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 › Specialized Pathway - Portfolio Management
Free CFA Specialized Pathway - Portfolio Management Practice Questions & Answers
250 exam-style Specialized Pathway - 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 121
Geometric compounded return Rg approximately equals Ra minus half sigma squared. Excessive LEVERAGE will eventually REDUCE Rg because:
Select an option first.
Correct answer: B — Sigma squared grows quadratically with leverage while Ra grows linearly, so the drag eventually dominates
Explanation: B is correct. The reading explains: leverage increases both Ra and sigma, but the squaring of sigma in the expression means there will be a point where increasing leverage will lower expected geometric compounded returns. Example: a portfolio that falls 20% then rises 20% has Ra = 0% but Rg = 0.8 x 1.2 - 1 = -4%. The volatility drag always reduces compounded returns relative to arithmetic returns.
Question 122
SLIPPAGE is defined as the difference between:
Select an option first.
Correct answer: B — The execution price and the midpoint of the bid/ask spread at the time the order was first entered
Explanation: B is correct. The reading defines: slippage is the difference between the execution price and the midpoint of the quoted market bid/ask spread at the time the trade was first entered. Slippage captures the market impact cost of a single trade, how much the execution price moved adversely relative to the mid-price at order entry due to the manager own buying or selling pressure.
Question 123
Based on empirical data, which statement about SLIPPAGE COSTS is CORRECT?
Select an option first.
Correct answer: C — Slippage costs are substantially higher in times of high market volatility
Explanation: C is correct. The four empirical conclusions: (1) slippage usually exceeds explicit costs; (2) slippage is greater for smaller-cap securities; (3) slippage is NOT necessarily greater in emerging markets; and (4) slippage is substantially higher in times of high market volatility. A is wrong: slippage usually exceeds explicit costs. B has it backwards: slippage is higher for small-caps. D is explicitly contradicted by conclusion 3.
Question 124
A diversified multi-factor fund has maximum position size 0.2% and ADV constraint of max 5% of ADV. The smallest eligible stock has market cap $4B and ADV = $60M. The AUM at which strategy execution is IMPAIRED is:
Select an option first.
Correct answer: B — $1.5 billion
Explanation: B is correct. Maximum absolute position = 5% x $60M ADV = $3M. Strategy is impaired when $3M / AUM < 0.2%, i.e., when AUM > $3M / 0.002 = $1.5 billion. Above $1.5B, the manager cannot hold the required 0.2% in the smallest position without exceeding the 5%-of-ADV constraint. This matches the reading example exactly.
Question 125
Higher market impact costs are MOST LIKELY associated with:
Select an option first.
Correct answer: B — Higher AUM, small-cap securities, and high portfolio turnover
Explanation: B is correct. The reading quiz confirms: higher portfolio turnover means the manager needs to trade more frequently, which implies bigger market impact cost. Higher AUM means larger individual trades. Small-cap securities have lower ADV so even moderate trades are a large percentage of daily volume creating more price impact. Both higher AUM and small-cap focus increase costs; high turnover increases the frequency of these events.
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 126
A 130/30 LONG EXTENSION fund has 130% long and 30% short. The GROSS and NET exposures are respectively:
Select an option first.
Correct answer: B — Gross = 160%, Net = 100%
Explanation: B is correct. Gross exposure = long + absolute value of short = 130% + 30% = 160%. Net exposure = long - short = 130% - 30% = 100%. Long extension portfolios are constrained to have net exposure of 100% while allowing the manager to express short views. The 160% gross exposure means the manager has leveraged the initial capital but maintains full market exposure on a net basis.
Question 127
A market-neutral fund is long $200M with beta 0.9 and short $150M with beta 1.2. The NET MARKET BETA is:
Select an option first.
Correct answer: C — 0.0
Explanation: C is correct. Net market beta = (Long value x Long beta) - (Short value x Short beta) = ($200M x 0.9) - ($150M x 1.2) = $180M - $180M = $0. This is the reading exact example. The portfolio is truly market-neutral because the long beta exposure exactly offsets the short beta exposure leaving no net sensitivity to overall market movements.
Question 128
The CAPACITY of a long/short strategy is limited by which factor that does NOT limit long-only strategies?
Select an option first.
Correct answer: C — The availability of shares to borrow to facilitate short selling
Explanation: C is correct. The reading states: capacity of short selling strategies is set by the availability of securities to borrow to facilitate short selling. This means the capacity of long/short strategies is likely to be lower than for long-only strategies. Long-only capacity is limited only by liquidity/market cap. Long/short strategies face the same limitation plus an additional one: if no shares can be borrowed for a desired short position, the trade cannot be executed.
Question 129
The KEY BENEFIT of long/short over long-only that is captured as increased TRANSFER COEFFICIENT (TC) in the fundamental law is:
Select an option first.
Correct answer: C — Long/short allows full expression of negative views without the long-only constraint of maximum underweight at zero
Explanation: C is correct. The reading states: a long/short manager is not constrained in the same way because they can short securities. This will increase the information ratio because lower constraints will increase the transfer coefficient of the manager. A long-only manager is limited to maximum underweight of zero for any security; a long/short manager can short to fully express negative views, increasing TC.
Question 130
A SHORT SQUEEZE creates losses for short sellers because:
Select an option first.
Correct answer: C — A sudden rise in a heavily-shorted stock forces short sellers to cover by buying back shares, potentially driving the price even higher
Explanation: C is correct. The reading defines: a short squeeze is where a sudden rise in the price of a heavily-shorted security forces short sellers to cover positions, buy back shares and potentially force the share price higher. This creates a feedback loop: forced covering drives prices higher, which forces more covering. The self-reinforcing nature means losses can escalate rapidly and unpredictably for short sellers.
Question 131
A long-only manager maximum UNDERWEIGHT in any benchmark security is limited to:
Select an option first.
Correct answer: B — The full benchmark weight of the security (reducing to zero holding)
Explanation: B is correct. The reading states: the most negative position a long-only manager can take is to not hold a security, meaning the maximum underweighting is set by the weight of the security in the benchmark. If a stock is 5% of the benchmark, the maximum underweight is 5% (hold zero). A long/short manager faces no such limit and can short the security, expressing a much stronger negative view.
Question 132
Market-neutral portfolios struggle to maintain TRUE ZERO BETA because:
Select an option first.
Correct answer: C — Correlations between long and short positions change continuously
Explanation: C is correct. The reading states: it is difficult in practice to maintain a zero beta given that correlations between exposures change continually. Even if a manager perfectly offsets long and short betas at initiation, correlations shift over time as market conditions change. A security beta is not static, it varies with market conditions, sector dynamics, and company-specific events, making continuous beta monitoring and rebalancing necessary.
Question 133
INCREMENTAL VaR (IVaR) measures:
Select an option first.
Correct answer: C — The change in portfolio VaR from adding OR removing a specific position entirely
Explanation: C is correct. IVaR, also called partial VaR, measures the change in total portfolio VaR from adding or removing a complete position. This differs from Marginal VaR (MVaR) which measures the impact of a very small infinitesimal change in one position size. CVaR measures the expected loss in the tail. IVaR is useful for evaluating whether adding a new position improves or worsens the overall portfolio risk profile.
Question 134
Immunizing a single liability using a ZERO-COUPON BOND matching the liability par value and maturity eliminates interest rate risk because:
Select an option first.
Correct answer: B — There are no intermediate cash flows to reinvest and no need to sell the bond before maturity, eliminating both reinvestment risk and price risk
Explanation: B is correct. The reading states: to immunize the interest rate risk on a single liability, buy a zero-coupon default-free bond with par and maturity matching the liability. With no cash flows to reinvest or bonds to sell, there is no cash flow or price risk. A zero-coupon bond makes one payment at maturity, creating a perfect cash flow match.
Question 135
Macaulay duration is a BALANCE POINT where price risk and reinvestment risk offset each other. If interest rates INCREASE, the immunized portfolio:
Select an option first.
Correct answer: B — Benefits from higher coupon reinvestment income that offsets the capital loss at the horizon date
Explanation: B is correct. The reading states: if rates increase, higher earnings from reinvesting all cash flows will offset a loss on price at the end of the horizon period. When rates rise, bond prices fall immediately but future coupon cash flows are reinvested at higher rates, and this reinvestment benefit exactly offsets the price loss at the Macaulay duration horizon. This balancing property is why matching Macaulay duration is key to immunization.
Question 136
Portfolio statistics (IRR, duration) used in ALM work should be computed from:
Select an option first.
Correct answer: B — Aggregate portfolio cash flows to derive the portfolio IRR
Explanation: B is correct. The reading states: for ALM, these average computations are less accurate than portfolio statistics computed directly from the portfolio aggregate cash flows. The portfolio IRR that equates all future cash flows to current portfolio value is the correct measure. It differs from the simple average YTM especially in non-flat yield curves. In an upward-sloping curve, portfolio IRR will be higher than the average YTM of individual bonds.
Question 137
For a barbell portfolio immunizing a single bullet liability, a PARALLEL SHIFT UP in the yield curve will cause the portfolio to:
Select an option first.
Correct answer: C — Slightly exceed the amount needed to fund the liability due to positive convexity
Explanation: C is correct. The reading states: if the yield curve shifts up or down in parallel fashion, the portfolio results will slightly exceed the amount required to pay the future liability. The additional positive convexity of the assets will lead them to outperform duration results alone for large parallel shifts. Asset convexity exceeds liability convexity so for any parallel shift the portfolio benefits more or loses less than the liability, creating a surplus.
Question 138
A POSITIVE BUTTERFLY TWIST (short and long rates rise; medium rates fall) creates the GREATEST structural risk for a barbell portfolio immunizing a medium-duration bullet liability because:
Select an option first.
Correct answer: B — Both long and short barbell bonds lose value as yields H and L rise, while PVL increases as yield M falls, PVA falls below PVL
Explanation: B is correct. The reading states: positive butterfly twist causes yield L and H to increase while yield M decreases. The portfolio market value will decrease as both yield L and H increase. PVL will increase as yield M decreases. PVA is now below PVL. This is certainly detrimental, and the reading confirms this may create significant structural risk. This is the worst-case scenario for a barbell immunizing a bullet liability.
Question 139
The THIRD RULE for immunizing a single liability, minimize portfolio convexity, is required because:
Select an option first.
Correct answer: B — Minimizing convexity reduces dispersion of asset cash flows around the liability, which reduces structural risk from yield curve reshaping
Explanation: B is correct. The reading states: this structural risk can be reduced by reducing the dispersion of asset cash flows around the liability cash flow. Reducing dispersion is directly related to reducing convexity. While higher convexity benefits from parallel shifts, it also means asset cash flows are more dispersed, increasing exposure to yield curve twists. If dispersion equals zero, the portfolio IS the replicating zero-coupon bond with perfect match and zero twist risk.
Question 140
Immunization DOES NOT MEAN the strategy is buy and hold because:
Select an option first.
Correct answer: B — Coupon-bearing bond duration declines more slowly than maturity while liability duration declines linearly, creating drift requiring rebalancing
Explanation: B is correct. The reading states: coupon-bearing bond duration declines more slowly than maturity, while the bullet liability duration will decline linearly with the approaching pay date. To maintain the immunization, the portfolio assets must be continually rebalanced to continually match portfolio to liability duration. A coupon bond duration falls slowly; the liability duration falls by 1 year each year, so they drift apart without rebalancing.
Question 141
BPV (basis point value) is ALSO referred to as:
Select an option first.
Correct answer: B — Price value of a basis point (PVBP) or value of an 01
Explanation: B is correct. The reading states: BPV is also referred to as price value of a basis point (PVBP) or value of an 01, meaning a 1 BP change in rates. BPV = Modified Duration x Portfolio Value x 0.0001. It measures the dollar change in portfolio value for a 1 basis point change in interest rates. Matching BPVA = BPVL combines the PVA requirement and duration-matching into a single practical metric.
Question 142
For multiple liabilities, asset dispersion and convexity must EXCEED (not be minimized relative to) liability levels. This is because:
Select an option first.
Correct answer: B — The assets need to bracket the liability cash flows to ensure adequate coverage of each payment date
Explanation: B is correct. When immunizing multiple liabilities spread over time, the asset cash flows need to bracket the liability payments with some assets maturing before early liabilities and some after later liabilities. This bracketing creates naturally higher asset dispersion and convexity than the liability cash flow schedule. Asset convexity must EXCEED liability convexity but not by too much to minimize structural risk from twists.
Question 143
Portfolio B is selected over Portfolio C for immunization because Portfolio B has BPV closely matching BPVL and convexity slightly exceeding liability convexity. Portfolio C would be preferred INSTEAD if:
Select an option first.
Correct answer: B — The company expects high volatility and potentially very large parallel shifts in the yield curve
Explanation: B is correct. The reading confirms: Portfolio C, while its BPV is not as good a match, has much higher convexity, and this would increase return relative to change in liability values for large parallel shifts in the yield curve. For very large parallel shifts, the convexity benefit dominates. A portfolio with much higher convexity significantly outperforms for extreme rate movements making the BPV mismatch less critical.
Question 144
Immunization can be described as ZERO REPLICATION because:
Select an option first.
Correct answer: B — A successful immunization replicates the price and yield path of the zero-coupon bond that could have been used for perfect cash flow matching
Explanation: B is correct. The reading states: immunization can be described as zero replication. A single zero-coupon bond could have been used for a no-risk, perfect cash flow match. The changes in portfolio value and IRR have replicated (or done better due to positive convexity) the changes in yield and value of that replicating zero-coupon bond. If the portfolio IRR change matches the yield change of that zero, the strategy succeeds.
Question 145
The BPV of a futures contract is APPROXIMATED as:
Select an option first.
Correct answer: A — The BPV of the cheapest-to-deliver (CTD) bond divided by its conversion factor
Explanation: A is correct. The reading states the BPV of the futures contract is approximately BPV_contract = BPV_CTD / CF_CTD. The CTD bond is the bond the contract seller will choose to deliver. Its BPV represents the price sensitivity of the deliverable adjusted by the conversion factor. This approximation is the basis for calculating how many contracts are needed to close a duration gap.
Question 146
A portfolio has BPVA = $203,456 and BPVL = $218,517. Using 5-year futures with CTD BPV = 48.165 and CF = 0.9237, the number of contracts to BUY is closest to:
Select an option first.
Correct answer: B — 289
Explanation: B is correct. BPV_contract = 48.165 / 0.9237 = 52.144. Duration gap = 218,517 - 203,456 = 15,061. Contracts = 15,061 / 52.144 = 288.8 approximately 289 contracts. BUY because BPVA < BPVL, assets have too little duration. This matches the reading example. Using 10-year contracts (CTD BPV = 86.7001, CF = 0.9169): BPV per contract = 94.558, and contracts = 15,061 / 94.558 = 159.
Question 147
With liability duration of 8.99 and a choice between 5-year and 10-year futures, which contract MINIMIZES STRUCTURAL RISK?
Select an option first.
Correct answer: B — 10-year contract because its duration is closer to the liability duration of 8.99
Explanation: B is correct. The reading confirms: the 10-year contract is the better duration match. This closer match would likely minimize structural risk to nonparallel yield curve shifts. A futures contract whose duration closely matches the liability duration will behave more similarly to the liability under yield curve reshaping. The 5-year contract has duration much shorter than 8.99 creating structural risk if the curve twists.
Question 148
Under CONTINGENT IMMUNIZATION, a manager who BELIEVES RATES WILL DECLINE should:
Select an option first.
Correct answer: C — Overhedge by buying more than the required contracts
Explanation: C is correct. The reading states: if the manager believes rates will decrease, overhedge (more than 100%) and the gains on the contracts will be increased, improving portfolio performance and increasing the surplus. If rates decline, bond prices rise. An overhedged portfolio with more long duration than needed for the 100% hedge will gain more value than the liability, growing the surplus.
Question 149
CONTINGENT IMMUNIZATION requires which INITIAL CONDITION?
Select an option first.
Correct answer: B — The portfolio must be significantly overfunded with a positive surplus (PVA greater than PVL)
Explanation: B is correct. The reading states: contingent immunization is a hybrid active/passive strategy and requires a significant surplus. The quiz confirms: this strategy requires initially overfunding the portfolio with more assets than needed to immunize. The surplus is the active management budget; if active management erodes it, the portfolio must immediately shift to full immunization before the surplus reaches zero.
Question 150
A DB pension plan has BPV gap = $2,052,970. CTD bond BPV = 128.98, conversion factor = 0.9436. The BPV of the futures contract and number of contracts to BUY for a 100% hedge are closest to:
Select an option first.
Correct answer: A — BPV_contract = 136.73; contracts = 15,015
Explanation: A is correct. BPV_contract = 128.98 / 0.9436 = 136.73. Contracts = 2,052,970 / 136.73 = 15,015. BUY because BPVA < BPVL. This is the DB pension example from the reading with the large duration gap due to 60% equity (zero duration) and 40% short bonds versus the liability BPV of 2,402,950.
More free CFA topics
Economics2,066
Quantitative Methods1,213
Portfolio Management1,079
Fixed Income908
Financial Statement Analysis904
Corporate Issuers884
Portfolio Construction605
Alternative Investments540
Specialized Pathway - Private Markets500
Asset Allocation499
Derivatives498
Equity390
Performance Measurement295
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.