Free CFA Level III: Private Markets Asset Allocation Practice Questions
Asset allocation on the CFA Level III Private Markets pathway covers mean-variance optimization, alternative asset allocation, goals-based frameworks, and rebalancing policies for portfolios with illiquid private market holdings.
Sample Questions
Question 1
Easy
Risk budgeting in asset allocation most accurately refers to:
Solution
C is correct.
Risk budgeting treats risk as a scarce resource and allocates it purposefully across asset classes, strategies, or factors. Each asset class receives a "risk budget" representing its allowed contribution to total portfolio risk. This approach ensures that risk is deployed where it is most likely to be compensated. For example, an investor might allocate 60% of the total risk budget to equities, 20% to credit, and 20% to alternatives, reflecting the expected risk-return tradeoff in each area.
Risk budgeting treats risk as a scarce resource and allocates it purposefully across asset classes, strategies, or factors. Each asset class receives a "risk budget" representing its allowed contribution to total portfolio risk. This approach ensures that risk is deployed where it is most likely to be compensated. For example, an investor might allocate 60% of the total risk budget to equities, 20% to credit, and 20% to alternatives, reflecting the expected risk-return tradeoff in each area.
Question 2
Medium
Which factor should lead an investor to use wider rebalancing corridors for an asset class?
Solution
B is correct.
The optimal corridor width involves a tradeoff between the cost of rebalancing (transaction costs, taxes, market impact) and the cost of portfolio drift (deviation from the target risk profile). When transaction costs are high for a particular asset class (e.g., private equity, real estate, or emerging market equities), wider corridors are appropriate because the savings from avoiding frequent costly trades outweigh the benefit of tighter portfolio alignment.
The optimal corridor width involves a tradeoff between the cost of rebalancing (transaction costs, taxes, market impact) and the cost of portfolio drift (deviation from the target risk profile). When transaction costs are high for a particular asset class (e.g., private equity, real estate, or emerging market equities), wider corridors are appropriate because the savings from avoiding frequent costly trades outweigh the benefit of tighter portfolio alignment.
Question 3
Hard
Applying the Singer-Terhaar framework with the integration and correlation assumptions provided, Voss's 10-year expected return on Private Real Estate is closest to:
Solution
B is correct. The global Sharpe ratio (from Global Equities, with US Cash as RF) is . The integrated risk premium for Private Real Estate is . The segmented risk premium is . The blended Singer-Terhaar premium is . Adding the risk-free rate gives .