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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 241
A manager wishes to INCREASE exposure to XYZ Corp (spreads expected to narrow) and DECREASE exposure to ABC Corp (spreads expected to widen). Using CDS, the manager should:
Select an option first.
Correct answer: B — Sell protection on XYZ Corp and buy protection on ABC Corp
Explanation: B is correct. The reading states: 'The manager should SELL protection on XYZ Corp to INCREASE EXPOSURE to XYZ Corp and profit if spreads narrow; they should BUY protection on ABC Corp to DECREASE EXPOSURE to ABC Corp and profit if spreads widen.' Selling protection = long risk = profit when spreads narrow (like owning the bond). Buying protection = short risk = profit when spreads widen. The reading example confirms: profits from ABC widening by 15 bps + profits from XYZ narrowing by 20 bps = total 241,875.
Question 242
For the CDS long-short strategy: buy protection on ABC Corp at $15M notional (EffSpreadDur=4.59, spreads WIDEN 15 bps) and sell protection on XYZ Corp at $15M notional (EffSpreadDur=4.62, spreads NARROW 20 bps). Total profit is:
Select an option first.
Correct answer: C — $241,875 (combined)
Explanation: C is correct. Profit from ABC widening (protection buyer profits from widening spreads): $15,000,000 x 0.0015 x 4.59 = $103,275. Profit from XYZ narrowing (protection seller profits from narrowing spreads): $15,000,000 x 0.0020 x 4.62 = $138,600. Total = $103,275 + $138,600 = $241,875. This matches the reading example exactly. Note: the P&L formula for CDS = notional x delta_spread (in decimal) x EffSpreadDur.
Question 243
For a DURATION-NEUTRAL CDS CURVE FLATTENER (expecting 10-year spread to fall relative to 5-year): 5-year EffSpreadDur = 4.78, 10-year EffSpreadDur = 9.18, with $5M notional in the 5-year contract, the NOTIONAL in the 10-year contract is closest to:
Select an option first.
Correct answer: B — $2,603,486
Explanation: B is correct. BPV of 5-year position = $5,000,000 x 4.780 x 0.0001 = $2,390. For duration neutrality, 10-year BPV must equal $2,390. So: notional_10yr x 9.18 x 0.0001 = $2,390, giving notional_10yr = $2,390 / 0.000918 = $2,603,486. The reading confirms this exact figure. Duration neutral means the profit/loss from changes in spread levels is zero; the trade profits only from the relative change in 10-year vs 5-year spreads.
Question 244
A manager expects a STABLE CREDIT SPREAD CURVE and wants to enhance returns using CDS. The manager would LEAST LIKELY:
Select an option first.
Correct answer: B — Buy protection in shorter-dated CDS contracts
Explanation: B is correct. The reading quiz confirms: 'Managers expecting a static credit spread curve should enhance the return of the portfolio through lowering the credit rating of the portfolio (buy HY bonds, sell HY protection) or extending the spread duration of the portfolio (buy longer-dated bonds, sell longer-dated CDS contracts).' Buying protection (B) is a defensive/bearish credit position that reduces spread income. In a static curve environment, the manager wants to EARN spread income, not pay it, making buying protection the least likely action.
Question 245
An active credit manager expects an ECONOMIC RECOVERY. Using CDS, the MOST APPROPRIATE positioning is:
Select an option first.
Correct answer: B — Sell short-dated CDS protection and buy long-dated CDS protection
Explanation: B is correct. The reading quiz confirms: 'An economic recovery is likely to see HY spreads fall by more than IG spreads and credit curves steepening. A manager should therefore sell protection on HY issues versus buying protection on IG issuers or increase exposure to HY securities in order to benefit from HY bonds outperforming IG bonds. To profit from the steepening curve, they should SELL SHORT-TERM PROTECTION and BUY LONGER-TERM PROTECTION.' During recovery, short-term credit risk reduces the most, causing short-term spreads to narrow; hence, sell short-dated protection.
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Question 246
An IG CDS trade: sell protection on $10M notional at 150 bps CDS spread, EffSpreadDur = 4.5. One year later, CDS spread = 120 bps, EffSpreadDur = 3.5. Total profit (coupon + price appreciation) is closest to:
Select an option first.
Correct answer: C — $255,000
Explanation: C is correct. The reading quiz calculates: IG standardized fixed coupon = 1%. Initial CDS price = 1 + [(0.01 - 0.015) x 4.5] = 0.9775. CDS price after 12 months = 1 + [(0.01 - 0.012) x 3.5] = 0.993. Since the manager SOLD protection (long risk), they profit from rising prices. Profit from price appreciation = (0.993 - 0.9775) x $10,000,000 = $155,000. Coupon income = 0.01 x $10,000,000 = $100,000. Total profit = $155,000 + $100,000 = $255,000.
Question 247
A key CONSIDERATION for cross-border credit investment in EMERGING MARKETS that is less relevant for developed market credit is:
Select an option first.
Correct answer: C — The sovereign ceiling whereby corporates are typically not rated higher than the sovereign
Explanation: C is correct. The reading states: 'Investors in emerging market corporate bonds also need to consider the level of control/influence the government may exert on the running of business and the sovereign ceiling set by the government, whereby corporations are usually not assigned higher-quality credit ratings than the sovereign credit rating of their domicile.' This sovereign ceiling constrains how creditworthy emerging market corporates can appear to rating agencies, even if the company itself is fundamentally sound.
Question 248
An EM-focused manager wishes to assess FISCAL STABILITY across two markets. The MOST relevant ratio to compare is:
Select an option first.
Correct answer: C — Budget deficit/GDP ratio
Explanation: C is correct. The reading quiz confirms: 'If the manager wishes to invest in the country with the greatest fiscal stability, they should increase exposure to Country A and reduce exposure to Country B due to the relative budget deficit/GDP ratios.' The budget deficit/GDP ratio measures how much the government needs to borrow annually relative to the size of its economy. Lower budget deficit/GDP = more fiscally stable. Foreign debt/GDP assesses external leverage; currency reserves/GDP assesses liquidity.
Question 249
An active manager expecting an ECONOMIC RECOVERY and a REBOUND IN RESIDENTIAL HOUSING PRICES would MOST LIKELY:
Select an option first.
Correct answer: C — Sell the AA-rated tranche of a residential MBS and buy the BB-rated tranche
Explanation: C is correct. The reading quiz confirms: 'In anticipation of an economic rebound, managers should lower the credit quality of investments since high-yield spreads will likely contract by more than IG spreads. The manager can incorporate their view on a housing market recovery by using MBS securities.' In a recovery, lower-rated (BB) tranches outperform as default rates fall and housing prices improve. MBS specifically captures the housing view. The manager sells the safer AA tranche and buys the BB tranche that benefits most from the housing recovery.
Question 250
For a portfolio of MBS securities, which change to ANALYTICAL INPUTS would INCREASE the modeled future value of the portfolio?
Select an option first.
Correct answer: C — A decrease in interest rate volatility
Explanation: C is correct. The reading quiz confirms: 'MBS securities contain a prepayment option held by the mortgage borrowers. This option, like a call option on a bond, will become more valuable as interest rate volatility increases. Since the prepayment option lies with the borrowers, the MBS securities have an embedded short position in the prepayment option. The MBS security will become more valuable if volatility assumptions fall and the embedded short prepayment option value falls.' Lower volatility reduces the value of the prepayment option (borne by the investor), increasing MBS value.
Question 251
COLLATERALIZED LOAN OBLIGATIONS (CLOs) are structured credit instruments backed by:
Select an option first.
Correct answer: C — Leveraged loans (loans to non-investment-grade companies)
Explanation: C is correct. The reading defines: 'Collateralized loan obligations (CLOs) with leveraged loans (i.e., loans to non-investment-grade companies) as collateral.' CLOs are a specific type of CDO using leveraged loans as the underlying collateral pool. The tranching of CLOs allows investors to choose different risk/return profiles from the same underlying loan pool. CDOs use general debt obligations; MBS uses mortgages; ABS uses consumer loans (auto, credit card). The senior tranches of CLOs typically receive investment-grade ratings even though the underlying leveraged loans are non-investment-grade.
Question 252
COVERED BONDS differ from other structured credit products (CDOs, CLOs, MBS) primarily because:
Select an option first.
Correct answer: B — Covered bond investors have RECOURSE to the issuing bank in addition to the covered pool, and non-performing loans must be substituted
Explanation: B is correct. The reading states: 'The investor here has recourse to the other asset of the bank should the bank fail to make payments on the covered bond (this is not the case for other types of structured products that are issued by an off-balance sheet special purpose vehicle (SPV) with no recourse to the original lender of the collateral loans). This, along with the fact that a lender would substitute nonperforming loans in the collateral, makes the credit risk of a covered bond LOWER than that of other structured products.'
Question 253
The KEY INPUTS to fixed-income analytical tools include:
Select an option first.
Correct answer: B — Portfolio positions, market data (prices/yields, FX, volatilities), credit and ESG ratings, and index data
Explanation: B is correct. The reading states: 'Inputs include portfolio position data, relevant market data (prices/yields, exchange rates, volatilities, etc.), credit and ESG ratings, and index data subscriptions for benchmarking purposes.' User-defined parameters (term structure models, risk models, scenario analysis, ESG filters, time horizon, and objectives) are a SEPARATE component distinct from inputs. Outputs include portfolio risk summaries, position selection tools, risk/scenario analysis, and trading tools.
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