Free CFA Level I Portfolio Management Practice Questions
Portfolio management on the CFA Level I exam covers modern portfolio theory, the capital asset pricing model (CAPM), risk and return measurement, and the investment policy statement. Weighted 5-8% (CFA Institute).
Sample Questions
Question 1
Easy
Which of the following best describes the Sharpe ratio?
Solution
A is correct. The Sharpe ratio is defined as , measuring a portfolio's excess return over the risk-free rate per unit of total risk, as captured by the standard deviation of returns.
Question 2
Medium
Value at Risk (VaR) is best described as:
Solution
A is correct.
VaR represents the minimum loss that would be exceeded with a specified probability (e.g., 5%) over a given time horizon. For example, a 1-day 5% VaR of 1 million means there is a 5% chance the portfolio will lose at least 1 million in one day.
VaR represents the minimum loss that would be exceeded with a specified probability (e.g., 5%) over a given time horizon. For example, a 1-day 5% VaR of 1 million means there is a 5% chance the portfolio will lose at least 1 million in one day.
Question 3
Hard
A portfolio manager reports the following for the past year: portfolio return of 16%, portfolio beta of 1.2, risk-free rate of 4%, and market return of 11%. Based on Jensen's alpha, the manager's risk-adjusted performance is best described as:
Solution
C is correct. Jensen's alpha is the difference between the portfolio's actual return and the return required by the CAPM. The required return is , or 12.4%. Jensen's alpha is then , or 3.6%. A positive alpha indicates the manager delivered returns above what the CAPM would require for the portfolio's systematic risk.