29 CFA Level 2 Practice Exams 2015 Questions on Portfolio Concepts

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With CAPM, investors receive alter their portfolio by altering allocation to the market portfolio. APT gives no special role to the market portfolio

• CML vs SML
• Active Risk
• APT vs CAPM
• APT Assumptions

1) Greater uncertainty in forecasts leads to less reliability2) Statistical input forecasts change over time (time instability)3) Small changes in inputs can cause large charges in frontier (overfitting), which leads to unreasonably short positions and frequent rebalancing

• Adjusted Beta (beta instability)
• Minimum Variance Frontier
• Efficient Frontier with RFR
• Reasons for min variance frontier instability (3)

E(Rc) = Rf + [E(Rt) - Rf / std dev(t)]*std dev(c)

• CML vs SML
• CAL Equation
• APT Assumptions
• Active Risk

Avg Variance *[ p + [ (1- p)/N]1) Variance approaches Avg Variance * p as N gets large2) The lower the correlation, the lower the minimum variance but the greater the number of stocks needed to reach it

• Variance of Equally Weighted Portfolio
• Efficient Frontier with RFR
• Variance of Eq. Weighed with Correlation
• Market Model Expected Return

If markets are in equilibrium, risk and return combinations for individual securities will lie along SML, but not CML. They will lie below CML because they include unsystematic risk

• CAL Equation
• APT vs CAPM
• CML vs SML
• Active Risk

1) APT explains variations across assets' expected returns in a single time period2) APT assumes no arbitrage, multi are ad hoc3) The APT intercept is the RFR

• APT vs CAPM
• APT vs Multi models
• The Market Model
• APT Assumptions

Used to derive inputs for the mean variance model. Regression model often used to estimate betaR(i) = Alpha + Beta * R(m) + error(i)

• Security Market Line
• The Market Model
• Capital Market Line
• APT vs Multi models

Cov(i,j) = Beta(i) Beta(j) Var(mkt)^2

• Market Model Assumptions
• Market Model Expected Return
• Market Model Variance
• Market Model Covariance between (i,j)

Use statistical methods, in factor analysis the factors are portfolios that explain the covariance in returns. In principal component models they explain variance. Don't lend themselves well to interpretation

• Macroeconomic Factor Models
• Statistical Factor Models
• Fundamental Factor Models
• APT vs Multi models

Beta = Covariance(i,mkt) / Var(mkt)= Corr(i,mkt)* [std dev(i)/std dev(mkt)]

• Calculating Beta
• Information Ratio
• Active Risk
• CAL Equation

Assumes asset returns explained by returns from firm specific factors (P/E, mkt cap, leverage, earnings growth)

• APT vs Multi models
• Statistical Factor Models
• Fundamental Factor Models
• Macroeconomic Factor Models