct answer: B — 0.75
Explanation: B correct: β = ρ(σp/σm) = 0.6×(15/12) = 0.6×1.25 = 0.75. Others wrong: Incorrect scaling.
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