16 CFA Level 2 Practice Exams 2015 Questions on Portfolio Management

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expected return= risk free+factor sens x price of risksolve this to get price of risk

• tracking risk
• active factor risk
• factor risk/price of risk
• active risk square

1)All investors are risk averse; they prefer less risk to more for the same level of expected return2)Expected returns for all assets are known.3)The variances and covariances of all asset returns are known.4)Investors need only know the expected returns, variances, and covariances of returns to determine optimal portfolios. They can ignore skewness, kurtosis, and other attributes of a distribution.5)There are no transaction costs or taxes.

• Market Model Assumption
• APT Assumption
• Mean - variance analysis assumption
• Appraisal ratio

(LLUTT): L (liquidity) - L (legal) - U (unique circumstance) - T (tax) - T (time)

• active factor risk
• information ratio
• what is CAL
• Investment Constraints

cov with mkt/mkt variance

• estimate beta of a stock from its cov with market and mkt variance
• TB model result in what kind of port
• Tangency portfolio std deviation
• Correlation b/w 2 assets given its betas and std dev of market

result in combination of active port indentified by the model and market (passive) port

• liquidity requirements incl what
• TB model result in what kind of port
• std deviation in perfect timing port
• factor risk/price of risk

when all investors share same expectation, CAL becomes CML

• FMCAR
• tracking risk
• what is CAL
• what is CML

expected return on how to allocate risky/risky free assets

• tracking risk
• what is CML
• what is CAL
• FMCAR

numerator:exposure factor( exposure factor1 x cov1+exposure factor2 x cov2)denominator:active risk squarefor a single factor: active factor risk/ active rik square

• CML Equation
• FMCAR
• what is CAL
• what is CML

misleading. perfect timing port will perform at least as well of t bills

• liquidity requirements incl what
• TB model result in what kind of port
• std deviation in perfect timing port
• information ratio

(active sensitivity of factor - benchmark) ^2 x factor variance

• APT Assumption
• active factor risk
• active risk square
• tracking risk

sample std deviation x (Return of port - return of benchmark)

• what is CAL
• tracking risk
• active factor risk
• what is CML

No arbitrage, can diversified all un-systematic risk, many assets available, factor model describe return

• Appraisal ratio
• Market Model Assumption
• CML Equation
• APT Assumption

arbitrage portfolio must have zero sensitivity to the factor. so we need to find the weight of each individualmportfolio with the long portfolio weight sum to 1 and the short portfoliomweight sum to -1. the arbitrage profit is weight x expexted return of all portfolio. rêmmber that weight x sensitivity of long port = sensitivity of short port

• Correlation b/w 2 assets given its betas and std dev of market
• arbitrage portfolio given expected returns of individual portfolio and their factor sensitivity
• Market Model: Expected return, variance and Cov
• Checking if adding new asset to portfolio is optimal