Portfolio Management is a core topic in CFA Level 1, carrying significant weight in the exam. It tests your understanding of risk-return tradeoffs, diversification, CAPM, efficient frontier, and the application of modern portfolio theory (MPT). To help you excel, we’ve prepared a comprehensive set of 200+ MCQs with detailed answers and explanations. These questions are carefully designed to mimic real CFA exam style, ensuring you get both conceptual clarity and practice under exam-like conditions.
Whether you’re aiming to master risk metrics, portfolio diversification, or market efficiency concepts, this question bank will help you build confidence for exam day.
📘 CFA Level 1 Portfolio Management MCQs
Q1.
Which of the following best describes the primary goal of portfolio management?
A) Maximizing short-term profits
B) Minimizing risk regardless of return
C) Maximizing return for a given level of risk
D) Avoiding losses entirely
Answer: C
Explanation: Portfolio management seeks to maximize expected return while controlling risk. The risk-return tradeoff is the core principle, not just eliminating losses or maximizing short-term profit.
Q2.
The efficient frontier represents:
A) Portfolios with maximum risk for given return
B) Portfolios that minimize return for given risk
C) Portfolios that maximize return for given risk
D) Portfolios that eliminate all risk
Answer: C
Explanation: The efficient frontier includes all optimal portfolios that provide the highest expected return for a given level of risk.
Q3.
Systematic risk is also called:
A) Diversifiable risk
B) Market risk
C) Unsystematic risk
D) Firm-specific risk
Answer: B
Explanation: Systematic (market) risk affects the entire market and cannot be diversified away. Unsystematic risk (firm-specific) can be reduced via diversification.
Q4.
According to CAPM, the expected return of a security is determined by:
A) Its alpha
B) Its beta relative to the market
C) The risk-free rate only
D) Its dividend yield
Answer: B
Explanation: CAPM states E(Ri)=Rf+βi(E(Rm)−Rf)E(R_i) = R_f + \beta_i (E(R_m) – R_f)E(Ri)=Rf+βi(E(Rm)−Rf). The beta relative to the market drives expected return.
Q5.
Which measure evaluates portfolio performance by comparing excess return to portfolio volatility?
A) Treynor ratio
B) Sharpe ratio
C) Jensen’s alpha
D) Information ratio
Answer: B
Explanation: The Sharpe ratio measures risk-adjusted performance by comparing excess return per unit of total risk (standard deviation).
Q6.
Which of the following portfolios is considered undiversified?
A) A portfolio of 100 randomly selected U.S. stocks
B) A portfolio with equal exposure to global equities, bonds, and real estate
C) A portfolio consisting of only one company’s stock
D) A portfolio with 20 stocks across different industries
Answer: C
Explanation: Holding only one company’s stock leaves the investor fully exposed to unsystematic (firm-specific) risk.
Q7.
In Modern Portfolio Theory (MPT), correlation between assets plays a critical role because:
A) High correlation increases diversification benefits
B) Low correlation reduces portfolio risk
C) Diversification does not depend on correlation
D) Negative correlation increases portfolio risk
Answer: B
Explanation: Diversification benefits come from combining assets with low or negative correlations, which reduces overall portfolio volatility.
Q8.
Which of the following is NOT a valid assumption of CAPM?
A) Investors are risk-averse
B) All investors have homogeneous expectations
C) Investors can borrow and lend at the risk-free rate
D) Markets are inefficient
Answer: D
Explanation: CAPM assumes efficient markets, risk aversion, homogeneous expectations, and frictionless trading.
Q9.
Jensen’s alpha measures:
A) Excess return of a portfolio over the risk-free rate
B) Portfolio’s performance relative to CAPM expectations
C) Total portfolio return without risk adjustment
D) Portfolio’s return compared to benchmark standard deviation
Answer: B
Explanation: Jensen’s alpha evaluates whether a portfolio generates returns above what CAPM predicts, adjusting for systematic risk.
Q10.
If an investor moves from a risk-free asset into a risky portfolio along the Capital Market Line (CML), what happens?
A) Risk decreases, return decreases
B) Risk increases, expected return increases
C) Risk decreases, expected return increases
D) Risk remains constant
Answer: B
Explanation: Along the CML, increasing allocation to the risky portfolio raises both risk and expected return.
Q11.
The slope of the Capital Market Line (CML) represents:
A) Portfolio variance
B) Market return
C) Sharpe ratio of the market portfolio
D) Beta of the market
Answer: C
Explanation: The slope of the CML equals the Sharpe ratio of the market portfolio (excess return over risk-free rate per unit of risk).
Q12.
A portfolio with a beta of 1.2 and an expected market return of 8%, with risk-free rate of 2%, has an expected return according to CAPM of:
A) 8.4%
B) 9.2%
C) 10.4%
D) 12%
Answer: C
Explanation: CAPM formula: E(R)=Rf+β(Rm−Rf)E(R) = R_f + \beta (R_m – R_f)E(R)=Rf+β(Rm−Rf).
= 2% + 1.2(8% − 2%) = 2% + 7.2% = 9.2%.
Oops correction → correct choice is B (9.2%).
Q13.
The Treynor ratio differs from the Sharpe ratio because it uses:
A) Alpha instead of return
B) Standard deviation instead of beta
C) Beta instead of standard deviation
D) Total return without adjustment
Answer: C
Explanation: The Treynor ratio measures excess return per unit of systematic risk (beta), while Sharpe uses total risk (standard deviation).
Q14.
The Information ratio measures portfolio return relative to:
A) Risk-free rate
B) Market portfolio
C) Benchmark portfolio
D) Diversification level
Answer: C
Explanation: Information ratio compares excess return over a benchmark to the tracking error, showing active management skill.
Q15.
Which of the following statements about diversification is TRUE?
A) Diversification eliminates systematic risk
B) Diversification reduces unsystematic risk
C) Diversification increases correlation
D) Diversification guarantees higher returns
Answer: B
Explanation: Diversification reduces unsystematic (firm-specific) risk, but systematic risk remains.
Q16.
An investor with low risk tolerance is most likely to:
A) Allocate heavily to equities
B) Hold primarily risk-free assets
C) Borrow at the risk-free rate to invest more in the market
D) Invest only in derivatives
Answer: B
Explanation: Low risk tolerance means higher allocation to safe, low-volatility investments.
Q17.
Which type of fund is actively managed to beat the market?
A) Index fund
B) ETF
C) Mutual fund
D) Passive bond fund
Answer: C
Explanation: Mutual funds are often actively managed with the goal of outperforming benchmarks.
Q18.
A portfolio with negative alpha implies:
A) Outperformance relative to CAPM
B) Underperformance relative to CAPM
C) Equal performance to CAPM
D) Risk-free returns
Answer: B
Explanation: Negative alpha indicates that the portfolio earned less than what CAPM predicted for its level of risk.
Q19.
In behavioral finance, loss aversion suggests investors:
A) Prefer gains over avoiding losses
B) Avoid risk entirely
C) Fear losses more than they value equivalent gains
D) Overvalue diversification
Answer: C
Explanation: Loss aversion is the tendency to weigh losses more heavily than equivalent gains.
Q20.
Which of the following is a limitation of CAPM?
A) Assumes risk-free borrowing is possible
B) Ignores systematic risk
C) Assumes investors behave irrationally
D) Does not consider diversification
Answer: A
Explanation: CAPM assumes investors can borrow/lend at the risk-free rate, which is unrealistic in practice.
Q21.
The Security Market Line (SML) plots:
A) Expected return against standard deviation
B) Expected return against beta
C) Variance against correlation
D) Actual return against alpha
Answer: B
Explanation: SML shows the relationship between expected return and systematic risk (beta).
Q22.
If a stock lies above the SML, it is considered:
A) Overpriced
B) Underpriced
C) Fairly priced
D) Risk-free
Answer: B
Explanation: Securities above the SML offer higher return for risk → undervalued.
Q23.
Which of the following is most associated with unsystematic risk?
A) Inflation shocks
B) Monetary policy changes
C) Poor management decisions in a company
D) Global recessions
Answer: C
Explanation: Unsystematic risk is firm-specific, like management errors or strikes.
Q24.
The optimal portfolio for an investor is found at the point where:
A) Capital Market Line touches the efficient frontier
B) SML intersects the x-axis
C) Portfolio alpha is maximized
D) Correlation is zero
Answer: A
Explanation: The tangency point of the CML and efficient frontier gives the optimal risky portfolio.
Q25.
Tracking error measures:
A) Volatility of the market
B) Deviation of portfolio return from a benchmark
C) Expected return per unit of beta
D) Risk-free asset deviation
Answer: B
Explanation: Tracking error shows how closely a portfolio follows its benchmark.
Q26.
The Capital Allocation Line (CAL) differs from the CML because:
A) CAL can represent any portfolio, not just the market portfolio
B) CAL ignores diversification
C) CAL always has a zero slope
D) CAL excludes risk-free assets
Answer: A
Explanation: CAL represents combinations of risk-free asset and any risky portfolio. CML is specific to the market portfolio.
Q27.
Which type of risk is most relevant to long-term investors holding a diversified portfolio?
A) Systematic risk
B) Firm-specific risk
C) Business risk
D) Operational risk
Answer: A
Explanation: Only systematic risk remains in a well-diversified portfolio.
Q28.
The efficient frontier shifts upward if:
A) Correlation between assets increases
B) Risk-free rate decreases
C) New assets with higher return/risk profiles are added
D) Portfolio variance increases
Answer: C
Explanation: Adding higher return or lower correlation assets improves efficiency, shifting the frontier upward.
Q29.
The main difference between CML and SML is that:
A) CML uses beta, SML uses standard deviation
B) CML uses total risk, SML uses systematic risk
C) CML applies to individual assets, SML to portfolios
D) Both show same relationship
Answer: B
Explanation: CML relates return to total risk (σ), SML relates return to systematic risk (β).
Q30.
A portfolio manager with high Sharpe ratio but low Information ratio is likely:
A) Beating the benchmark consistently
B) Earning strong absolute returns but not relative to benchmark
C) Taking excess unsystematic risk
D) Tracking the index exactly
Answer: B
Explanation: High Sharpe → good risk-adjusted returns overall. Low Info ratio → not outperforming benchmark efficiently.
Q31.
Jensen’s alpha measures:
A) Excess return compared to CAPM expectations
B) Return per unit of standard deviation
C) Portfolio’s tracking error
D) Portfolio’s correlation with the market
Answer: A
Explanation: Jensen’s alpha indicates how much a portfolio outperformed (or underperformed) its CAPM-expected return.
Q32.
If the correlation between two assets is −1, the portfolio variance can be:
A) Zero
B) Maximum
C) Equal to the sum of variances
D) Undefined
Answer: A
Explanation: Perfect negative correlation allows for complete diversification, eliminating risk.
Q33.
Which investor type is most likely to prefer high-dividend stocks?
A) Tax-exempt investors
B) Investors in high tax brackets
C) Growth-oriented investors
D) Institutional investors
Answer: A
Explanation: Tax-exempt investors are not penalized by dividend taxation, making high-dividend stocks attractive.
Q34.
The Beta of a portfolio is calculated as:
A) Weighted average of asset betas
B) Correlation of assets with variance
C) Sum of standard deviations
D) Expected return of the portfolio
Answer: A
Explanation: Portfolio beta is the weighted average of the betas of its individual assets.
Q35.
An actively managed portfolio is MOST justified when:
A) Markets are highly efficient
B) Markets are inefficient and mispriced securities exist
C) Tracking error is zero
D) CAPM holds perfectly
Answer: B
Explanation: Active management adds value when markets are inefficient.
Q36.
The Separation theorem in portfolio theory states:
A) All investors hold the same optimal risky portfolio
B) Each investor creates a unique risky portfolio
C) Diversification eliminates systematic risk
D) Investors cannot hold risk-free assets
Answer: A
Explanation: Separation theorem → all investors choose the same risky portfolio; their final mix differs only by risk preference.
Q37.
The global minimum-variance portfolio is the:
A) Portfolio with the highest return
B) Portfolio with the lowest beta
C) Portfolio with the lowest variance for any set of risky assets
D) Risk-free portfolio
Answer: C
Explanation: GMVP is the point on the efficient frontier with the lowest risk.
Q38.
Which of the following is a bottom-up approach to portfolio management?
A) Sector rotation
B) Fundamental stock picking
C) Macro analysis of GDP trends
D) Global asset allocation
Answer: B
Explanation: Bottom-up analysis focuses on individual security selection, regardless of industry or economy.
Q39.
A portfolio manager with a high R² (coefficient of determination) relative to a benchmark implies:
A) Strong performance vs. CAPM
B) Returns mostly explained by the benchmark
C) Poor diversification
D) Market timing ability
Answer: B
Explanation: A high R² means portfolio returns are closely explained by the benchmark.
Q40.
Which type of efficient market hypothesis suggests that stock prices reflect ALL information (public + private)?
A) Weak-form
B) Semi-strong form
C) Strong-form
D) None
Answer: C
Explanation: Strong-form EMH states that even insider information is reflected in stock prices.
Q41.
A portfolio’s Sharpe ratio is 1.2, while the benchmark Sharpe ratio is 0.8. This indicates:
A) Portfolio underperformed
B) Portfolio outperformed on a risk-adjusted basis
C) Both had equal performance
D) Benchmark was more efficient
Answer: B
Explanation: A higher Sharpe ratio means better risk-adjusted performance.
Q42.
If an investor wants inflation protection, the best allocation is:
A) Government bonds
B) Treasury Inflation-Protected Securities (TIPS)
C) Corporate bonds
D) Preferred stock
Answer: B
Explanation: TIPS adjust principal and interest payments with inflation.
Q43.
The Black-Litterman model is used for:
A) Forecasting macroeconomic growth
B) Improving portfolio optimization by incorporating investor views
C) Estimating variance of assets
D) Measuring CAPM efficiency
Answer: B
Explanation: Black-Litterman improves mean-variance optimization by blending market equilibrium with investor opinions.
Q44.
If a stock’s expected return is below the SML, it is considered:
A) Overpriced
B) Underpriced
C) Fairly priced
D) Risk-free
Answer: A
Explanation: Securities below the SML offer lower return for risk → overpriced.
Q45.
A core-satellite portfolio strategy involves:
A) Using only index funds
B) Combining a passive core with active satellite investments
C) Investing only in emerging markets
D) Avoiding diversification
Answer: B
Explanation: Core provides stable returns (index funds), satellites target alpha (active strategies).
Q46.
The endowment model of investing is characterized by:
A) High liquidity
B) Large allocations to alternative assets
C) Minimal diversification
D) Heavy use of money market instruments
Answer: B
Explanation: Endowment funds (e.g., Yale model) emphasize alternatives like hedge funds, PE, real assets.
Q47.
Behavioral finance bias where investors hold losing stocks too long is called:
A) Herding
B) Disposition effect
C) Overconfidence
D) Anchoring
Answer: B
Explanation: Disposition effect → tendency to sell winners too soon, hold losers too long.
Q48.
If the correlation between two assets is 0, diversification:
A) Provides no benefit
B) Provides some benefit
C) Eliminates all risk
D) Doubles the portfolio return
Answer: B
Explanation: Zero correlation still reduces portfolio variance (unless perfectly correlated).
Q49.
The Treynor-Black model focuses on:
A) Optimal mix of active and passive portfolios
B) Risk-free borrowing
C) Pure diversification
D) Estimating tracking error
Answer: A
Explanation: Treynor-Black combines mispriced securities with passive index holdings.
Q50.
Which statement about active vs. passive investing is most accurate?
A) Active investing always outperforms
B) Passive investing is more cost-efficient
C) Passive investing eliminates systematic risk
D) Active investing eliminates transaction costs
Answer: B
Explanation: Passive investing (index funds/ETFs) is generally cheaper and more tax-efficient, though not guaranteed to outperform.
Q51.
The Capital Market Line (CML) differs from the Security Market Line (SML) because:
A) CML measures total risk, SML measures systematic risk
B) CML applies to all assets, SML only to portfolios
C) SML is linear, CML is non-linear
D) CML includes only non-risky assets
Answer: A
Explanation: CML plots risk (standard deviation) vs. return, while SML plots beta (systematic risk) vs. return.
Q52.
Which measure is least appropriate for evaluating a well-diversified portfolio?
A) Jensen’s alpha
B) Treynor ratio
C) Sharpe ratio
D) Beta
Answer: C
Explanation: For diversified portfolios, Treynor and Jensen are more relevant since unsystematic risk is eliminated.
Q53.
The Information Ratio (IR) is defined as:
A) Excess return / tracking error
B) Portfolio return / market return
C) Alpha / beta
D) Standard deviation / mean return
Answer: A
Explanation: IR = active return divided by tracking error → evaluates active manager performance.
Q54.
A pension fund with long-term obligations is MOST likely to invest in:
A) Money market instruments
B) Long-duration bonds and equities
C) High-yield short-term bonds
D) Gold
Answer: B
Explanation: Pension funds prefer long-duration assets to match long-term liabilities.
Q55.
A portfolio has an expected return of 12% and standard deviation of 10%. Risk-free rate is 4%. Its Sharpe ratio is:
A) 0.4
B) 0.8
C) 1.2
D) 2.0
Answer: B
Explanation: Sharpe = (12%−4%)/10% = 0.8.
Q56.
Which portfolio is dominant?
A) Higher return, higher risk than another
B) Same return, lower risk
C) Lower return, higher risk
D) Equal risk, lower return
Answer: B
Explanation: A dominant portfolio offers the same return with lower risk, or higher return with the same risk.
Q57.
The Markowitz efficient frontier shows:
A) Portfolios with maximum returns for a given risk
B) Portfolios with zero correlation
C) Only risk-free assets
D) CAPM alphas
Answer: A
Explanation: The frontier represents optimal risk-return combinations.
Q58.
The equity risk premium is:
A) Market return − risk-free rate
B) Risk-free rate + inflation
C) Excess return of bonds over equities
D) Alpha of a portfolio
Answer: A
Explanation: ERP = expected market return minus risk-free rate.
Q59.
The Treynor ratio uses:
A) Total risk
B) Beta (systematic risk)
C) Variance
D) Standard deviation
Answer: B
Explanation: Treynor = (Portfolio return − Risk-free rate) / Beta.
Q60.
The primary objective of a sovereign wealth fund is:
A) Short-term liquidity
B) Long-term growth and stabilization
C) High leverage returns
D) Day trading
Answer: B
Explanation: Sovereign wealth funds invest excess reserves for long-term economic stabilization and growth.
Q61.
Which of the following is NOT an assumption of CAPM?
A) Investors are risk-averse
B) Markets are frictionless
C) Investors have homogeneous expectations
D) Investors can influence market prices
Answer: D
Explanation: CAPM assumes price-taking investors; none can influence prices.
Q62.
The time-weighted rate of return (TWRR) is preferred over the money-weighted rate when:
A) Investor controls cash flows
B) Investor has no control over cash flows
C) Cash flows are irregular
D) Portfolio contains only fixed income
Answer: B
Explanation: TWRR eliminates the impact of external cash flows and measures portfolio manager performance.
Q63.
If an investor wants to hedge foreign equity exposure, the best tool is:
A) Interest rate swaps
B) Currency forwards
C) Equity swaps
D) Credit default swaps
Answer: B
Explanation: Currency forwards hedge FX risk in foreign investments.
Q64.
The efficient frontier shifts upward when:
A) Risk-free rate increases
B) New asset with low correlation is added
C) Systematic risk increases
D) Inflation rises
Answer: B
Explanation: Adding an uncorrelated asset improves diversification, pushing the frontier upward.
Q65.
The Security Characteristic Line (SCL) plots:
A) Portfolio return vs. beta
B) Excess return vs. market return
C) Asset return vs. market return
D) Sharpe ratio vs. alpha
Answer: C
Explanation: SCL is a regression line of asset returns against market returns.
Q66.
If two portfolios have the same Sharpe ratio, the investor should select:
A) The one with higher standard deviation
B) The one with higher expected return
C) Either one, as risk-adjusted performance is equal
D) The one with higher beta
Answer: C
Explanation: Same Sharpe → risk-adjusted return is equal.
Q67.
A defined contribution pension plan risk is borne by:
A) Employer
B) Employee
C) Government
D) Central bank
Answer: B
Explanation: In defined contribution, the employee bears investment risk.
Q68.
The Capital Allocation Line (CAL) combines:
A) Risk-free asset and market portfolio
B) Only risky portfolios
C) Only government securities
D) Inflation-adjusted assets
Answer: A
Explanation: CAL shows combinations of risk-free and risky assets.
Q69.
The optimal portfolio for an investor is located where:
A) Efficient frontier touches CAL
B) Indifference curve is tangent to CAL
C) SML intersects with beta
D) Sharpe ratio is zero
Answer: B
Explanation: Optimal portfolio is at CAL–indifference curve tangency.
Q70.
The equity style box categorizes funds by:
A) Market cap and investment style (value/growth)
B) Beta and alpha
C) Industry and sector
D) Country allocation
Answer: A
Explanation: Morningstar’s style box classifies equity funds into size × style.
Q71.
The Jensen’s alpha of a portfolio measures:
A) Diversification level
B) Excess return relative to CAPM
C) Standard deviation
D) Correlation with market
Answer: B
Explanation: Jensen’s alpha = actual return − expected CAPM return.
Q72.
Which portfolio measure is MOST appropriate if the portfolio is not diversified?
A) Treynor ratio
B) Sharpe ratio
C) Information ratio
D) Jensen’s alpha
Answer: B
Explanation: Sharpe uses total risk (σ), suitable for non-diversified portfolios.
Q73.
The Black-Litterman model is primarily used for:
A) Forecasting GDP
B) Asset allocation incorporating investor views
C) Hedging FX risk
D) Estimating risk-free rate
Answer: B
Explanation: Black-Litterman blends market equilibrium returns with subjective investor views.
Q74.
If a portfolio has negative alpha, it means:
A) It outperformed the market
B) It underperformed compared to CAPM expectations
C) It is risk-free
D) It has a beta of zero
Answer: B
Explanation: Negative alpha = underperformance after adjusting for risk.
Q75.
The tracking error measures:
A) Diversification
B) Standard deviation of active return
C) Market beta
D) Risk-free deviation
Answer: B
Explanation: Tracking error = volatility of active return vs. benchmark.
Q76.
A hedge fund strategy that seeks mispricing between similar securities is:
A) Global macro
B) Market neutral
C) Arbitrage
D) Event-driven
Answer: C
Explanation: Arbitrage strategies profit from mispricing of related securities.
Q77.
The Beta of a risk-free asset is:
A) 0
B) 1
C) −1
D) Undefined
Answer: A
Explanation: Risk-free asset has no correlation with the market → beta = 0.
Q78.
The Efficient Market Hypothesis (EMH) in semi-strong form implies:
A) Prices reflect only past data
B) Prices reflect past and all public information
C) Prices reflect all public and private info
D) Prices are unpredictable
Answer: B
Explanation: Semi-strong = past + public information fully reflected.
Q79.
A portfolio with a Sharpe ratio of 0 indicates:
A) No risk
B) Risk-free return equals portfolio return
C) High alpha
D) Poor diversification
Answer: B
Explanation: Sharpe = (Rp−Rf)/σ. If 0 → Rp = Rf.
Q80.
The risk-adjusted performance measure most relevant to institutional investors is:
A) Sharpe
B) Treynor
C) Jensen’s alpha
D) Information ratio
Answer: D
Explanation: Institutions track performance relative to a benchmark → IR is key.
Q81.
If the correlation between two assets is −1, diversification:
A) Eliminates all risk
B) Increases risk
C) Has no effect
D) Creates arbitrage
Answer: A
Explanation: Perfect negative correlation allows full risk elimination.
Q82.
The Security Market Line (SML) intercept is:
A) Beta = 1
B) Market return
C) Risk-free rate
D) Zero
Answer: C
Explanation: At beta = 0, return = risk-free rate.
Q83.
In behavioral finance, loss aversion implies:
A) Investors prefer gains to losses equally
B) Losses hurt more than equivalent gains please
C) Investors are always risk-neutral
D) Losses have no effect
Answer: B
Explanation: Loss aversion = losses are psychologically felt stronger.
Q84.
The alpha of the market portfolio in CAPM is:
A) Positive
B) Zero
C) Negative
D) Equal to risk-free rate
Answer: B
Explanation: Market portfolio lies on SML → alpha = 0.
Q85.
Which portfolio has the highest diversification benefit?
A) Assets with correlation +1
B) Assets with correlation −0.5
C) Assets with correlation 0.9
D) Assets with correlation 0.7
Answer: B
Explanation: Lower (negative) correlation → higher diversification.
Q86.
The global minimum variance portfolio is:
A) Portfolio with lowest beta
B) Portfolio with lowest possible variance
C) Portfolio with maximum Sharpe ratio
D) Portfolio with highest alpha
Answer: B
Explanation: GMV portfolio minimizes variance across all possible combinations.
Q87.
Active return of a portfolio is:
A) Portfolio return − Benchmark return
B) Portfolio return − Risk-free rate
C) Alpha
D) Market return − Portfolio return
Answer: A
Explanation: Active return measures outperformance relative to benchmark.
Q88.
If a mutual fund has a Sharpe ratio lower than the market, it means:
A) Outperformed market risk-adjusted
B) Underperformed risk-adjusted
C) Equal performance
D) No risk exposure
Answer: B
Explanation: Lower Sharpe = worse risk-adjusted return vs. market.
Q89.
The core-satellite approach to portfolio construction involves:
A) Investing only in passive funds
B) Using passive core + active satellites
C) Using only hedge funds
D) Only government bonds
Answer: B
Explanation: Core = passive index, Satellites = active strategies.
Q90.
The upside capture ratio > 100% means:
A) Portfolio underperforms in bull markets
B) Portfolio outperforms in bull markets
C) Portfolio neutral to market
D) Portfolio only performs in bear markets
Answer: B
Explanation: Ratio >100% = outperformance in rising markets.
Q91.
The downside deviation is used in:
A) Sharpe ratio
B) Sortino ratio
C) Jensen’s alpha
D) Treynor ratio
Answer: B
Explanation: Sortino ratio uses downside risk instead of total volatility.
Q92.
A mutual fund manager’s skill is best measured by:
A) Beta
B) Tracking error
C) Information ratio
D) Sharpe ratio
Answer: C
Explanation: IR measures active return relative to benchmark risk.
Q93.
The IC (Information Coefficient) is a measure of:
A) Correlation between forecasted and actual returns
B) Beta sensitivity
C) Market efficiency
D) Portfolio alpha
Answer: A
Explanation: IC measures forecasting skill (accuracy).
Q94.
Factor investing relies on:
A) Stock picking only
B) Exposure to risk factors like value, size, momentum
C) Market timing
D) Arbitrage
Answer: B
Explanation: Factor investing systematically targets specific return drivers.
Q95.
A portfolio has an alpha of +2% and beta of 1.2. This means:
A) Underperformed CAPM
B) Outperformed CAPM
C) No systematic risk
D) Purely passive
Answer: B
Explanation: Positive alpha = excess return beyond CAPM prediction.
Q96.
The Treynor-Black model combines:
A) Efficient frontier and risk-free rate
B) Active portfolio with passive market portfolio
C) Derivatives with equities
D) Arbitrage and CAPM
Answer: B
Explanation: Treynor-Black blends active portfolio with market index.
Q97.
The portfolio turnover ratio measures:
A) Risk-adjusted performance
B) Frequency of trading
C) Correlation with benchmark
D) Alpha stability
Answer: B
Explanation: High turnover → frequent buying/selling.
Q98.
The characteristics line slope represents:
A) Alpha
B) Beta
C) Sharpe ratio
D) IR
Answer: B
Explanation: Regression slope = beta.
Q99.
In asset-liability management (ALM), immunization is used to:
A) Maximize return
B) Match asset and liability durations
C) Minimize Sharpe ratio
D) Hedge FX risk
Answer: B
Explanation: Immunization balances asset and liability interest rate sensitivity.
Q100.
A portfolio with beta = 1 and alpha = 0:
A) Outperforms market
B) Underperforms market
C) Moves exactly with the market
D) Is risk-free
Answer: C
Explanation: Beta = 1 → same volatility as market, alpha = 0 → no excess return.
Q101.
The Capital Allocation Line (CAL) shows:
A) The risk-return tradeoff between risky and risk-free assets
B) Efficient frontier of risky assets only
C) The Security Market Line (SML)
D) Market portfolio only
Answer: A
Explanation: CAL combines risk-free and risky portfolios.
Q102.
The Capital Market Line (CML) is valid only for:
A) Efficient portfolios
B) Any portfolio
C) Risk-free assets only
D) Arbitrage portfolios
Answer: A
Explanation: CML applies to portfolios on the efficient frontier.
Q103.
A pension fund with long-term liabilities should focus mainly on:
A) Short-term money market instruments
B) Duration-matched bonds
C) Hedge funds only
D) Commodity futures
Answer: B
Explanation: Matching duration ensures stability of long-term obligations.
Q104.
The Markowitz portfolio theory assumes:
A) Returns are normally distributed
B) Investors are risk-seeking
C) Prices are always fair
D) Assets have zero correlation
Answer: A
Explanation: Key assumption = returns are normally distributed, variance measures risk.
Q105.
Which ratio uses semi-variance instead of variance?
A) Treynor
B) Sharpe
C) Sortino
D) Jensen’s alpha
Answer: C
Explanation: Sortino focuses on downside deviation only.
Q106.
Dollar-weighted return is equivalent to:
A) Time-weighted return
B) Internal Rate of Return (IRR)
C) Arithmetic mean
D) Jensen’s alpha
Answer: B
Explanation: Dollar-weighted return = IRR of cash flows.
Q107.
The optimal portfolio for an investor is at the point where:
A) CAL is tangent to efficient frontier
B) CML meets beta = 1
C) Alpha is maximum
D) Market return equals risk-free rate
Answer: A
Explanation: Tangency point maximizes Sharpe ratio.
Q108.
The Information Ratio (IR) is calculated as:
A) Active return ÷ Active risk
B) Alpha ÷ Beta
C) Return ÷ Volatility
D) Market return ÷ Risk-free return
Answer: A
Explanation: IR measures consistency of active return.
Q109.
Systematic risk can be reduced by:
A) Diversification
B) Hedging
C) Increasing beta
D) Adding more stocks
Answer: B
Explanation: Only hedging removes systematic (market) risk; diversification reduces unsystematic risk.
Q110.
The Treynor ratio uses which measure of risk?
A) Standard deviation
B) Beta
C) Variance
D) Tracking error
Answer: B
Explanation: Treynor ratio = (Rp−Rf)/β.
Q111.
Excess kurtosis in portfolio returns indicates:
A) Normal distribution
B) Fewer extreme outcomes
C) Higher probability of extreme outcomes
D) Mean returns are zero
Answer: C
Explanation: Excess kurtosis → fat tails, more extreme risk events.
Q112.
The efficient frontier is:
A) Set of portfolios offering max return for a given risk
B) All possible portfolio combinations
C) The market portfolio only
D) The risk-free asset
Answer: A
Explanation: Efficient frontier = optimal risk-return tradeoff.
Q113.
The security characteristic line plots:
A) Portfolio returns vs. risk-free rate
B) Asset excess return vs. market excess return
C) Alpha vs. Beta
D) Risk vs. Sharpe ratio
Answer: B
Explanation: Regression of asset returns on market → slope = beta.
Q114.
The excess return over the risk-free rate is called:
A) Sharpe ratio
B) Risk premium
C) Alpha
D) Beta
Answer: B
Explanation: Risk premium = return above risk-free.
Q115.
The arbitrage pricing theory (APT) allows:
A) Multiple factors driving returns
B) Only one risk factor
C) No arbitrage opportunities
D) Random returns
Answer: A
Explanation: APT uses multi-factor model unlike CAPM’s single beta.
Q116.
If two portfolios have the same return but different volatility, which has the higher Sharpe ratio?
A) Portfolio with higher volatility
B) Portfolio with lower volatility
C) Both equal
D) Depends on alpha
Answer: B
Explanation: Sharpe penalizes volatility → lower volatility gives higher Sharpe.
Q117.
Liquidity risk in portfolio management arises when:
A) Assets can be sold quickly
B) Assets cannot be sold without loss
C) Market beta = 1
D) Correlation is negative
Answer: B
Explanation: Liquidity risk = inability to sell quickly without price impact.
Q118.
Style drift occurs when:
A) Fund manager deviates from stated investment style
B) Market changes beta
C) Portfolio changes alpha
D) Investors shift to alternatives
Answer: A
Explanation: Style drift → inconsistency with fund mandate.
Q119.
The herding behavior in behavioral finance leads to:
A) Market efficiency
B) Momentum effects
C) Reduced volatility
D) Perfect diversification
Answer: B
Explanation: Herding = investors follow crowd → momentum trends.
Q120.
The expected shortfall (CVaR) is superior to VaR because:
A) It assumes normal distribution
B) It accounts for tail losses beyond VaR
C) It ignores extreme outcomes
D) It equals variance
Answer: B
Explanation: CVaR = expected loss beyond VaR cutoff.
Q121.
A normal distribution has skewness of:
A) 0
B) 1
C) −1
D) 2
Answer: A
Explanation: Symmetrical distribution → skewness = 0.
Q122.
The fundamental law of active management states:
A) IR = IC × √Breadth
B) IR = Alpha × Beta
C) Sharpe ratio = Beta × IC
D) Alpha = Risk premium
Answer: A
Explanation: Law: IR improves with better skill (IC) & more opportunities (breadth).
Q123.
A portfolio’s beta of 1.5 indicates:
A) Moves less than market
B) Moves same as market
C) More volatile than market
D) No correlation
Answer: C
Explanation: Beta >1 = more volatile than market.
Q124.
The optimal risky portfolio is chosen based on:
A) Highest alpha
B) Highest Sharpe ratio
C) Lowest beta
D) Lowest variance
Answer: B
Explanation: Tangency portfolio maximizes Sharpe ratio.
Q125.
The ex-ante Sharpe ratio is based on:
A) Historical returns
B) Expected returns
C) Market beta
D) Actual variance
Answer: B
Explanation: Ex-ante uses forward-looking expected returns.
Q126.
The equity risk premium is best defined as:
A) Expected equity return − Risk-free rate
B) Bond return − Equity return
C) Market return ÷ Beta
D) Alpha of equity portfolio
Answer: A
Explanation: ERP compensates for holding risky equities over risk-free.
Q127.
Rebalancing a portfolio ensures:
A) Portfolio matches original risk profile
B) Higher returns
C) No volatility
D) Alpha increases
Answer: A
Explanation: Rebalancing restores strategic asset allocation.
Q128.
The calendar rebalancing method adjusts portfolio:
A) Continuously
B) At fixed intervals
C) Only during crashes
D) When alpha is zero
Answer: B
Explanation: Calendar rebalancing = periodic adjustments (monthly, quarterly).
Q129.
The constant mix strategy involves:
A) Keeping asset weights fixed regardless of price
B) Buying more equities in bull market
C) Shifting fully to risk-free assets
D) Reducing diversification
Answer: A
Explanation: Constant mix = maintain target percentages.
Q130.
CPPI (Constant Proportion Portfolio Insurance) protects against:
A) Downside risk
B) Upside risk
C) Arbitrage losses
D) Market efficiency
Answer: A
Explanation: CPPI ensures a floor value is protected while capturing upside.
Q131.
A core-satellite portfolio typically has:
A) All passive holdings
B) Passive core + active satellites
C) Active core only
D) Bonds only
Answer: B
Explanation: Core = passive index, satellites = active alpha strategies.
Q132.
Behavioral portfolio theory suggests investors:
A) Always maximize Sharpe
B) Create layered portfolios for goals
C) Are purely rational
D) Ignore risk aversion
Answer: B
Explanation: Investors build goal-based layers (safety + aspiration).
Q133.
Overconfidence bias leads investors to:
A) Trade less
B) Trade excessively
C) Avoid risk
D) Follow passive strategies
Answer: B
Explanation: Overconfidence → excessive trading, often reducing returns.
Q134.
The Disposition Effect refers to:
A) Selling losers too early
B) Holding winners too long
C) Selling winners too early & holding losers too long
D) Ignoring tax efficiency
Answer: C
Explanation: Investors sell winners quickly, hold losers longer.
Q135.
Anchoring bias occurs when investors:
A) Over-diversify
B) Rely too heavily on initial reference points
C) Trade less
D) Avoid benchmarks
Answer: B
Explanation: Anchoring = sticking to initial values even if irrelevant.
Q136.
A market-neutral strategy attempts to:
A) Hedge systematic risk
B) Maximize volatility
C) Increase correlation
D) Eliminate alpha
Answer: A
Explanation: Market-neutral strategies hedge beta exposure.
Q137.
The Sharpe ratio is most useful for:
A) Diversified portfolios
B) Non-diversified portfolios
C) Risk-free assets
D) Individual stocks
Answer: A
Explanation: Sharpe applies when portfolio is diversified across assets.
Q138.
Active risk is the same as:
A) Tracking error
B) Standard deviation
C) Alpha
D) Beta
Answer: A
Explanation: Active risk = tracking error relative to benchmark.
Q139.
Bayesian updating in portfolio theory is used in:
A) Black-Litterman model
B) CAPM
C) Arbitrage pricing
D) Momentum trading
Answer: A
Explanation: Black-Litterman applies Bayesian statistics to adjust expected returns.
Q140.
The Sharpe ratio of the market portfolio is:
A) Zero
B) Maximum
C) Negative
D) Undefined
Answer: B
Explanation: Market portfolio lies on CML → highest Sharpe ratio.
Q141.
Performance attribution breaks returns into:
A) Asset allocation, security selection, interaction
B) Alpha, beta, gamma
C) Risk, return, variance
D) Tracking error, Sharpe, IR
Answer: A
Explanation: Attribution identifies sources of return.
Q142.
Jensen’s alpha is positive when:
A) Portfolio underperforms CAPM
B) Portfolio outperforms CAPM
C) Portfolio equals CAPM return
D) Market return is negative
Answer: B
Explanation: Positive alpha = excess return over CAPM prediction.
Q143.
Tactical asset allocation differs from strategic allocation because:
A) It is long-term focused
B) It changes weights to exploit short-term opportunities
C) It ignores diversification
D) It matches liabilities
Answer: B
Explanation: Tactical = short-term shifts, strategic = long-term targets.
Q144.
The beta of the risk-free asset is:
A) 1
B) 0
C) −1
D) Undefined
Answer: B
Explanation: Risk-free asset has zero systematic risk.
Q145.
The Hedge Fund replication strategy involves:
A) Cloning hedge fund strategies via liquid securities
B) Direct hedge fund investing
C) Using illiquid assets
D) Reducing diversification
Answer: A
Explanation: Replication = mimic hedge fund returns using indices/factors.
Q146.
Tracking error volatility is minimized when:
A) Portfolio = Benchmark
B) Portfolio is leveraged
C) Portfolio alpha is negative
D) Beta = 1.5
Answer: A
Explanation: Identical holdings to benchmark = zero tracking error.
Q147.
Factor models decompose returns into:
A) Alpha + beta exposures
B) Market + risk-free return
C) Systematic + unsystematic return
D) IR + Sharpe
Answer: A
Explanation: Factor models explain return via common risk factors & alpha.
Q148.
The value-at-risk (VaR) at 95% confidence means:
A) Worst-case loss 95% of time
B) Maximum expected loss 5% of time
C) Return will equal zero
D) Market is efficient
Answer: B
Explanation: VaR = loss threshold not exceeded with 95% probability.
Q149.
Resampling the efficient frontier is used to:
A) Adjust for estimation error in inputs
B) Increase alpha
C) Reduce Sharpe ratio
D) Increase beta
Answer: A
Explanation: Resampling smooths frontier under uncertain estimates.
Q150.
Risk budgeting in portfolio construction involves:
A) Allocating capital equally
B) Allocating risk across asset classes
C) Eliminating volatility
D) Maximizing tracking error
Answer: B
Explanation: Risk budgeting distributes risk (not capital) among assets.
Q151.
The security market line (SML) represents:
A) Portfolio returns vs. risk-free rate
B) Expected return vs. beta
C) Efficient frontier of risky assets
D) Capital allocation line
Answer: B
Explanation: SML plots expected return as a function of beta under CAPM.
Q152.
The alpha of a portfolio is:
A) Return above CAPM prediction
B) Return below CAPM prediction
C) Equal to beta × market return
D) Always zero
Answer:
Explanation: Alpha = abnormal excess return beyond systematic risk.
Q153.
If an asset lies above the SML, it is:
A) Overvalued
B) Undervalued
C) Fairly valued
D) Risk-free
Answer: B
Explanation: Above SML = higher return than required → undervalued.
Q154.
Which of the following is a risk-adjusted performance measure?
A) Sharpe ratio
B) Alpha
C) Beta
D) Skewness
Answer: A
Explanation: Sharpe adjusts returns for risk.
Q155.
The Separation Theorem in portfolio theory states:
A) Investment decision = financing decision
B) Optimal portfolio choice is independent of risk preferences
C) Investors separate alpha and beta
D) Hedge funds separate risk from return
Answer: B
Explanation: Separation theorem → all investors hold the same tangency portfolio, then adjust with risk-free asset.
Q156.
Global minimum variance portfolio is:
A) Portfolio with lowest variance among risky assets
B) Market portfolio
C) Risk-free asset
D) Unsystematic risk only
Answer: A
Explanation: It’s the least risky point on efficient frontier.
Q157.
The optimal complete portfolio is chosen based on:
A) Risk-free rate only
B) Investor’s utility function
C) Tangency portfolio only
D) Market beta
Answer: B
Explanation: Utility function determines tradeoff between risk and return.
Q158.
Treynor-Black model combines:
A) Active alpha portfolio + passive market portfolio
B) Risk-free + risky portfolio
C) Market portfolio + risk-free asset
D) Efficient frontier + SML
Answer: A
Explanation: Treynor-Black optimally blends alpha with passive market.
Q159.
The Sharpe ratio is appropriate when:
A) Portfolio is fully diversified
B) Portfolio is not diversified
C) Beta is zero
D) Alpha = 0
Answer: A
Explanation: Uses total risk → works best for diversified portfolios.
Q160.
The Treynor ratio is appropriate when:
A) Portfolio is well-diversified
B) Portfolio is not diversified
C) Market is inefficient
D) Risk-free rate is negative
Answer: A
Explanation: Uses beta (systematic risk), assumes diversification removes unsystematic risk.
Q161.
The Information ratio (IR) is most useful for:
A) Passive managers
B) Active managers relative to benchmark
C) Market index
D) Risk-free asset
Answer: B
Explanation: IR measures active return vs. active risk.
Q162.
A high tracking error implies:
A) Portfolio closely follows benchmark
B) Portfolio deviates significantly from benchmark
C) Portfolio is risk-free
D) Beta = 1
Answer: B
Explanation: Tracking error = volatility of active return.
Q163.
The Black-Litterman model improves on Markowitz optimization by:
A) Using investor views with market equilibrium returns
B) Eliminating risk
C) Assuming zero correlation
D) Maximizing alpha
Answer: A
Explanation: Black-Litterman integrates subjective views + equilibrium returns.
Q164.
A portfolio with beta = 0.8 will:
A) Move more than market
B) Move less than market
C) Move opposite to market
D) Have no risk
Answer: B
Explanation: Beta <1 → less sensitive than market.
Q165.
Risk parity portfolios allocate:
A) Equal capital to each asset
B) Equal risk contribution from each asset
C) Equal Sharpe ratio
D) Equal alpha
Answer: B
Explanation: Each asset contributes equally to total portfolio risk.
Q166.
Monte Carlo simulation in portfolio management is used to:
A) Calculate mean returns only
B) Model probability distributions of outcomes
C) Eliminate variance
D) Reduce diversification
Answer: B
Explanation: Monte Carlo simulates thousands of random return paths.
Q167.
Scenario analysis is best described as:
A) Stress-testing portfolio under different assumptions
B) Eliminating downside risk
C) Predicting exact return
D) Arbitrage opportunity
Answer: A
Explanation: Scenario analysis = testing returns under different market conditions.
Q168.
Immunization strategy in fixed income portfolio management means:
A) Eliminating reinvestment risk
B) Matching duration of assets and liabilities
C) Avoiding credit risk
D) Removing alpha
Answer: B
Explanation: Immunization locks in return by matching liability duration.
Q169.
The capital market line (CML) differs from SML because:
A) CML uses standard deviation as risk measure
B) CML uses beta as risk measure
C) SML shows efficient frontier
D) CML applies to all assets
Answer: A
Explanation: CML plots expected return vs. total risk (σ).
Q170.
The security market line (SML) differs from CML because:
A) SML uses beta as risk measure
B) SML uses standard deviation
C) SML is for efficient portfolios only
D) SML = CAL
Answer: A
Explanation: SML: return vs. beta → applies to all assets.
Q171.
The M-square measure is based on:
A) Sharpe ratio adjusted to market risk
B) Treynor ratio
C) Jensen’s alpha
D) Tracking error
Answer: A
Explanation: M² translates Sharpe ratio into percentage return form.
Q172.
Performance appraisal is the process of:
A) Decomposing performance into allocation, selection, timing
B) Calculating alpha only
C) Maximizing beta
D) Reducing volatility
Answer: A
Explanation: Appraisal helps identify drivers of performance.
Q173.
Style analysis is often performed using:
A) Regressing portfolio returns on style indices
B) CAPM only
C) Monte Carlo simulation
D) Sharpe ratio
Answer: A
Explanation: Style analysis identifies exposure to different investment styles.
Q174.
Hedge ratio in portfolio insurance is used to:
A) Measure risk-free rate
B) Determine the proportion of assets to hedge
C) Measure Sharpe ratio
D) Calculate tracking error
Answer: B
Explanation: Hedge ratio defines how much of the portfolio is hedged.
Q175.
Portable alpha strategy involves:
A) Earning alpha from one asset while getting beta exposure from another
B) Using only passive strategies
C) Eliminating market exposure
D) Holding risk-free assets only
Answer: A
Explanation: Portable alpha = separate alpha source + desired beta exposure.
Q176.
The efficient frontier represents:
A) Portfolios with highest return for given risk
B) Portfolios with lowest return for given risk
C) Market portfolio only
D) All possible portfolios
Answer: A
Explanation: Efficient frontier = best risk-return combinations.
Q177.
Adding a risk-free asset to the efficient frontier creates:
A) Capital allocation line (CAL)
B) Security market line
C) Global minimum variance portfolio
D) Arbitrage opportunity
Answer: A
Explanation: CAL is tangent from risk-free rate to efficient frontier.
Q178.
The tangency portfolio is:
A) The optimal risky portfolio
B) The global minimum variance portfolio
C) The market index
D) The benchmark portfolio
Answer: A
Explanation: Tangency portfolio maximizes Sharpe ratio.
Q179.
If the correlation between assets = –1, then:
A) No diversification benefit
B) Perfect diversification, zero risk possible
C) Returns are independent
D) Portfolio beta = 1
Answer: B
Explanation: Perfect negative correlation eliminates risk.
Q180.
Which portfolio measure uses downside deviation instead of standard deviation?
A) Sortino ratio
B) Sharpe ratio
C) Treynor ratio
D) Information ratio
Answer: A
Explanation: Sortino focuses on downside risk.
Q181.
The Jensen’s alpha is:
A) Excess return over CAPM expected return
B) Return explained by beta
C) Measure of total risk
D) Measure of tracking error
Answer: A
Explanation: Jensen’s alpha shows abnormal performance.
Q182.
The Fama-French three-factor model adds:
A) Size & value factors to CAPM
B) Momentum factor only
C) Liquidity & default risk
D) Skewness and kurtosis
Answer: A
Explanation: It extends CAPM with SMB (size) and HML (value).
Q183.
Carhart four-factor model adds:
A) Momentum factor to Fama-French
B) Liquidity factor
C) Credit spread factor
D) Volatility factor
Answer: A
Explanation: Carhart adds momentum as the 4th factor.
Q184.
An active manager’s performance is best evaluated using:
A) Information ratio
B) Sharpe ratio only
C) Treynor ratio only
D) Alpha = 0
Answer: A
Explanation: IR measures value added relative to active risk.
Q185.
If a manager’s beta = 1.2 and market return = 10%, risk-free rate = 2%, expected return per CAPM = ?
A) 11.6%
B) 12.0%
C) 13.6%
D) 14.4%
Answer: C
Explanation: E(R)=2+1.2×(10–2)=11.6E(R) = 2 + 1.2 × (10 – 2) = 11.6%E(R)=2+1.2×(10–2)=11.6. Correction → actually 11.6% (A).
Q186.
The active return of a portfolio is:
A) Portfolio return – benchmark return
B) Portfolio return – risk-free rate
C) Benchmark return – market return
D) Portfolio return – beta × market return
Answer: A
Explanation: Active return = performance vs. benchmark.
Q187.
The Sharpe ratio penalizes:
A) Downside deviation only
B) Total volatility
C) Systematic risk only
D) Diversifiable risk only
Answer: B
Explanation: Uses standard deviation as denominator.
Q188.
A portfolio manager hedging systematic risk but keeping alpha exposure is using:
A) Market-neutral strategy
B) Passive indexing
C) Buy-and-hold
D) Value-weighted strategy
Answer: A
Explanation: Market-neutral hedges beta, keeps alpha.
Q189.
The fundamental law of active management says Information Ratio =
A) IC × √Breadth
B) Alpha × Beta
C) Sharpe ratio ÷ Treynor ratio
D) Active return ÷ market risk
Answer: A
Explanation: IR = skill (IC) × breadth (no. of independent bets).
Q190.
Corner portfolios in mean-variance optimization are:
A) Portfolios on efficient frontier where weights change
B) Global minimum variance portfolios
C) Only risk-free assets
D) Passive portfolios
Answer: A
Explanation: Corner portfolios = points of weight shifts.
Q191.
Performance attribution breaks return into:
A) Asset allocation, security selection, interaction
B) Alpha and beta only
C) Systematic and unsystematic risk
D) Style and size only
Answer: A
Explanation: Attribution decomposes returns.
Q192.
Ex-post tracking error measures:
A) Realized volatility of active returns
B) Forecast error of alpha
C) Expected benchmark deviation
D) Market risk
Answer: A
Explanation: It’s backward-looking tracking error.
Q193.
Ex-ante tracking error measures:
A) Expected volatility of active returns
B) Realized volatility
C) Risk-free deviation
D) Benchmark return only
Answer: A
Explanation: Forward-looking tracking error estimate.
Q194.
Performance fees aligned with investor interest are often based on:
A) High-water marks
B) Flat annual fee
C) Benchmark return only
D) Market-neutral portfolio
Answer: A
Explanation: High-water mark prevents double charging.
Q195.
Hedge fund replication strategies use:
A) Factor models to mimic hedge fund returns
B) Active stock picking
C) Arbitrage only
D) Global minimum variance
Answer: A
Explanation: Replication mimics exposures at lower cost.
Q196.
Risk budgeting is:
A) Allocating risk capital among strategies
B) Allocating capital equally
C) Eliminating variance
D) Matching duration
Answer: A
Explanation: Risk budgeting assigns how much risk each strategy can take.
Q197.
The Omega ratio measures:
A) Probability-weighted gains vs. losses beyond threshold
B) Beta risk only
C) Sharpe ratio squared
D) Information ratio × alpha
Answer: A
Explanation: Omega ratio evaluates risk-adjusted performance with full distribution.
Q198.
Skewness and kurtosis matter in portfolio evaluation because:
A) Investors care about tail risks
B) They improve Sharpe ratio
C) They eliminate variance
D) They represent only mean risk
Answer: A
Explanation: Non-normal return distributions affect investor utility.
Q199.
Liquidity-adjusted VaR (L-VaR) accounts for:
A) Bid-ask spreads and price impact
B) Systematic risk only
C) Beta of market
D) Risk-free rate
Answer: A
Explanation: L-VaR adjusts traditional VaR for illiquidity costs.
Q200.
The ultimate goal of portfolio management is:
A) Maximize alpha regardless of risk
B) Achieve optimal risk-adjusted return aligned with investor objectives
C) Beat the benchmark at all costs
D) Minimize volatility to zero
Answer: B
Explanation: Portfolio management balances risk-return per investor goals.
Q1.
Which of the following best describes the primary goal of portfolio management?
A) Maximizing short-term profits
B) Minimizing risk regardless of return
C) Maximizing return for a given level of risk
D) Avoiding losses entirely
Answer: C
Explanation: Portfolio management seeks to maximize expected return while controlling risk. The risk-return tradeoff is the core principle, not just eliminating losses or maximizing short-term profit.
Q2.
The efficient frontier represents:
A) Portfolios with maximum risk for given return
B) Portfolios that minimize return for given risk
C) Portfolios that maximize return for given risk
D) Portfolios that eliminate all risk
Answer: C
Explanation: The efficient frontier includes all optimal portfolios that provide the highest expected return for a given level of risk.
Q3.
Systematic risk is also called:
A) Diversifiable risk
B) Market risk
C) Unsystematic risk
D) Firm-specific risk
Answer: B
Explanation: Systematic (market) risk affects the entire market and cannot be diversified away. Unsystematic risk (firm-specific) can be reduced via diversification.
Q4.
According to CAPM, the expected return of a security is determined by:
A) Its alpha
B) Its beta relative to the market
C) The risk-free rate only
D) Its dividend yield
Answer: B
Explanation: CAPM states E(Ri)=Rf+βi(E(Rm)−Rf)E(R_i) = R_f + \beta_i (E(R_m) – R_f)E(Ri)=Rf+βi(E(Rm)−Rf). The beta relative to the market drives expected return.
Q5.
Which measure evaluates portfolio performance by comparing excess return to portfolio volatility?
A) Treynor ratio
B) Sharpe ratio
C) Jensen’s alpha
D) Information ratio
Answer: B
Explanation: The Sharpe ratio measures risk-adjusted performance by comparing excess return per unit of total risk (standard deviation).
Q6.
Which of the following portfolios is considered undiversified?
A) A portfolio of 100 randomly selected U.S. stocks
B) A portfolio with equal exposure to global equities, bonds, and real estate
C) A portfolio consisting of only one company’s stock
D) A portfolio with 20 stocks across different industries
Answer: C
Explanation: Holding only one company’s stock leaves the investor fully exposed to unsystematic (firm-specific) risk.
Q7.
In Modern Portfolio Theory (MPT), correlation between assets plays a critical role because:
A) High correlation increases diversification benefits
B) Low correlation reduces portfolio risk
C) Diversification does not depend on correlation
D) Negative correlation increases portfolio risk
Answer: B
Explanation: Diversification benefits come from combining assets with low or negative correlations, which reduces overall portfolio volatility.
Q8.
Which of the following is NOT a valid assumption of CAPM?
A) Investors are risk-averse
B) All investors have homogeneous expectations
C) Investors can borrow and lend at the risk-free rate
D) Markets are inefficient
Answer: D
Explanation: CAPM assumes efficient markets, risk aversion, homogeneous expectations, and frictionless trading.
Q9.
Jensen’s alpha measures:
A) Excess return of a portfolio over the risk-free rate
B) Portfolio’s performance relative to CAPM expectations
C) Total portfolio return without risk adjustment
D) Portfolio’s return compared to benchmark standard deviation
Answer: B
Explanation: Jensen’s alpha evaluates whether a portfolio generates returns above what CAPM predicts, adjusting for systematic risk.
Q10.
If an investor moves from a risk-free asset into a risky portfolio along the Capital Market Line (CML), what happens?
A) Risk decreases, return decreases
B) Risk increases, expected return increases
C) Risk decreases, expected return increases
D) Risk remains constant
Answer: B
Explanation: Along the CML, increasing allocation to the risky portfolio raises both risk and expected return.
Q11.
The slope of the Capital Market Line (CML) represents:
A) Portfolio variance
B) Market return
C) Sharpe ratio of the market portfolio
D) Beta of the market
Answer: C
Explanation: The slope of the CML equals the Sharpe ratio of the market portfolio (excess return over risk-free rate per unit of risk).
Q12.
A portfolio with a beta of 1.2 and an expected market return of 8%, with risk-free rate of 2%, has an expected return according to CAPM of:
A) 8.4%
B) 9.2%
C) 10.4%
D) 12%
Answer: C
Explanation: CAPM formula: E(R)=Rf+β(Rm−Rf)E(R) = R_f + \beta (R_m – R_f)E(R)=Rf+β(Rm−Rf).
= 2% + 1.2(8% − 2%) = 2% + 7.2% = 9.2%.
Oops correction → correct choice is B (9.2%).
Q13.
The Treynor ratio differs from the Sharpe ratio because it uses:
A) Alpha instead of return
B) Standard deviation instead of beta
C) Beta instead of standard deviation
D) Total return without adjustment
Answer: C
Explanation: The Treynor ratio measures excess return per unit of systematic risk (beta), while Sharpe uses total risk (standard deviation).
Q14.
The Information ratio measures portfolio return relative to:
A) Risk-free rate
B) Market portfolio
C) Benchmark portfolio
D) Diversification level
Answer: C
Explanation: Information ratio compares excess return over a benchmark to the tracking error, showing active management skill.
Q15.
Which of the following statements about diversification is TRUE?
A) Diversification eliminates systematic risk
B) Diversification reduces unsystematic risk
C) Diversification increases correlation
D) Diversification guarantees higher returns
Answer: B
Explanation: Diversification reduces unsystematic (firm-specific) risk, but systematic risk remains.
Q16.
An investor with low risk tolerance is most likely to:
A) Allocate heavily to equities
B) Hold primarily risk-free assets
C) Borrow at the risk-free rate to invest more in the market
D) Invest only in derivatives
Answer: B
Explanation: Low risk tolerance means higher allocation to safe, low-volatility investments.
Q17.
Which type of fund is actively managed to beat the market?
A) Index fund
B) ETF
C) Mutual fund
D) Passive bond fund
Answer: C
Explanation: Mutual funds are often actively managed with the goal of outperforming benchmarks.
Q18.
A portfolio with negative alpha implies:
A) Outperformance relative to CAPM
B) Underperformance relative to CAPM
C) Equal performance to CAPM
D) Risk-free returns
Answer: B
Explanation: Negative alpha indicates that the portfolio earned less than what CAPM predicted for its level of risk.
Q19.
In behavioral finance, loss aversion suggests investors:
A) Prefer gains over avoiding losses
B) Avoid risk entirely
C) Fear losses more than they value equivalent gains
D) Overvalue diversification
Answer: C
Explanation: Loss aversion is the tendency to weigh losses more heavily than equivalent gains.
Q20.
Which of the following is a limitation of CAPM?
A) Assumes risk-free borrowing is possible
B) Ignores systematic risk
C) Assumes investors behave irrationally
D) Does not consider diversification
Answer: A
Explanation: CAPM assumes investors can borrow/lend at the risk-free rate, which is unrealistic in practice.
Q21.
The Security Market Line (SML) plots:
A) Expected return against standard deviation
B) Expected return against beta
C) Variance against correlation
D) Actual return against alpha
Answer: B
Explanation: SML shows the relationship between expected return and systematic risk (beta).
Q22.
If a stock lies above the SML, it is considered:
A) Overpriced
B) Underpriced
C) Fairly priced
D) Risk-free
Answer: B
Explanation: Securities above the SML offer higher return for risk → undervalued.
Q23.
Which of the following is most associated with unsystematic risk?
A) Inflation shocks
B) Monetary policy changes
C) Poor management decisions in a company
D) Global recessions
Answer: C
Explanation: Unsystematic risk is firm-specific, like management errors or strikes.
Q24.
The optimal portfolio for an investor is found at the point where:
A) Capital Market Line touches the efficient frontier
B) SML intersects the x-axis
C) Portfolio alpha is maximized
D) Correlation is zero
Answer: A
Explanation: The tangency point of the CML and efficient frontier gives the optimal risky portfolio.
Q25.
Tracking error measures:
A) Volatility of the market
B) Deviation of portfolio return from a benchmark
C) Expected return per unit of beta
D) Risk-free asset deviation
Answer: B
Explanation: Tracking error shows how closely a portfolio follows its benchmark.
Q26.
The Capital Allocation Line (CAL) differs from the CML because:
A) CAL can represent any portfolio, not just the market portfolio
B) CAL ignores diversification
C) CAL always has a zero slope
D) CAL excludes risk-free assets
Answer: A
Explanation: CAL represents combinations of risk-free asset and any risky portfolio. CML is specific to the market portfolio.
Q27.
Which type of risk is most relevant to long-term investors holding a diversified portfolio?
A) Systematic risk
B) Firm-specific risk
C) Business risk
D) Operational risk
Answer: A
Explanation: Only systematic risk remains in a well-diversified portfolio.
Q28.
The efficient frontier shifts upward if:
A) Correlation between assets increases
B) Risk-free rate decreases
C) New assets with higher return/risk profiles are added
D) Portfolio variance increases
Answer: C
Explanation: Adding higher return or lower correlation assets improves efficiency, shifting the frontier upward.
Q29.
The main difference between CML and SML is that:
A) CML uses beta, SML uses standard deviation
B) CML uses total risk, SML uses systematic risk
C) CML applies to individual assets, SML to portfolios
D) Both show same relationship
Answer: B
Explanation: CML relates return to total risk (σ), SML relates return to systematic risk (β).
Q30.
A portfolio manager with high Sharpe ratio but low Information ratio is likely:
A) Beating the benchmark consistently
B) Earning strong absolute returns but not relative to benchmark
C) Taking excess unsystematic risk
D) Tracking the index exactly
Answer: B
Explanation: High Sharpe → good risk-adjusted returns overall. Low Info ratio → not outperforming benchmark efficiently.
Q31.
Jensen’s alpha measures:
A) Excess return compared to CAPM expectations
B) Return per unit of standard deviation
C) Portfolio’s tracking error
D) Portfolio’s correlation with the market
Answer: A
Explanation: Jensen’s alpha indicates how much a portfolio outperformed (or underperformed) its CAPM-expected return.
Q32.
If the correlation between two assets is −1, the portfolio variance can be:
A) Zero
B) Maximum
C) Equal to the sum of variances
D) Undefined
Answer: A
Explanation: Perfect negative correlation allows for complete diversification, eliminating risk.
Q33.
Which investor type is most likely to prefer high-dividend stocks?
A) Tax-exempt investors
B) Investors in high tax brackets
C) Growth-oriented investors
D) Institutional investors
Answer: A
Explanation: Tax-exempt investors are not penalized by dividend taxation, making high-dividend stocks attractive.
Q34.
The Beta of a portfolio is calculated as:
A) Weighted average of asset betas
B) Correlation of assets with variance
C) Sum of standard deviations
D) Expected return of the portfolio
Answer: A
Explanation: Portfolio beta is the weighted average of the betas of its individual assets.
Q35.
An actively managed portfolio is MOST justified when:
A) Markets are highly efficient
B) Markets are inefficient and mispriced securities exist
C) Tracking error is zero
D) CAPM holds perfectly
Answer: B
Explanation: Active management adds value when markets are inefficient.
Q36.
The Separation theorem in portfolio theory states:
A) All investors hold the same optimal risky portfolio
B) Each investor creates a unique risky portfolio
C) Diversification eliminates systematic risk
D) Investors cannot hold risk-free assets
Answer: A
Explanation: Separation theorem → all investors choose the same risky portfolio; their final mix differs only by risk preference.
Q37.
The global minimum-variance portfolio is the:
A) Portfolio with the highest return
B) Portfolio with the lowest beta
C) Portfolio with the lowest variance for any set of risky assets
D) Risk-free portfolio
Answer: C
Explanation: GMVP is the point on the efficient frontier with the lowest risk.
Q38.
Which of the following is a bottom-up approach to portfolio management?
A) Sector rotation
B) Fundamental stock picking
C) Macro analysis of GDP trends
D) Global asset allocation
Answer: B
Explanation: Bottom-up analysis focuses on individual security selection, regardless of industry or economy.
Q39.
A portfolio manager with a high R² (coefficient of determination) relative to a benchmark implies:
A) Strong performance vs. CAPM
B) Returns mostly explained by the benchmark
C) Poor diversification
D) Market timing ability
Answer: B
Explanation: A high R² means portfolio returns are closely explained by the benchmark.
Q40.
Which type of efficient market hypothesis suggests that stock prices reflect ALL information (public + private)?
A) Weak-form
B) Semi-strong form
C) Strong-form
D) None
Answer: C
Explanation: Strong-form EMH states that even insider information is reflected in stock prices.
Q41.
A portfolio’s Sharpe ratio is 1.2, while the benchmark Sharpe ratio is 0.8. This indicates:
A) Portfolio underperformed
B) Portfolio outperformed on a risk-adjusted basis
C) Both had equal performance
D) Benchmark was more efficient
Answer: B
Explanation: A higher Sharpe ratio means better risk-adjusted performance.
Q42.
If an investor wants inflation protection, the best allocation is:
A) Government bonds
B) Treasury Inflation-Protected Securities (TIPS)
C) Corporate bonds
D) Preferred stock
Answer: B
Explanation: TIPS adjust principal and interest payments with inflation.
Q43.
The Black-Litterman model is used for:
A) Forecasting macroeconomic growth
B) Improving portfolio optimization by incorporating investor views
C) Estimating variance of assets
D) Measuring CAPM efficiency
Answer: B
Explanation: Black-Litterman improves mean-variance optimization by blending market equilibrium with investor opinions.
Q44.
If a stock’s expected return is below the SML, it is considered:
A) Overpriced
B) Underpriced
C) Fairly priced
D) Risk-free
Answer: A
Explanation: Securities below the SML offer lower return for risk → overpriced.
Q45.
A core-satellite portfolio strategy involves:
A) Using only index funds
B) Combining a passive core with active satellite investments
C) Investing only in emerging markets
D) Avoiding diversification
Answer: B
Explanation: Core provides stable returns (index funds), satellites target alpha (active strategies).
Q46.
The endowment model of investing is characterized by:
A) High liquidity
B) Large allocations to alternative assets
C) Minimal diversification
D) Heavy use of money market instruments
Answer: B
Explanation: Endowment funds (e.g., Yale model) emphasize alternatives like hedge funds, PE, real assets.
Q47.
Behavioral finance bias where investors hold losing stocks too long is called:
A) Herding
B) Disposition effect
C) Overconfidence
D) Anchoring
Answer: B
Explanation: Disposition effect → tendency to sell winners too soon, hold losers too long.
Q48.
If the correlation between two assets is 0, diversification:
A) Provides no benefit
B) Provides some benefit
C) Eliminates all risk
D) Doubles the portfolio return
Answer: B
Explanation: Zero correlation still reduces portfolio variance (unless perfectly correlated).
Q49.
The Treynor-Black model focuses on:
A) Optimal mix of active and passive portfolios
B) Risk-free borrowing
C) Pure diversification
D) Estimating tracking error
Answer: A
Explanation: Treynor-Black combines mispriced securities with passive index holdings.
Q50.
Which statement about active vs. passive investing is most accurate?
A) Active investing always outperforms
B) Passive investing is more cost-efficient
C) Passive investing eliminates systematic risk
D) Active investing eliminates transaction costs
Answer: B
Explanation: Passive investing (index funds/ETFs) is generally cheaper and more tax-efficient, though not guaranteed to outperform.
Q51.
The Capital Market Line (CML) differs from the Security Market Line (SML) because:
A) CML measures total risk, SML measures systematic risk
B) CML applies to all assets, SML only to portfolios
C) SML is linear, CML is non-linear
D) CML includes only non-risky assets
Answer: A
Explanation: CML plots risk (standard deviation) vs. return, while SML plots beta (systematic risk) vs. return.
Q52.
Which measure is least appropriate for evaluating a well-diversified portfolio?
A) Jensen’s alpha
B) Treynor ratio
C) Sharpe ratio
D) Beta
Answer: C
Explanation: For diversified portfolios, Treynor and Jensen are more relevant since unsystematic risk is eliminated.
Q53.
The Information Ratio (IR) is defined as:
A) Excess return / tracking error
B) Portfolio return / market return
C) Alpha / beta
D) Standard deviation / mean return
Answer: A
Explanation: IR = active return divided by tracking error → evaluates active manager performance.
Q54.
A pension fund with long-term obligations is MOST likely to invest in:
A) Money market instruments
B) Long-duration bonds and equities
C) High-yield short-term bonds
D) Gold
Answer: B
Explanation: Pension funds prefer long-duration assets to match long-term liabilities.
Q55.
A portfolio has an expected return of 12% and standard deviation of 10%. Risk-free rate is 4%. Its Sharpe ratio is:
A) 0.4
B) 0.8
C) 1.2
D) 2.0
Answer: B
Explanation: Sharpe = (12%−4%)/10% = 0.8.
Q56.
Which portfolio is dominant?
A) Higher return, higher risk than another
B) Same return, lower risk
C) Lower return, higher risk
D) Equal risk, lower return
Answer: B
Explanation: A dominant portfolio offers the same return with lower risk, or higher return with the same risk.
Q57.
The Markowitz efficient frontier shows:
A) Portfolios with maximum returns for a given risk
B) Portfolios with zero correlation
C) Only risk-free assets
D) CAPM alphas
Answer: A
Explanation: The frontier represents optimal risk-return combinations.
Q58.
The equity risk premium is:
A) Market return − risk-free rate
B) Risk-free rate + inflation
C) Excess return of bonds over equities
D) Alpha of a portfolio
Answer: A
Explanation: ERP = expected market return minus risk-free rate.
Q59.
The Treynor ratio uses:
A) Total risk
B) Beta (systematic risk)
C) Variance
D) Standard deviation
Answer: B
Explanation: Treynor = (Portfolio return − Risk-free rate) / Beta.
Q60.
The primary objective of a sovereign wealth fund is:
A) Short-term liquidity
B) Long-term growth and stabilization
C) High leverage returns
D) Day trading
Answer: B
Explanation: Sovereign wealth funds invest excess reserves for long-term economic stabilization and growth.
Q61.
Which of the following is NOT an assumption of CAPM?
A) Investors are risk-averse
B) Markets are frictionless
C) Investors have homogeneous expectations
D) Investors can influence market prices
Answer: D
Explanation: CAPM assumes price-taking investors; none can influence prices.
Q62.
The time-weighted rate of return (TWRR) is preferred over the money-weighted rate when:
A) Investor controls cash flows
B) Investor has no control over cash flows
C) Cash flows are irregular
D) Portfolio contains only fixed income
Answer: B
Explanation: TWRR eliminates the impact of external cash flows and measures portfolio manager performance.
Q63.
If an investor wants to hedge foreign equity exposure, the best tool is:
A) Interest rate swaps
B) Currency forwards
C) Equity swaps
D) Credit default swaps
Answer: B
Explanation: Currency forwards hedge FX risk in foreign investments.
Q64.
The efficient frontier shifts upward when:
A) Risk-free rate increases
B) New asset with low correlation is added
C) Systematic risk increases
D) Inflation rises
Answer: B
Explanation: Adding an uncorrelated asset improves diversification, pushing the frontier upward.
Q65.
The Security Characteristic Line (SCL) plots:
A) Portfolio return vs. beta
B) Excess return vs. market return
C) Asset return vs. market return
D) Sharpe ratio vs. alpha
Answer: C
Explanation: SCL is a regression line of asset returns against market returns.
Q66.
If two portfolios have the same Sharpe ratio, the investor should select:
A) The one with higher standard deviation
B) The one with higher expected return
C) Either one, as risk-adjusted performance is equal
D) The one with higher beta
Answer: C
Explanation: Same Sharpe → risk-adjusted return is equal.
Q67.
A defined contribution pension plan risk is borne by:
A) Employer
B) Employee
C) Government
D) Central bank
Answer: B
Explanation: In defined contribution, the employee bears investment risk.
Q68.
The Capital Allocation Line (CAL) combines:
A) Risk-free asset and market portfolio
B) Only risky portfolios
C) Only government securities
D) Inflation-adjusted assets
Answer: A
Explanation: CAL shows combinations of risk-free and risky assets.
Q69.
The optimal portfolio for an investor is located where:
A) Efficient frontier touches CAL
B) Indifference curve is tangent to CAL
C) SML intersects with beta
D) Sharpe ratio is zero
Answer: B
Explanation: Optimal portfolio is at CAL–indifference curve tangency.
Q70.
The equity style box categorizes funds by:
A) Market cap and investment style (value/growth)
B) Beta and alpha
C) Industry and sector
D) Country allocation
Answer: A
Explanation: Morningstar’s style box classifies equity funds into size × style.
Q71.
The Jensen’s alpha of a portfolio measures:
A) Diversification level
B) Excess return relative to CAPM
C) Standard deviation
D) Correlation with market
Answer: B
Explanation: Jensen’s alpha = actual return − expected CAPM return.
Q72.
Which portfolio measure is MOST appropriate if the portfolio is not diversified?
A) Treynor ratio
B) Sharpe ratio
C) Information ratio
D) Jensen’s alpha
Answer: B
Explanation: Sharpe uses total risk (σ), suitable for non-diversified portfolios.
Q73.
The Black-Litterman model is primarily used for:
A) Forecasting GDP
B) Asset allocation incorporating investor views
C) Hedging FX risk
D) Estimating risk-free rate
Answer: B
Explanation: Black-Litterman blends market equilibrium returns with subjective investor views.
Q74.
If a portfolio has negative alpha, it means:
A) It outperformed the market
B) It underperformed compared to CAPM expectations
C) It is risk-free
D) It has a beta of zero
Answer: B
Explanation: Negative alpha = underperformance after adjusting for risk.
Q75.
The tracking error measures:
A) Diversification
B) Standard deviation of active return
C) Market beta
D) Risk-free deviation
Answer: B
Explanation: Tracking error = volatility of active return vs. benchmark.
Q76.
A hedge fund strategy that seeks mispricing between similar securities is:
A) Global macro
B) Market neutral
C) Arbitrage
D) Event-driven
Answer: C
Explanation: Arbitrage strategies profit from mispricing of related securities.
Q77.
The Beta of a risk-free asset is:
A) 0
B) 1
C) −1
D) Undefined
Answer: A
Explanation: Risk-free asset has no correlation with the market → beta = 0.
Q78.
The Efficient Market Hypothesis (EMH) in semi-strong form implies:
A) Prices reflect only past data
B) Prices reflect past and all public information
C) Prices reflect all public and private info
D) Prices are unpredictable
Answer: B
Explanation: Semi-strong = past + public information fully reflected.
Q79.
A portfolio with a Sharpe ratio of 0 indicates:
A) No risk
B) Risk-free return equals portfolio return
C) High alpha
D) Poor diversification
Answer: B
Explanation: Sharpe = (Rp−Rf)/σ. If 0 → Rp = Rf.
Q80.
The risk-adjusted performance measure most relevant to institutional investors is:
A) Sharpe
B) Treynor
C) Jensen’s alpha
D) Information ratio
Answer: D
Explanation: Institutions track performance relative to a benchmark → IR is key.
Q81.
If the correlation between two assets is −1, diversification:
A) Eliminates all risk
B) Increases risk
C) Has no effect
D) Creates arbitrage
Answer: A
Explanation: Perfect negative correlation allows full risk elimination.
Q82.
The Security Market Line (SML) intercept is:
A) Beta = 1
B) Market return
C) Risk-free rate
D) Zero
Answer: C
Explanation: At beta = 0, return = risk-free rate.
Q83.
In behavioral finance, loss aversion implies:
A) Investors prefer gains to losses equally
B) Losses hurt more than equivalent gains please
C) Investors are always risk-neutral
D) Losses have no effect
Answer: B
Explanation: Loss aversion = losses are psychologically felt stronger.
Q84.
The alpha of the market portfolio in CAPM is:
A) Positive
B) Zero
C) Negative
D) Equal to risk-free rate
Answer: B
Explanation: Market portfolio lies on SML → alpha = 0.
Q85.
Which portfolio has the highest diversification benefit?
A) Assets with correlation +1
B) Assets with correlation −0.5
C) Assets with correlation 0.9
D) Assets with correlation 0.7
Answer: B
Explanation: Lower (negative) correlation → higher diversification.
Q86.
The global minimum variance portfolio is:
A) Portfolio with lowest beta
B) Portfolio with lowest possible variance
C) Portfolio with maximum Sharpe ratio
D) Portfolio with highest alpha
Answer: B
Explanation: GMV portfolio minimizes variance across all possible combinations.
Q87.
Active return of a portfolio is:
A) Portfolio return − Benchmark return
B) Portfolio return − Risk-free rate
C) Alpha
D) Market return − Portfolio return
Answer: A
Explanation: Active return measures outperformance relative to benchmark.
Q88.
If a mutual fund has a Sharpe ratio lower than the market, it means:
A) Outperformed market risk-adjusted
B) Underperformed risk-adjusted
C) Equal performance
D) No risk exposure
Answer: B
Explanation: Lower Sharpe = worse risk-adjusted return vs. market.
Q89.
The core-satellite approach to portfolio construction involves:
A) Investing only in passive funds
B) Using passive core + active satellites
C) Using only hedge funds
D) Only government bonds
Answer: B
Explanation: Core = passive index, Satellites = active strategies.
Q90.
The upside capture ratio > 100% means:
A) Portfolio underperforms in bull markets
B) Portfolio outperforms in bull markets
C) Portfolio neutral to market
D) Portfolio only performs in bear markets
Answer: B
Explanation: Ratio >100% = outperformance in rising markets.
Q91.
The downside deviation is used in:
A) Sharpe ratio
B) Sortino ratio
C) Jensen’s alpha
D) Treynor ratio
Answer: B
Explanation: Sortino ratio uses downside risk instead of total volatility.
Q92.
A mutual fund manager’s skill is best measured by:
A) Beta
B) Tracking error
C) Information ratio
D) Sharpe ratio
Answer: C
Explanation: IR measures active return relative to benchmark risk.
Q93.
The IC (Information Coefficient) is a measure of:
A) Correlation between forecasted and actual returns
B) Beta sensitivity
C) Market efficiency
D) Portfolio alpha
Answer: A
Explanation: IC measures forecasting skill (accuracy).
Q94.
Factor investing relies on:
A) Stock picking only
B) Exposure to risk factors like value, size, momentum
C) Market timing
D) Arbitrage
Answer: B
Explanation: Factor investing systematically targets specific return drivers.
Q95.
A portfolio has an alpha of +2% and beta of 1.2. This means:
A) Underperformed CAPM
B) Outperformed CAPM
C) No systematic risk
D) Purely passive
Answer: B
Explanation: Positive alpha = excess return beyond CAPM prediction.
Q96.
The Treynor-Black model combines:
A) Efficient frontier and risk-free rate
B) Active portfolio with passive market portfolio
C) Derivatives with equities
D) Arbitrage and CAPM
Answer: B
Explanation: Treynor-Black blends active portfolio with market index.
Q97.
The portfolio turnover ratio measures:
A) Risk-adjusted performance
B) Frequency of trading
C) Correlation with benchmark
D) Alpha stability
Answer: B
Explanation: High turnover → frequent buying/selling.
Q98.
The characteristics line slope represents:
A) Alpha
B) Beta
C) Sharpe ratio
D) IR
Answer: B
Explanation: Regression slope = beta.
Q99.
In asset-liability management (ALM), immunization is used to:
A) Maximize return
B) Match asset and liability durations
C) Minimize Sharpe ratio
D) Hedge FX risk
Answer: B
Explanation: Immunization balances asset and liability interest rate sensitivity.
Q100.
A portfolio with beta = 1 and alpha = 0:
A) Outperforms market
B) Underperforms market
C) Moves exactly with the market
D) Is risk-free
Answer: C
Explanation: Beta = 1 → same volatility as market, alpha = 0 → no excess return.
Q101.
The Capital Allocation Line (CAL) shows:
A) The risk-return tradeoff between risky and risk-free assets
B) Efficient frontier of risky assets only
C) The Security Market Line (SML)
D) Market portfolio only
Answer: A
Explanation: CAL combines risk-free and risky portfolios.
Q102.
The Capital Market Line (CML) is valid only for:
A) Efficient portfolios
B) Any portfolio
C) Risk-free assets only
D) Arbitrage portfolios
Answer: A
Explanation: CML applies to portfolios on the efficient frontier.
Q103.
A pension fund with long-term liabilities should focus mainly on:
A) Short-term money market instruments
B) Duration-matched bonds
C) Hedge funds only
D) Commodity futures
Answer: B
Explanation: Matching duration ensures stability of long-term obligations.
Q104.
The Markowitz portfolio theory assumes:
A) Returns are normally distributed
B) Investors are risk-seeking
C) Prices are always fair
D) Assets have zero correlation
Answer: A
Explanation: Key assumption = returns are normally distributed, variance measures risk.
Q105.
Which ratio uses semi-variance instead of variance?
A) Treynor
B) Sharpe
C) Sortino
D) Jensen’s alpha
Answer: C
Explanation: Sortino focuses on downside deviation only.
Q106.
Dollar-weighted return is equivalent to:
A) Time-weighted return
B) Internal Rate of Return (IRR)
C) Arithmetic mean
D) Jensen’s alpha
Answer: B
Explanation: Dollar-weighted return = IRR of cash flows.
Q107.
The optimal portfolio for an investor is at the point where:
A) CAL is tangent to efficient frontier
B) CML meets beta = 1
C) Alpha is maximum
D) Market return equals risk-free rate
Answer: A
Explanation: Tangency point maximizes Sharpe ratio.
Q108.
The Information Ratio (IR) is calculated as:
A) Active return ÷ Active risk
B) Alpha ÷ Beta
C) Return ÷ Volatility
D) Market return ÷ Risk-free return
Answer: A
Explanation: IR measures consistency of active return.
Q109.
Systematic risk can be reduced by:
A) Diversification
B) Hedging
C) Increasing beta
D) Adding more stocks
Answer: B
Explanation: Only hedging removes systematic (market) risk; diversification reduces unsystematic risk.
Q110.
The Treynor ratio uses which measure of risk?
A) Standard deviation
B) Beta
C) Variance
D) Tracking error
Answer: B
Explanation: Treynor ratio = (Rp−Rf)/β.
Q111.
Excess kurtosis in portfolio returns indicates:
A) Normal distribution
B) Fewer extreme outcomes
C) Higher probability of extreme outcomes
D) Mean returns are zero
Answer: C
Explanation: Excess kurtosis → fat tails, more extreme risk events.
Q112.
The efficient frontier is:
A) Set of portfolios offering max return for a given risk
B) All possible portfolio combinations
C) The market portfolio only
D) The risk-free asset
Answer: A
Explanation: Efficient frontier = optimal risk-return tradeoff.
Q113.
The security characteristic line plots:
A) Portfolio returns vs. risk-free rate
B) Asset excess return vs. market excess return
C) Alpha vs. Beta
D) Risk vs. Sharpe ratio
Answer: B
Explanation: Regression of asset returns on market → slope = beta.
Q114.
The excess return over the risk-free rate is called:
A) Sharpe ratio
B) Risk premium
C) Alpha
D) Beta
Answer: B
Explanation: Risk premium = return above risk-free.
Q115.
The arbitrage pricing theory (APT) allows:
A) Multiple factors driving returns
B) Only one risk factor
C) No arbitrage opportunities
D) Random returns
Answer: A
Explanation: APT uses multi-factor model unlike CAPM’s single beta.
Q116.
If two portfolios have the same return but different volatility, which has the higher Sharpe ratio?
A) Portfolio with higher volatility
B) Portfolio with lower volatility
C) Both equal
D) Depends on alpha
Answer: B
Explanation: Sharpe penalizes volatility → lower volatility gives higher Sharpe.
Q117.
Liquidity risk in portfolio management arises when:
A) Assets can be sold quickly
B) Assets cannot be sold without loss
C) Market beta = 1
D) Correlation is negative
Answer: B
Explanation: Liquidity risk = inability to sell quickly without price impact.
Q118.
Style drift occurs when:
A) Fund manager deviates from stated investment style
B) Market changes beta
C) Portfolio changes alpha
D) Investors shift to alternatives
Answer: A
Explanation: Style drift → inconsistency with fund mandate.
Q119.
The herding behavior in behavioral finance leads to:
A) Market efficiency
B) Momentum effects
C) Reduced volatility
D) Perfect diversification
Answer: B
Explanation: Herding = investors follow crowd → momentum trends.
Q120.
The expected shortfall (CVaR) is superior to VaR because:
A) It assumes normal distribution
B) It accounts for tail losses beyond VaR
C) It ignores extreme outcomes
D) It equals variance
Answer: B
Explanation: CVaR = expected loss beyond VaR cutoff.
Q121.
A normal distribution has skewness of:
A) 0
B) 1
C) −1
D) 2
Answer: A
Explanation: Symmetrical distribution → skewness = 0.
Q122.
The fundamental law of active management states:
A) IR = IC × √Breadth
B) IR = Alpha × Beta
C) Sharpe ratio = Beta × IC
D) Alpha = Risk premium
Answer: A
Explanation: Law: IR improves with better skill (IC) & more opportunities (breadth).
Q123.
A portfolio’s beta of 1.5 indicates:
A) Moves less than market
B) Moves same as market
C) More volatile than market
D) No correlation
Answer: C
Explanation: Beta >1 = more volatile than market.
Q124.
The optimal risky portfolio is chosen based on:
A) Highest alpha
B) Highest Sharpe ratio
C) Lowest beta
D) Lowest variance
Answer: B
Explanation: Tangency portfolio maximizes Sharpe ratio.
Q125.
The ex-ante Sharpe ratio is based on:
A) Historical returns
B) Expected returns
C) Market beta
D) Actual variance
Answer: B
Explanation: Ex-ante uses forward-looking expected returns.
Q126.
The equity risk premium is best defined as:
A) Expected equity return − Risk-free rate
B) Bond return − Equity return
C) Market return ÷ Beta
D) Alpha of equity portfolio
Answer: A
Explanation: ERP compensates for holding risky equities over risk-free.
Q127.
Rebalancing a portfolio ensures:
A) Portfolio matches original risk profile
B) Higher returns
C) No volatility
D) Alpha increases
Answer: A
Explanation: Rebalancing restores strategic asset allocation.
Q128.
The calendar rebalancing method adjusts portfolio:
A) Continuously
B) At fixed intervals
C) Only during crashes
D) When alpha is zero
Answer: B
Explanation: Calendar rebalancing = periodic adjustments (monthly, quarterly).
Q129.
The constant mix strategy involves:
A) Keeping asset weights fixed regardless of price
B) Buying more equities in bull market
C) Shifting fully to risk-free assets
D) Reducing diversification
Answer: A
Explanation: Constant mix = maintain target percentages.
Q130.
CPPI (Constant Proportion Portfolio Insurance) protects against:
A) Downside risk
B) Upside risk
C) Arbitrage losses
D) Market efficiency
Answer: A
Explanation: CPPI ensures a floor value is protected while capturing upside.
Q131.
A core-satellite portfolio typically has:
A) All passive holdings
B) Passive core + active satellites
C) Active core only
D) Bonds only
Answer: B
Explanation: Core = passive index, satellites = active alpha strategies.
Q132.
Behavioral portfolio theory suggests investors:
A) Always maximize Sharpe
B) Create layered portfolios for goals
C) Are purely rational
D) Ignore risk aversion
Answer: B
Explanation: Investors build goal-based layers (safety + aspiration).
Q133.
Overconfidence bias leads investors to:
A) Trade less
B) Trade excessively
C) Avoid risk
D) Follow passive strategies
Answer: B
Explanation: Overconfidence → excessive trading, often reducing returns.
Q134.
The Disposition Effect refers to:
A) Selling losers too early
B) Holding winners too long
C) Selling winners too early & holding losers too long
D) Ignoring tax efficiency
Answer: C
Explanation: Investors sell winners quickly, hold losers longer.
Q135.
Anchoring bias occurs when investors:
A) Over-diversify
B) Rely too heavily on initial reference points
C) Trade less
D) Avoid benchmarks
Answer: B
Explanation: Anchoring = sticking to initial values even if irrelevant.
Q136.
A market-neutral strategy attempts to:
A) Hedge systematic risk
B) Maximize volatility
C) Increase correlation
D) Eliminate alpha
Answer: A
Explanation: Market-neutral strategies hedge beta exposure.
Q137.
The Sharpe ratio is most useful for:
A) Diversified portfolios
B) Non-diversified portfolios
C) Risk-free assets
D) Individual stocks
Answer: A
Explanation: Sharpe applies when portfolio is diversified across assets.
Q138.
Active risk is the same as:
A) Tracking error
B) Standard deviation
C) Alpha
D) Beta
Answer: A
Explanation: Active risk = tracking error relative to benchmark.
Q139.
Bayesian updating in portfolio theory is used in:
A) Black-Litterman model
B) CAPM
C) Arbitrage pricing
D) Momentum trading
Answer: A
Explanation: Black-Litterman applies Bayesian statistics to adjust expected returns.
Q140.
The Sharpe ratio of the market portfolio is:
A) Zero
B) Maximum
C) Negative
D) Undefined
Answer: B
Explanation: Market portfolio lies on CML → highest Sharpe ratio.
Q141.
Performance attribution breaks returns into:
A) Asset allocation, security selection, interaction
B) Alpha, beta, gamma
C) Risk, return, variance
D) Tracking error, Sharpe, IR
Answer: A
Explanation: Attribution identifies sources of return.
Q142.
Jensen’s alpha is positive when:
A) Portfolio underperforms CAPM
B) Portfolio outperforms CAPM
C) Portfolio equals CAPM return
D) Market return is negative
Answer: B
Explanation: Positive alpha = excess return over CAPM prediction.
Q143.
Tactical asset allocation differs from strategic allocation because:
A) It is long-term focused
B) It changes weights to exploit short-term opportunities
C) It ignores diversification
D) It matches liabilities
Answer: B
Explanation: Tactical = short-term shifts, strategic = long-term targets.
Q144.
The beta of the risk-free asset is:
A) 1
B) 0
C) −1
D) Undefined
Answer: B
Explanation: Risk-free asset has zero systematic risk.
Q145.
The Hedge Fund replication strategy involves:
A) Cloning hedge fund strategies via liquid securities
B) Direct hedge fund investing
C) Using illiquid assets
D) Reducing diversification
Answer: A
Explanation: Replication = mimic hedge fund returns using indices/factors.
Q146.
Tracking error volatility is minimized when:
A) Portfolio = Benchmark
B) Portfolio is leveraged
C) Portfolio alpha is negative
D) Beta = 1.5
Answer: A
Explanation: Identical holdings to benchmark = zero tracking error.
Q147.
Factor models decompose returns into:
A) Alpha + beta exposures
B) Market + risk-free return
C) Systematic + unsystematic return
D) IR + Sharpe
Answer: A
Explanation: Factor models explain return via common risk factors & alpha.
Q148.
The value-at-risk (VaR) at 95% confidence means:
A) Worst-case loss 95% of time
B) Maximum expected loss 5% of time
C) Return will equal zero
D) Market is efficient
Answer: B
Explanation: VaR = loss threshold not exceeded with 95% probability.
Q149.
Resampling the efficient frontier is used to:
A) Adjust for estimation error in inputs
B) Increase alpha
C) Reduce Sharpe ratio
D) Increase beta
Answer: A
Explanation: Resampling smooths frontier under uncertain estimates.
Q150.
Risk budgeting in portfolio construction involves:
A) Allocating capital equally
B) Allocating risk across asset classes
C) Eliminating volatility
D) Maximizing tracking error
Answer: B
Explanation: Risk budgeting distributes risk (not capital) among assets.
Q151.
The security market line (SML) represents:
A) Portfolio returns vs. risk-free rate
B) Expected return vs. beta
C) Efficient frontier of risky assets
D) Capital allocation line
Answer: B
Explanation: SML plots expected return as a function of beta under CAPM.
Q152.
The alpha of a portfolio is:
A) Return above CAPM prediction
B) Return below CAPM prediction
C) Equal to beta × market return
D) Always zero
Answer:
Explanation: Alpha = abnormal excess return beyond systematic risk.
Q153.
If an asset lies above the SML, it is:
A) Overvalued
B) Undervalued
C) Fairly valued
D) Risk-free
Answer: B
Explanation: Above SML = higher return than required → undervalued.
Q154.
Which of the following is a risk-adjusted performance measure?
A) Sharpe ratio
B) Alpha
C) Beta
D) Skewness
Answer: A
Explanation: Sharpe adjusts returns for risk.
Q155.
The Separation Theorem in portfolio theory states:
A) Investment decision = financing decision
B) Optimal portfolio choice is independent of risk preferences
C) Investors separate alpha and beta
D) Hedge funds separate risk from return
Answer: B
Explanation: Separation theorem → all investors hold the same tangency portfolio, then adjust with risk-free asset.
Q156.
Global minimum variance portfolio is:
A) Portfolio with lowest variance among risky assets
B) Market portfolio
C) Risk-free asset
D) Unsystematic risk only
Answer: A
Explanation: It’s the least risky point on efficient frontier.
Q157.
The optimal complete portfolio is chosen based on:
A) Risk-free rate only
B) Investor’s utility function
C) Tangency portfolio only
D) Market beta
Answer: B
Explanation: Utility function determines tradeoff between risk and return.
Q158.
Treynor-Black model combines:
A) Active alpha portfolio + passive market portfolio
B) Risk-free + risky portfolio
C) Market portfolio + risk-free asset
D) Efficient frontier + SML
Answer: A
Explanation: Treynor-Black optimally blends alpha with passive market.
Q159.
The Sharpe ratio is appropriate when:
A) Portfolio is fully diversified
B) Portfolio is not diversified
C) Beta is zero
D) Alpha = 0
Answer: A
Explanation: Uses total risk → works best for diversified portfolios.
Q160.
The Treynor ratio is appropriate when:
A) Portfolio is well-diversified
B) Portfolio is not diversified
C) Market is inefficient
D) Risk-free rate is negative
Answer: A
Explanation: Uses beta (systematic risk), assumes diversification removes unsystematic risk.
Q161.
The Information ratio (IR) is most useful for:
A) Passive managers
B) Active managers relative to benchmark
C) Market index
D) Risk-free asset
Answer: B
Explanation: IR measures active return vs. active risk.
Q162.
A high tracking error implies:
A) Portfolio closely follows benchmark
B) Portfolio deviates significantly from benchmark
C) Portfolio is risk-free
D) Beta = 1
Answer: B
Explanation: Tracking error = volatility of active return.
Q163.
The Black-Litterman model improves on Markowitz optimization by:
A) Using investor views with market equilibrium returns
B) Eliminating risk
C) Assuming zero correlation
D) Maximizing alpha
Answer: A
Explanation: Black-Litterman integrates subjective views + equilibrium returns.
Q164.
A portfolio with beta = 0.8 will:
A) Move more than market
B) Move less than market
C) Move opposite to market
D) Have no risk
Answer: B
Explanation: Beta <1 → less sensitive than market.
Q165.
Risk parity portfolios allocate:
A) Equal capital to each asset
B) Equal risk contribution from each asset
C) Equal Sharpe ratio
D) Equal alpha
Answer: B
Explanation: Each asset contributes equally to total portfolio risk.
Q166.
Monte Carlo simulation in portfolio management is used to:
A) Calculate mean returns only
B) Model probability distributions of outcomes
C) Eliminate variance
D) Reduce diversification
Answer: B
Explanation: Monte Carlo simulates thousands of random return paths.
Q167.
Scenario analysis is best described as:
A) Stress-testing portfolio under different assumptions
B) Eliminating downside risk
C) Predicting exact return
D) Arbitrage opportunity
Answer: A
Explanation: Scenario analysis = testing returns under different market conditions.
Q168.
Immunization strategy in fixed income portfolio management means:
A) Eliminating reinvestment risk
B) Matching duration of assets and liabilities
C) Avoiding credit risk
D) Removing alpha
Answer: B
Explanation: Immunization locks in return by matching liability duration.
Q169.
The capital market line (CML) differs from SML because:
A) CML uses standard deviation as risk measure
B) CML uses beta as risk measure
C) SML shows efficient frontier
D) CML applies to all assets
Answer: A
Explanation: CML plots expected return vs. total risk (σ).
Q170.
The security market line (SML) differs from CML because:
A) SML uses beta as risk measure
B) SML uses standard deviation
C) SML is for efficient portfolios only
D) SML = CAL
Answer: A
Explanation: SML: return vs. beta → applies to all assets.
Q171.
The M-square measure is based on:
A) Sharpe ratio adjusted to market risk
B) Treynor ratio
C) Jensen’s alpha
D) Tracking error
Answer: A
Explanation: M² translates Sharpe ratio into percentage return form.
Q172.
Performance appraisal is the process of:
A) Decomposing performance into allocation, selection, timing
B) Calculating alpha only
C) Maximizing beta
D) Reducing volatility
Answer: A
Explanation: Appraisal helps identify drivers of performance.
Q173.
Style analysis is often performed using:
A) Regressing portfolio returns on style indices
B) CAPM only
C) Monte Carlo simulation
D) Sharpe ratio
Answer: A
Explanation: Style analysis identifies exposure to different investment styles.
Q174.
Hedge ratio in portfolio insurance is used to:
A) Measure risk-free rate
B) Determine the proportion of assets to hedge
C) Measure Sharpe ratio
D) Calculate tracking error
Answer: B
Explanation: Hedge ratio defines how much of the portfolio is hedged.
Q175.
Portable alpha strategy involves:
A) Earning alpha from one asset while getting beta exposure from another
B) Using only passive strategies
C) Eliminating market exposure
D) Holding risk-free assets only
Answer: A
Explanation: Portable alpha = separate alpha source + desired beta exposure.
Q176.
The efficient frontier represents:
A) Portfolios with highest return for given risk
B) Portfolios with lowest return for given risk
C) Market portfolio only
D) All possible portfolios
Answer: A
Explanation: Efficient frontier = best risk-return combinations.
Q177.
Adding a risk-free asset to the efficient frontier creates:
A) Capital allocation line (CAL)
B) Security market line
C) Global minimum variance portfolio
D) Arbitrage opportunity
Answer: A
Explanation: CAL is tangent from risk-free rate to efficient frontier.
Q178.
The tangency portfolio is:
A) The optimal risky portfolio
B) The global minimum variance portfolio
C) The market index
D) The benchmark portfolio
Answer: A
Explanation: Tangency portfolio maximizes Sharpe ratio.
Q179.
If the correlation between assets = –1, then:
A) No diversification benefit
B) Perfect diversification, zero risk possible
C) Returns are independent
D) Portfolio beta = 1
Answer: B
Explanation: Perfect negative correlation eliminates risk.
Q180.
Which portfolio measure uses downside deviation instead of standard deviation?
A) Sortino ratio
B) Sharpe ratio
C) Treynor ratio
D) Information ratio
Answer: A
Explanation: Sortino focuses on downside risk.
Q181.
The Jensen’s alpha is:
A) Excess return over CAPM expected return
B) Return explained by beta
C) Measure of total risk
D) Measure of tracking error
Answer: A
Explanation: Jensen’s alpha shows abnormal performance.
Q182.
The Fama-French three-factor model adds:
A) Size & value factors to CAPM
B) Momentum factor only
C) Liquidity & default risk
D) Skewness and kurtosis
Answer: A
Explanation: It extends CAPM with SMB (size) and HML (value).
Q183.
Carhart four-factor model adds:
A) Momentum factor to Fama-French
B) Liquidity factor
C) Credit spread factor
D) Volatility factor
Answer: A
Explanation: Carhart adds momentum as the 4th factor.
Q184.
An active manager’s performance is best evaluated using:
A) Information ratio
B) Sharpe ratio only
C) Treynor ratio only
D) Alpha = 0
Answer: A
Explanation: IR measures value added relative to active risk.
Q185.
If a manager’s beta = 1.2 and market return = 10%, risk-free rate = 2%, expected return per CAPM = ?
A) 11.6%
B) 12.0%
C) 13.6%
D) 14.4%
Answer: C
Explanation: E(R)=2+1.2×(10–2)=11.6E(R) = 2 + 1.2 × (10 – 2) = 11.6%E(R)=2+1.2×(10–2)=11.6. Correction → actually 11.6% (A).
Q186.
The active return of a portfolio is:
A) Portfolio return – benchmark return
B) Portfolio return – risk-free rate
C) Benchmark return – market return
D) Portfolio return – beta × market return
Answer: A
Explanation: Active return = performance vs. benchmark.
Q187.
The Sharpe ratio penalizes:
A) Downside deviation only
B) Total volatility
C) Systematic risk only
D) Diversifiable risk only
Answer: B
Explanation: Uses standard deviation as denominator.
Q188.
A portfolio manager hedging systematic risk but keeping alpha exposure is using:
A) Market-neutral strategy
B) Passive indexing
C) Buy-and-hold
D) Value-weighted strategy
Answer: A
Explanation: Market-neutral hedges beta, keeps alpha.
Q189.
The fundamental law of active management says Information Ratio =
A) IC × √Breadth
B) Alpha × Beta
C) Sharpe ratio ÷ Treynor ratio
D) Active return ÷ market risk
Answer: A
Explanation: IR = skill (IC) × breadth (no. of independent bets).
Q190.
Corner portfolios in mean-variance optimization are:
A) Portfolios on efficient frontier where weights change
B) Global minimum variance portfolios
C) Only risk-free assets
D) Passive portfolios
Answer: A
Explanation: Corner portfolios = points of weight shifts.
Q191.
Performance attribution breaks return into:
A) Asset allocation, security selection, interaction
B) Alpha and beta only
C) Systematic and unsystematic risk
D) Style and size only
Answer: A
Explanation: Attribution decomposes returns.
Q192.
Ex-post tracking error measures:
A) Realized volatility of active returns
B) Forecast error of alpha
C) Expected benchmark deviation
D) Market risk
Answer: A
Explanation: It’s backward-looking tracking error.
Q193.
Ex-ante tracking error measures:
A) Expected volatility of active returns
B) Realized volatility
C) Risk-free deviation
D) Benchmark return only
Answer: A
Explanation: Forward-looking tracking error estimate.
Q194.
Performance fees aligned with investor interest are often based on:
A) High-water marks
B) Flat annual fee
C) Benchmark return only
D) Market-neutral portfolio
Answer: A
Explanation: High-water mark prevents double charging.
Q195.
Hedge fund replication strategies use:
A) Factor models to mimic hedge fund returns
B) Active stock picking
C) Arbitrage only
D) Global minimum variance
Answer: A
Explanation: Replication mimics exposures at lower cost.
Q196.
Risk budgeting is:
A) Allocating risk capital among strategies
B) Allocating capital equally
C) Eliminating variance
D) Matching duration
Answer: A
Explanation: Risk budgeting assigns how much risk each strategy can take.
Q197.
The Omega ratio measures:
A) Probability-weighted gains vs. losses beyond threshold
B) Beta risk only
C) Sharpe ratio squared
D) Information ratio × alpha
Answer: A
Explanation: Omega ratio evaluates risk-adjusted performance with full distribution.
Q198.
Skewness and kurtosis matter in portfolio evaluation because:
A) Investors care about tail risks
B) They improve Sharpe ratio
C) They eliminate variance
D) They represent only mean risk
Answer: A
Explanation: Non-normal return distributions affect investor utility.
Q199.
Liquidity-adjusted VaR (L-VaR) accounts for:
A) Bid-ask spreads and price impact
B) Systematic risk only
C) Beta of market
D) Risk-free rate
Answer: A
Explanation: L-VaR adjusts traditional VaR for illiquidity costs.
Q200.
The ultimate goal of portfolio management is:
A) Maximize alpha regardless of risk
B) Achieve optimal risk-adjusted return aligned with investor objectives
C) Beat the benchmark at all costs
D) Minimize volatility to zero
Answer: B
Explanation: Portfolio management balances risk-return per investor goals.
This concludes our CFA Level 1 Portfolio Management MCQs (200+) practice set. If you’ve gone through all sections, you should now be well-prepared for the Portfolio Management portion of the CFA exam. For complete CFA Level 1 coverage, explore our other sections:
- CFA Level 1 Ethics
- CFA Level 1 Quantitative Methods
- CFA Level 1 Financial Reporting & Analysis
- CFA Level 1 Economics MCQs
- CFA Level 1 Corporate Finance MCQs
- CFA Level 1 Equity Investments
- CFA Level 1 Alternative Investments
- CFA Level 1 Derivatives
Keep practicing, revise weak areas, and ensure you understand not just the answers but also the reasoning behind them. Best of luck with your CFA journey! 🚀📊