Portfolio Risk and Return: Part II practice questions

What to know

Identify the rule, formula, or decision criterion before reading the answer choices. CFA Level I distractors often use the right vocabulary with the wrong condition.

How to practice

Work each item under time pressure, then compare your reasoning with the step-by-step explanation and key takeaway.

Review signal

Missed questions should become scheduled reviews when the error comes from a concept gap, formula setup, or answer-choice trap.

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:

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:

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:

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:

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:

Portfolio Management

Portfolio Risk and Return: Part II

The security market line relates expected return to:

Portfolio Management

Portfolio Risk and Return: Part II

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

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:

Portfolio Management

Portfolio Risk and Return: Part II

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

Portfolio Management

Portfolio Risk and Return: Part II

The Sharpe ratio measures excess return per unit of:

Portfolio Management

Portfolio Risk and Return: Part II

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

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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: