CFA Level I subject

Portfolio Management practice questions

Portfolio Management questions connect risk and return, asset allocation, CAPM, IPS constraints, behavioral biases, performance, and risk management. This section currently includes 137 public practice questions across 24 topic modules, with explanations, formulas, traps, and key takeaways.

Indicative public exam weight: 8-12%. Start with a topic guide when you need focused review, or use adaptive mode for mixed practice and due reviews.

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Asset Allocation and ESG

1 public question with explanations, formulas, and exam traps.

Basics of Portfolio Planning and Construction

16 public questions with explanations, formulas, and exam traps.

Behavioral Biases

1 public question with explanations, formulas, and exam traps.

CAL, CML, and SML

1 public question with explanations, formulas, and exam traps.

CAPM

1 public question with explanations, formulas, and exam traps.

CML and Portfolio Choice

1 public question with explanations, formulas, and exam traps.

IPS - Risk Tolerance

2 public questions with explanations, formulas, and exam traps.

Efficient Frontier

1 public question with explanations, formulas, and exam traps.

Introduction to Risk Management

13 public questions with explanations, formulas, and exam traps.

Investor Types

1 public question with explanations, formulas, and exam traps.

IPS - Constraints

1 public question with explanations, formulas, and exam traps.

Market Model

1 public question with explanations, formulas, and exam traps.

Performance Measures

2 public questions with explanations, formulas, and exam traps.

Portfolio Beta

1 public question with explanations, formulas, and exam traps.

Portfolio Management Process

1 public question with explanations, formulas, and exam traps.

Portfolio Management: An Overview

16 public questions with explanations, formulas, and exam traps.

Portfolio Risk and Return

2 public questions with explanations, formulas, and exam traps.

Portfolio Risk and Return: Part I

35 public questions with explanations, formulas, and exam traps.

Portfolio Risk and Return: Part II

28 public questions with explanations, formulas, and exam traps.

Risk Management

1 public question with explanations, formulas, and exam traps.

Risk Modification

1 public question with explanations, formulas, and exam traps.

Systematic and Nonsystematic Risk

1 public question with explanations, formulas, and exam traps.

The Behavioral Biases of Individuals

8 public questions with explanations, formulas, and exam traps.

Utility and CAL

1 public question with explanations, formulas, and exam traps.

Easy

Portfolio Management

Asset Allocation and ESG

An IPS specifies a long-run 60/30/10 strategic allocation and permits ESG integration when it does NOT violate risk, return, and liquidity objectives. The most accurate interpretation is that ESG integration:

Easy

Portfolio Management

Basics of Portfolio Planning and Construction

Within a typical investment policy statement, the strategic asset allocation and the rebalancing policy are most likely presented in the:

Easy

Portfolio Management

Basics of Portfolio Planning and Construction

Chen Wei, a senior executive, may NOT trade shares of his employer during quarterly blackout windows and must obtain pre-clearance before any sale. In his investment policy statement, these restrictions are most appropriately classified under:

Moderate

Portfolio Management

Basics of Portfolio Planning and Construction

Amara Diallo, a 30-year-old founder whose income depends entirely on her early-stage company, tells her adviser she wants an aggressive, equity-only portfolio. The adviser concludes that her volatile income and limited cash reserves give her a low ability to take risk. The adviser should most appropriately:

Moderate

Portfolio Management

Basics of Portfolio Planning and Construction

The Solveig Future Fund invests exclusively in companies whose products advance renewable-energy generation and water conservation, selecting holdings specifically for exposure to those two areas. This ESG implementation approach is best described as:

Very Difficult

Portfolio Management

Basics of Portfolio Planning and Construction

An investment policy statement contains two risk statements. Statement 1: 'The portfolio should NOT lose more than 12% of its value over any 12-month period, assessed at a 95% confidence level.' Statement 2: 'Annualized tracking risk relative to the policy benchmark should NOT exceed 3%.' These statements are best classified, respectively, as:

Easy

Portfolio Management

Basics of Portfolio Planning and Construction

In assessing financial risk tolerance, ability to take risk is best described as:

Easy

Portfolio Management

Basics of Portfolio Planning and Construction

A required cash withdrawal from the portfolio in six months is most likely classified in the IPS as a:

Easy

Portfolio Management

Basics of Portfolio Planning and Construction

Strategic asset allocation is best described as:

Easy

Portfolio Management

Basics of Portfolio Planning and Construction

Rebalancing is most accurately described as:

Moderate

Portfolio Management

Basics of Portfolio Planning and Construction

An investment committee excludes companies with material revenue from tobacco and also directs managers to assess governance quality in security analysis. These instructions are most accurately described as:

Moderate

Portfolio Management

Basics of Portfolio Planning and Construction

An investor has substantial wealth, stable income, a long time horizon, and low liquidity needs, but becomes very anxious during modest market declines. The adviser should most appropriately classify the investor as having:

Moderate

Portfolio Management

Basics of Portfolio Planning and Construction

A foundation must distribute 5% of portfolio value each year to support grants. In the IPS, this required annual payout is most appropriately classified as a:

Moderate

Portfolio Management

Basics of Portfolio Planning and Construction

A portfolio begins with a target allocation of 60% equity and 40% bonds and a value of 1,000,000. Equity rises 20% and bonds fall 5%. To rebalance to the original target weights, the manager should most likely:

Very Difficult

Portfolio Management

Basics of Portfolio Planning and Construction

A client has a long time horizon and no near-term spending needs but says, "I will sell everything if the portfolio falls 5%." The IPS should most appropriately reflect:

Very Difficult

Portfolio Management

Basics of Portfolio Planning and Construction

A portfolio's policy target for equities is 60% with a permitted range of 55% to 65%. After a market rally, equities rise to 64%. The manager leaves the allocation unchanged. This decision is most accurately described as:

Easy

Portfolio Management

Basics of Portfolio Planning and Construction

A client instructs the manager to invest only in companies with high ESG scores relative to industry peers, while keeping the benchmark universe otherwise intact. The implementation approach is best described as:

Moderate

Portfolio Management

Behavioral Biases

An investor refuses to sell a losing position because selling would make the loss feel real, even though new information has weakened the investment case. The bias is most likely:

Moderate

Portfolio Management

CAL, CML, and SML

A line shows combinations of the risk-free asset and the market portfolio, with expected return plotted against total portfolio standard deviation. This line is best described as the:

Moderate

Portfolio Management

CAPM

The risk-free rate is 3.5%, expected market return is 9.0%, and a stock's beta is 1.25. The CAPM expected return is closest to:

Moderate

Portfolio Management

CML and Portfolio Choice

An investor can borrow at the risk-free rate and invest in the market portfolio. A portfolio located above the capital market line would most likely indicate:

Moderate

Portfolio Management

IPS - Risk Tolerance

An investor has a high financial ability to bear risk but becomes unwilling to accept even moderate short-term losses. When establishing the investor's overall risk tolerance in the IPS, the adviser should most appropriately:

Moderate

Portfolio Management

Efficient Frontier

A risky portfolio lies below the minimum-variance frontier for a given expected return. The most accurate interpretation is that the portfolio is:

Easy

Portfolio Management

Introduction to Risk Management

A securities firm suffers a large loss when an employee circumvents internal controls to conceal unauthorized trades. This loss is best classified as arising from:

Easy

Portfolio Management

Introduction to Risk Management

Within an organization's risk management framework, deciding which risks the organization is willing to pursue, which risks it should avoid, and how much total loss it can withstand is best described as establishing:

Moderate

Portfolio Management

Introduction to Risk Management

A chemicals producer faces the possibility of a plant explosion that is very unlikely in any given year but would be financially catastrophic if it occurred. Third-party insurance is available at a premium close to the actuarially fair level. The most appropriate risk treatment is to:

Moderate

Portfolio Management

Introduction to Risk Management

A chief investment officer expresses the fund's total risk appetite as a 10% annual volatility target and allocates that total among equity beta, duration, and currency factor exposures, sizing positions by their contributions to risk rather than by capital amounts. This practice is best described as:

Easy

Portfolio Management

Introduction to Risk Management

Risk management is most accurately defined as the process of:

Very Difficult

Portfolio Management

Introduction to Risk Management

A board member reviews a risk report showing a one-month 5% value at risk of EUR 8 million and concludes, 'Our maximum possible loss in any month is EUR 8 million.' The statement is most accurately criticized because VaR:

Moderate

Portfolio Management

Introduction to Risk Management

A risk committee sets a maximum 95% one-day VaR limit for a trading desk and requires daily reporting against the limit. These actions are best described as part of:

Moderate

Portfolio Management

Introduction to Risk Management

A portfolio has a one-day 95% VaR of 4 million. The most accurate interpretation is that:

Moderate

Portfolio Management

Introduction to Risk Management

A company buys insurance to reduce the financial effect of property damage from natural disasters. This risk modification method is best described as:

Easy

Portfolio Management

Introduction to Risk Management

A risk manager estimates normal-market VaR and then separately evaluates losses from a 30% equity market decline and a sudden credit spread widening. The second exercise is best described as:

Easy

Portfolio Management

Introduction to Risk Management

An investment firm allocates a fixed amount of tracking error to each strategy and monitors whether each team stays within its assigned risk allowance. This practice is best described as:

Easy

Portfolio Management

Introduction to Risk Management

A portfolio manager uses an equity futures position to reduce exposure to a broad equity market decline. This action is best described as:

Moderate

Portfolio Management

Introduction to Risk Management

A 50 million portfolio has daily standard deviation of 1.0%. Assuming a normal distribution and using a 2.33 z-score, the one-day 99% VaR is closest to:

Moderate

Portfolio Management

Investor Types

Compared with a defined contribution pension plan, a defined benefit pension plan most likely places greater emphasis on:

Moderate

Portfolio Management

IPS - Constraints

A client must pay a known tuition bill in nine months and also has a 25-year retirement objective. In the IPS, the tuition bill is most appropriately treated as:

Moderate

Portfolio Management

IPS - Risk Tolerance

A retired investor with modest assets says she is comfortable taking high risk, but her required spending needs would deplete the portfolio if a 15% loss occurred. The most appropriate risk assessment is that:

Moderate

Portfolio Management

Market Model

A stock's covariance with the market is 0.032 and the market variance is 0.040. The risk-free rate is 2% and expected market return is 8%. Under CAPM, the expected stock return is closest to:

Moderate

Portfolio Management

Performance Measures

A portfolio returned 11.2%; the risk-free rate was 3.2%; the market returned 9.5%. The portfolio standard deviation was 18%, market standard deviation 15%, and portfolio beta 0.90. Jensen's alpha is closest to:

Moderate

Portfolio Management

Performance Measures

Two portfolios have identical excess returns. Portfolio X has higher standard deviation but the same beta as Portfolio Y. Relative to Y, X must have:

Moderate

Portfolio Management

Portfolio Beta

A portfolio has USD40 million in a stock with beta 1.2, USD35 million in a stock with beta 0.8, and USD25 million in a risk-free asset. The portfolio beta is closest to:

Moderate

Portfolio Management

Portfolio Management Process

A wealth manager first identifies a client's return objective, risk tolerance, constraints, and benchmark policy before selecting managers and securities. This sequence is most consistent with:

Easy

Portfolio Management

Portfolio Management: An Overview

The portfolio perspective is best described as focusing on:

Easy

Portfolio Management

Portfolio Management: An Overview

Compared with an open-end mutual fund tracking the same index, an exchange-traded fund most likely:

Easy

Portfolio Management

Portfolio Management: An Overview

The planning step in the portfolio management process most likely includes:

Easy

Portfolio Management

Portfolio Management: An Overview

Relative to a life insurance company, a property and casualty insurer most likely has:

Easy

Portfolio Management

Portfolio Management: An Overview

An investment policy statement is most accurately described as a document that:

Moderate

Portfolio Management

Portfolio Management: An Overview

Marta Olsen manages the securities portfolio of a commercial bank funded primarily by short-term customer deposits. In setting policy for the portfolio, the bank's primary consideration is most likely to:

Easy

Portfolio Management

Portfolio Management: An Overview

Diversification most likely reduces portfolio risk by lowering exposure to:

Moderate

Portfolio Management

Portfolio Management: An Overview

Compared with a typical index mutual fund, a hedge fund is most likely to:

Easy

Portfolio Management

Portfolio Management: An Overview

A defined contribution pension plan is best described as a plan in which:

Very Difficult

Portfolio Management

Portfolio Management: An Overview

The Halversen Manufacturing defined benefit plan has been closed to new employees, and its ratio of retired to active participants has risen steadily. Relative to its earlier profile, the plan's investment policy should most likely reflect:

Easy

Portfolio Management

Portfolio Management: An Overview

Passive management is most accurately associated with:

Easy

Portfolio Management

Portfolio Management: An Overview

Compared with a separately managed account, a mutual fund is most accurately described as:

Easy

Portfolio Management

Portfolio Management: An Overview

The feedback step of the portfolio management process most likely includes:

Moderate

Portfolio Management

Portfolio Management: An Overview

An adviser first documents a client's objectives and constraints, then selects the strategic asset allocation, and later measures performance against the client's goals. These activities are best classified, respectively, as:

Moderate

Portfolio Management

Portfolio Management: An Overview

A pension plan promises employees a retirement income based on years of service and final salary. The plan sponsor invests plan assets to meet those promised payments. The plan is best described as:

Easy

Portfolio Management

Portfolio Management: An Overview

A wealthy individual asks an adviser to recommend three stocks with the highest stand-alone expected returns. The adviser instead begins with the client's IPS and evaluates how potential holdings affect the total portfolio. The adviser's approach is most accurately justified because:

Moderate

Portfolio Management

Portfolio Risk and Return

A portfolio invests 60% in Asset A and 40% in Asset B. Expected returns are 11% and 7%, standard deviations are 18% and 12%, and correlation is 0.25. The portfolio expected return and standard deviation are closest to:

Moderate

Portfolio Management

Portfolio Risk and Return

A stock has correlation of 0.60 with the market, stock standard deviation of 24%, and market standard deviation of 16%. The stock beta is closest to:

Easy

Portfolio Management

Portfolio Risk and Return: Part I

Based on long-run historical capital market data, the asset class that has exhibited both the highest average annual return and the highest standard deviation of returns is most likely:

Easy

Portfolio Management

Portfolio Risk and Return: Part I

On a graph of expected return against standard deviation, the indifference curves of a more risk-averse investor, relative to those of a less risk-averse investor, are most likely:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

Priya Nair allocates her assets between a risk-free asset yielding 4.0% and a risky fund with an expected return of 10.0% and a standard deviation of 20.0%. She targets a complete portfolio standard deviation of 12.0%. The expected return of her complete portfolio is closest to:

Easy

Portfolio Management

Portfolio Risk and Return: Part I

The holding period return for a stock purchased at P0, sold at P1, and paying income D during the period is:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

Tomas Reyes invests 70% of a portfolio in a domestic equity fund with a standard deviation of 14% and 30% in a commodity fund with a standard deviation of 26%. The correlation between the two funds is -0.30. The portfolio standard deviation is closest to:

Easy

Portfolio Management

Portfolio Risk and Return: Part I

For a volatile series of returns, the geometric mean return is most likely:

Very Difficult

Portfolio Management

Portfolio Risk and Return: Part I

Ingrid Sorensen holds 50% in Asset A (standard deviation 16%) and 50% in Asset B (standard deviation 24%), with a correlation of 0.20 between the assets. Relative to the portfolio standard deviation that would result if the correlation were +1.0, the reduction in portfolio standard deviation achieved at the actual correlation is closest to:

Easy

Portfolio Management

Portfolio Risk and Return: Part I

When a portfolio manager is evaluated independently of the timing of client external cash flows, the most appropriate return measure is:

Easy

Portfolio Management

Portfolio Risk and Return: Part I

The expected return of a risky asset with discrete scenarios is calculated as the:

Easy

Portfolio Management

Portfolio Risk and Return: Part I

The expected return of a portfolio is most accurately calculated as the:

Easy

Portfolio Management

Portfolio Risk and Return: Part I

For a two-asset risky portfolio, diversification benefits are greatest when the assets have:

Easy

Portfolio Management

Portfolio Risk and Return: Part I

A risk-averse investor will most likely choose, among portfolios with the same expected return, the portfolio with the:

Easy

Portfolio Management

Portfolio Risk and Return: Part I

The slope of the capital allocation line is best interpreted as the:

Easy

Portfolio Management

Portfolio Risk and Return: Part I

The efficient frontier of risky assets consists of portfolios that:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

An investor buys a share for 100, sells it one year later for 94, and receives a dividend of 2. The holding period return is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

A portfolio has annual returns of -5%, 10%, and 35%. The arithmetic mean return is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

A fund earns 10%, -5%, and 15% over three years. The annual geometric mean return is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

Given scenario returns of -4%, 8%, and 16% with probabilities of 0.30, 0.50, and 0.20, respectively, the expected return is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

For returns of 4%, 8%, and 12%, the population standard deviation is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

Asset A has a standard deviation of 10%, Asset B has a standard deviation of 20%, and the correlation between the assets is 0.50. The covariance between A and B is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

The covariance between two assets is 0.012. The standard deviations of the assets are 20% and 30%. The correlation is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

A portfolio invests 60% in Asset X with expected return of 8% and 40% in Asset Y with expected return of 12%. The portfolio expected return is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

A portfolio has 60% in Asset A and 40% in Asset B. Asset A has standard deviation of 10%, Asset B has standard deviation of 20%, and their correlation is 0.25. The portfolio standard deviation is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

An account begins with 100. It grows to 110 before an external contribution of 50. After the contribution, the account grows to 180 by year-end. The time-weighted return is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

An account begins with 100. It is worth 105 after one year, at which time 50 is withdrawn. One year later the account is worth 60. The annual money-weighted return is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

Using the sample covariance convention, Asset A returns are 4%, 8%, and 12%, and Asset B returns are 2%, 6%, and 10%. The sample covariance is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

A portfolio invests 50% in Asset A and 50% in Asset B. Asset A has standard deviation 10%, Asset B has standard deviation 20%, and the correlation is 0.60. The portfolio standard deviation is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

A manager reports an arithmetic mean return that is higher than the geometric mean return over the same period. The most likely explanation is that:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

Using the utility function U = E(R) - 0.5 A sigma\^2, with returns and risk in decimals and A = 4, which portfolio provides the highest utility?

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

Asset A has standard deviation of 15%, Asset B has standard deviation of 25%, and the correlation between A and B is 0.20. The weight of Asset A in the global minimum-variance two-asset portfolio is closest to:

Very Difficult

Portfolio Management

Portfolio Risk and Return: Part I

A portfolio holds 40% in Asset A and 60% in Asset B. Asset A has expected return 7% and standard deviation 12%; Asset B has expected return 11% and standard deviation 18%; their correlation is -0.25. The portfolio expected return and standard deviation are closest to:

Easy

Portfolio Management

Portfolio Risk and Return: Part I

Three asset pairs have correlations of -0.40, 0.20, and 0.85, respectively. Holding all else equal, the pair expected to provide the greatest diversification benefit is:

Moderate

Portfolio Management

Portfolio Risk and Return: Part I

A portfolio starts the year at 100 and rises to 110 immediately before an external contribution of 50. It ends the year at 168. The time-weighted return is closest to:

Very Difficult

Portfolio Management

Portfolio Risk and Return: Part I

An investor has risk aversion coefficient A = 3. A risky portfolio has expected return 10% and standard deviation 16%, and the risk-free rate is 2%. Among the following allocations to the risky portfolio, the investor's utility is highest at:

Easy

Portfolio Management

Portfolio Risk and Return: Part I

On a graph of expected return versus standard deviation for risky assets, the global minimum-variance portfolio is best described as the portfolio that:

Easy

Portfolio Management

Portfolio Risk and Return: Part II

An employee holds nearly all of her wealth in shares of her employer. Under capital market theory, the portion of her risk for which the market does NOT provide compensation through higher expected return is best described as:

Easy

Portfolio Management

Portfolio Risk and Return: Part II

A security's returns are uncorrelated with the market portfolio, and the security has a total standard deviation of 35%. Under the CAPM, the security's expected return is most likely:

Moderate

Portfolio Management

Portfolio Risk and Return: Part II

A stock's returns have a correlation of 0.50 with the market portfolio. The proportion of the stock's total variance that is nonsystematic is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part II

Lena Fischer estimates that Stock Q has a correlation of 0.40 with the market, a standard deviation of 30%, and that the market standard deviation is 15%. The risk-free rate is 3.0%, and the expected market return is 9.5%. Under the CAPM, the expected return of Stock Q is closest to:

Very Difficult

Portfolio Management

Portfolio Risk and Return: Part II

Diego Maranhao will invest his entire investable wealth in one of two funds. Fund X earned 15.0% with a standard deviation of 25.0% and a beta of 1.00. Fund Y earned 11.0% with a standard deviation of 12.0% and a beta of 0.90. The risk-free rate is 2.0%. The most appropriate selection is:

Easy

Portfolio Management

Portfolio Risk and Return: Part II

The security market line relates expected return to:

Easy

Portfolio Management

Portfolio Risk and Return: Part II

Beta is most accurately described as a measure of an asset's:

Easy

Portfolio Management

Portfolio Risk and Return: Part II

Under the CAPM, the expected return on an asset is equal to the risk-free rate plus:

Easy

Portfolio Management

Portfolio Risk and Return: Part II

A security with a positive alpha relative to the CAPM is most likely:

Easy

Portfolio Management

Portfolio Risk and Return: Part II

The Sharpe ratio measures excess return per unit of:

Easy

Portfolio Management

Portfolio Risk and Return: Part II

The Treynor ratio is most appropriate when evaluating a portfolio that is:

Moderate

Portfolio Management

Portfolio Risk and Return: Part II

The covariance between a stock and the market is 0.018, and the market variance is 0.0225. The stock's beta is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part II

The risk-free rate is 3%, the expected market return is 8%, and a stock's beta is 1.20. The stock's required return under the CAPM is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part II

An analyst forecasts a return of 10% for a stock. The risk-free rate is 2%, the expected market risk premium is 7%, and the stock's beta is 0.80. The stock's alpha is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part II

A portfolio return is 12%, the risk-free rate is 3%, and the portfolio standard deviation is 18%. The Sharpe ratio is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part II

A well-diversified portfolio earns 11%, the risk-free rate is 3%, and the portfolio beta is 0.80. The Treynor ratio is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part II

A portfolio earns 11%, the risk-free rate is 3%, portfolio standard deviation is 10%, market standard deviation is 16%, and market return is 12%. The portfolio's M-squared active performance relative to the market is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part II

An investor allocates 75% to a risky portfolio with expected return of 11% and 25% to a risk-free asset yielding 3%. The expected return of the complete portfolio is closest to:

Moderate

Portfolio Management

Portfolio Risk and Return: Part II

An investor borrows at the risk-free rate and invests 125% of equity in a risky portfolio with standard deviation of 16%. The complete portfolio standard deviation is closest to:

Very Difficult

Portfolio Management

Portfolio Risk and Return: Part II

An investor borrows at the 2% risk-free rate and invests 120% of equity in the market portfolio, which has expected return of 9% and standard deviation of 15%. The complete portfolio expected return and standard deviation are closest to:

Very Difficult

Portfolio Management

Portfolio Risk and Return: Part II

A stock has standard deviation of 30%, the market standard deviation is 20%, and the stock-market correlation is 0.60. The risk-free rate is 3% and the expected market risk premium is 6%. If the analyst's forecast return is 9.6%, the stock is most likely:

Very Difficult

Portfolio Management

Portfolio Risk and Return: Part II

An analyst states: "The CML is used to evaluate whether any individual security is mispriced, while the SML applies only to efficient portfolios." The most accurate response is that the statement:

Very Difficult

Portfolio Management

Portfolio Risk and Return: Part II

Fund A earned 12% with standard deviation of 15% and beta of 1.20. Fund B earned 11% with standard deviation of 10% and beta of 0.80. The risk-free rate was 3%. Based on both Sharpe and Treynor ratios, the better performer is:

Moderate

Portfolio Management

Portfolio Risk and Return: Part II

A portfolio earned 11%. The risk-free rate was 2%, the market return was 8%, and the portfolio beta was 1.20. Jensen's alpha is closest to:

Easy

Portfolio Management

Portfolio Risk and Return: Part II

A stock's CAPM required return is 8%. An analyst's expected return estimate is 6%. The stock plots:

Moderate

Portfolio Management

Portfolio Risk and Return: Part II

A portfolio holds 50% in a stock with beta 1.10, 30% in a stock with beta 0.80, and 20% in a stock with beta 1.50. The portfolio beta is closest to:

Easy

Portfolio Management

Portfolio Risk and Return: Part II

Two securities have the same beta. Security X has a higher expected return than Security Y. Relative to the SML, Security X is most likely:

Moderate

Portfolio Management

Portfolio Risk and Return: Part II

A stock has correlation with the market of 0.75, stock standard deviation of 24%, and market standard deviation of 18%. The stock's beta is closest to:

Moderate

Portfolio Management

Risk Management

A board sets enterprise-wide risk tolerance, delegates limits to business units, and receives reports comparing actual exposures with limits. The process is best described as:

Moderate

Portfolio Management

Risk Modification

A portfolio manager reduces foreign currency risk by entering forward contracts while keeping the underlying foreign bonds. The risk modification method is best described as:

Moderate

Portfolio Management

Systematic and Nonsystematic Risk

A well-diversified investor asks for a higher expected return because a stock has high firm-specific litigation risk that is uncorrelated with market returns. Under CAPM, the request is least justified because:

Easy

Portfolio Management

The Behavioral Biases of Individuals

Which of the following biases is most likely classified as an emotional bias rather than a cognitive error?

Moderate

Portfolio Management

The Behavioral Biases of Individuals

Rosa Almeida funds her living expenses only from dividends and interest, refusing to sell shares even when better total-return opportunities exist, and she manages her vacation account separately from her retirement account without considering how the holdings in the two accounts interact. Her behavior is most consistent with:

Moderate

Portfolio Management

The Behavioral Biases of Individuals

Analyst Johan Berg set a target price of 60 for a stock. After the company issues materially weaker forward guidance, he lowers his target only to 58, staying near his original figure despite the significance of the new information. Berg's behavior is most consistent with:

Very Difficult

Portfolio Management

The Behavioral Biases of Individuals

After three profitable years, fund manager Keiko Tanaka attributes her gains to superior skill and her occasional losses to bad luck. She now publishes earnings forecasts with unusually narrow ranges and has increased both portfolio concentration and trading frequency. Tanaka's behavior is most consistent with:

Easy

Portfolio Management

The Behavioral Biases of Individuals

A portfolio manager privately concludes that a sector is overvalued but keeps buying it because most competing managers are buying. When such behavior is widespread among investors, it most likely contributes to:

Easy

Portfolio Management

The Behavioral Biases of Individuals

A cognitive error is most accurately described as a bias arising from:

Moderate

Portfolio Management

The Behavioral Biases of Individuals

An investor refuses to sell a losing stock because realizing the loss would feel painful, even though better risk-adjusted opportunities are available. The behavior is most consistent with:

Easy

Portfolio Management

The Behavioral Biases of Individuals

A group of investors extrapolates a short streak of high returns far into the future and pushes prices away from values implied by fundamentals. This behavior most directly illustrates:

Moderate

Portfolio Management

Utility and CAL

An investor has risk aversion coefficient A = 4 and evaluates portfolios using U = E(R) - 0.5A sigma^2, with returns in decimals. Portfolio A: E=8%, sigma=10%. Portfolio B: E=11%, sigma=18%. Portfolio C: E=13%, sigma=25%. The optimal portfolio is: