76 Free CFA Level 2 Practice Questions and Answers on Portfolio Management

76 Free CFA Level 2 Practice Questions and Answers on Portfolio Management tightly focus on the highlights in the curriculum for your improved understanding of portfolio management. Those free CFA practice exam questions and clear answers are nicely formatted to make revising what you’ve learnt easier and refresh your study experience. It’s not necessary to to check answers and calculate your score by yourself. With one simple click into the submit button, your total points with correct/incorrect answers will come out so that you can compare and contrast easily. You can measure where you’re standing in your studies by that way and hereby have proper strategies for exam prep. Wish your upcoming exam a great success!
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M square = E(optimal risky portfolio) - E(market)

• Determine risk tolerance
• Modigliani squared measure
• risk value (SML)
• maximum risk reduction

Calculate return from interest rate: use real exchange rate * (1 + r(f))(1+r(d))note: use real exchange rateReal exchange rate = S * Price foreign / Price domqestic

• Real exchange rate from spot nominal exchange rate
• Calculate active specific risk (or asset selection risk)
• Calculate return of foreign bonds, knowing inflation rate and interest rate
• Calcuate foreign currency appreciation

The client's risk aversion will remain unchanged next year, which suggests that the percentage allocated to cash will not change. A higher market return suggests greater weight should be placed on the passively managed portfolio, especially in light of Keene's prediction that markets will move closer to equilibrium. Less emphasis is placed on active management as markets move toward equilibrium (alphas move closer to zero).

• risk and return of the portfolio: combination of risky portfolio and risk free
• Steps to create Treynor-Black model
• compare: a certain stock's volatility to the average stock
• how to rebalance Treynor Black portfolio if client's risk aversion is unchanged and market return increases

determine asset allocationThe CML is derived by drawing a tangent line from the intercept point on the efficient frontier to the point where the expected return equals the risk-free rate of return. Since the horizontal value is SDV -> value E(R) based on total risk

• Purpose of CML
• icapm
• CAL vs. CML
• Market price of risk

If the real rate remains constant, the change in the exchange rate will simply reflect the inflation differential.FXexpected = FXcurrent * (1 − inflation differential)The expected DC return on the bond should be approximately equal to the FC return minus the FC depreciation.DCreturn = FCreturn − FCdepreciation

• Expected excess return vs. alpha
• Calculate FX expected and DC expected
• Interest rate partiy
• Calculate active risk squared

1. Intercept:- Macro: expected return- Fundamental: no econ interpretation2. Sensitivities:- Macro: estimated- Fundamental: calculated from the attributes data 3. Number of factors:- Macro: not many- Fundamental: usually a lot4. Factors:- Macro: surprises-Fund: rates of returns associated w each factor (P/E, size, etc.), estimated using regression

• Relationship between APT and multifactor model
• Return on a factor mimicking portfolio
• Macroeconomic factor model vs. fundamental factor model
• active factor risk vs. active specific risk

No economic interpretationJust the regression intercept necessary to make the unsystematic risk of the asset equal to 0 (?)

• Macroeconomic factor model vs. fundamental factor model
• Estimate of values of fundamental factors
• Intercept term of fundamental factor model
• Relationship between APT and multifactor model

1. active factor: Risk from active factor tilts attributable to deviations of the portfolio's factor sensitivities versus the benchmark's sensitivities to the same set of factors.2. active specific risk: Risk from active asset selection attributable to deviations of the portfolio's individual asset weightings versus the benchmark's individual assetweightings, after controlling for differences in factor sensitivities of the portfolioversus the benchmark.

• Multifactor models to predict asset returns
• Active return vs. active risk
• Systematic vs. unsystematic risks
• Active factor risk vs. active specific risk

the return difference between low and high P/E stocks

• Sharpe ratio of optimal risky portfolio
• Construct optimal risky portfolio
• pure factor portfolio
• Return on a factor mimicking portfolio

Regress asset return on single factor: the return on the market portfolio

• CAL vs. CML
• Market model (source of CAPM)
• assumption of APT
• Arbitrage pricing theory (APT)