Free CFA Level III: Portfolio Management Credit Strategies Practice Questions (2026)

Sample Questions

Question 1 Easy

A bottom-up credit analysis approach involves:

Solution

A is correct.

Bottom-up credit analysis focuses on individual issuers: analyzing financial statements, business fundamentals, competitive position, and management quality to assess creditworthiness. The analyst then identifies bonds that are attractively priced relative to their credit risk, seeking to buy undervalued credit and avoid overvalued credit.

Question 2 Medium

A sector rotation strategy in credit involves:

Solution

C is correct.

Sector rotation in credit is a top-down strategy that adjusts the portfolio's allocation across different credit sectors (e.g., financials, industrials, utilities, consumer) based on relative value analysis and economic outlook. For example, overweighting financials when the banking sector is expected to benefit from rising interest rates, or overweighting utilities when seeking defensive positioning.

Question 3 Hard

To align the portfolio's DTS with the benchmark using only the CDX IG overlay, Park's most appropriate action is to:

Solution

C is correct. Portfolio DTS is 852 bps-years versus benchmark DTS of 823.5 bps-years (

0.30 \times 180 \times 5.5 + 0.45 \times 120 \times 6.0 + 0.15 \times 100 \times 7.5 + 0.10 \times 200 \times 4.5 = 297 + 324 + 112.5 + 90 = 823.5

), so the portfolio carries 28.5 bps-years of excess active spread risk. To remove credit risk, Park must BUY CDX IG protection (a synthetic short on the index). The required notional satisfies

(N / V) \times O A S_{C D X} \times S D_{C D X} = Δ D T S

N = \frac{Δ D T S \times V}{O A S _{C D X} \times S D _{C D X}} = \frac{28.5 \times $1 , 200 , 000 , 000}{75 \times 4.7} = \frac{$34 , 200 , 000 , 000}{352.5} \approx $97 million .

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