Free CFA Level III: Portfolio Management Portfolio Construction Practice Questions
Portfolio construction on the CFA Level III Portfolio Management pathway tests risk budgeting, factor exposure management, implementation constraints, and the integration of ESG considerations into investment processes.
Sample Questions
Question 1
Easy
Price improvement occurs when:
Solution
A is correct.
Price improvement occurs when a trade executes at a price better than the prevailing quoted price for the customer. For a buy order, this means executing below the ask price, and specifically if below the midquote, the effective spread is narrower than the quoted spread. This represents a genuine cost saving for the investor.
Price improvement occurs when a trade executes at a price better than the prevailing quoted price for the customer. For a buy order, this means executing below the ask price, and specifically if below the midquote, the effective spread is narrower than the quoted spread. This represents a genuine cost saving for the investor.
Question 2
Medium
This scenario best illustrates:
Solution
B is correct.
This scenario illustrates a classic risk concentration where a single underlying factor (oil prices) drives multiple correlated adverse outcomes simultaneously: reduced SWF contributions (fiscal), portfolio losses on energy holdings (market), sovereign credit deterioration (credit), and domestic asset declines (economic). An ERM framework would identify this as a critical concentration because the risks amplify each other rather than offsetting.
This scenario illustrates a classic risk concentration where a single underlying factor (oil prices) drives multiple correlated adverse outcomes simultaneously: reduced SWF contributions (fiscal), portfolio losses on energy holdings (market), sovereign credit deterioration (credit), and domestic asset declines (economic). An ERM framework would identify this as a critical concentration because the risks amplify each other rather than offsetting.
Question 3
Hard
Which return objective is most appropriate for Marcus's IPS?
Solution
A is correct.
Marcus's return objective must account for: (1) net annual living expenses after Social Security begins ( starting at 65, and 200,000 for the first 3 years), (2) inflation to preserve purchasing power over a 28-year horizon, and (3) maintaining sufficient assets to fund a 1 million estate bequest. A real (inflation-adjusted) return framework properly addresses all three needs.
Marcus's return objective must account for: (1) net annual living expenses after Social Security begins ( starting at 65, and 200,000 for the first 3 years), (2) inflation to preserve purchasing power over a 28-year horizon, and (3) maintaining sufficient assets to fund a 1 million estate bequest. A real (inflation-adjusted) return framework properly addresses all three needs.