Portfolio Management

CFA® Level II, published weight 10–15%. Active management, ETFs, multifactor models, market risk, backtesting.

What the outline covers

Economics and Investment Markets
Analysis of Active Portfolio Management
Exchange-Traded Funds: Mechanics and Applications
Using Multifactor Models
Measuring and Managing Market Risk
Backtesting and Simulation

Sample questions

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Question 1

A manager has an information coefficient of 0.05, 100 independent bets per year and a transfer coefficient of 0.8. The expected information ratio is closest to:

IC 0.05 · BR 100 · TC 0.8

A. 0.04
B. 0.40
C. 0.50
D. 4.00

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B. IR ≈ IC × √BR × TC = 0.05 × 10 × 0.8 = 0.40. Breadth enters as a square root, so doubling bets does not double the ratio.

Reading: Portfolio Management — Analysis of Active Portfolio Management, LOS 2.d

Question 2

A portfolio holds 400 stocks but all positions reflect a single macroeconomic view. Under the fundamental law of active management, breadth is closest to:

A. 400
B. 20
C. 1
D. 400 divided by the transfer coefficient

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C. Breadth counts independent decisions, not holdings. One macro view driving every position is a breadth of one.

Reading: Portfolio Management — Analysis of Active Portfolio Management, LOS 2.e

Question 3

A portfolio has a one-day 95% VaR of $1.2m. The most accurate interpretation is:

VaR₉₅,₁d = $1.2m

A. The maximum loss on any single day is $1.2m
B. On 5% of days the loss is expected to exceed $1.2m
C. The average daily loss is $1.2m
D. Losses will never exceed $1.2m in a month

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B. VaR is a quantile of the loss distribution. It states the frequency with which the threshold is breached, never the size of the breach.

Reading: Portfolio Management — Measuring and Managing Market Risk, LOS 5.b

Question 4

A backtest uses financial statement data as later restated rather than as originally reported. This introduces:

A. Survivorship bias
B. Look-ahead bias
C. Data snooping bias
D. Selection bias

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B. Restated data was not available at the decision date, so the backtest uses information the manager could not have had — look-ahead bias.

Reading: Portfolio Management — Backtesting and Simulation, LOS 6.c

Question 5

An ETF trades persistently at a premium to net asset value. The most likely cause is:

A. A failure of the creation/redemption mechanism
B. High portfolio turnover within the fund
C. A high expense ratio
D. A large number of authorised participants

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A. Arbitrage by authorised participants normally closes premiums and discounts. A persistent premium implies the mechanism is impaired.

Reading: Portfolio Management — Exchange-Traded Funds, LOS 3.c

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