Portfolio Construction

CFA® Level III, published weight 15–20%. Equity and fixed-income portfolios, alternatives, institutions, trading costs.

What the outline covers

Overview of Equity Portfolio Management
Overview of Fixed-Income Portfolio Management
Asset Allocation to Alternative Investments
An Overview of Private Wealth Management
Portfolio Management for Institutional Investors
Trading Costs and Electronic Markets
Case Study in Portfolio Management: Institutional (SWF)

Sample questions

These 5 questions are free in the app too. Try each one before opening the answer.

Question 1

A portfolio has an active share of 0.75 but active risk of only 2%. This combination most likely describes:

Active share 0.75 · Active risk 2%

A. A concentrated sector-rotation strategy
B. A diversified stock picker with limited factor tilts
C. A closet indexer
D. A leveraged long-short fund

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B. High active share means very different holdings; low active risk means those differences largely offset, which is diversified stock selection.

Reading: Portfolio Construction — Overview of Equity Portfolio Management

Question 2

In immunising a single liability, the manager should match the present value and duration of the liability while:

A. Maximising portfolio convexity
B. Minimising portfolio convexity
C. Maximising portfolio yield
D. Matching the liability’s cash flows exactly

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B. Minimising convexity subject to matching duration minimises structural risk from non-parallel shifts in the yield curve.

Reading: Portfolio Construction — Overview of Fixed-Income Portfolio Management

Question 3

An endowment with a perpetual horizon and a 5% spending rule is best positioned to bear:

A. Low liquidity risk and high liability risk
B. High illiquidity and equity risk relative to most institutions
C. Regulatory capital constraints similar to an insurer
D. A duration-matched fixed income mandate

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B. A perpetual horizon and predictable spending permit substantial allocations to illiquid and equity-like assets in pursuit of the return required.

Reading: Portfolio Construction — Portfolio Management for Institutional Investors

Question 4

An order for 10,000 shares is placed at a decision price of $50. 8,000 shares fill at an average of $50.40 and the order is cancelled with the price at $51. Implementation shortfall includes:

Decision $50 · 8,000 @ $50.40 · 2,000 unfilled, price $51

A. Only the realised price impact on the 8,000 shares
B. Realised impact plus commissions only
C. Realised impact, commissions and the opportunity cost on the 2,000 unfilled shares
D. Only the commission paid

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C. Implementation shortfall captures the full gap between the paper portfolio and the actual one, including the cost of the portion never executed.

Reading: Portfolio Construction — Trading Costs and Electronic Markets

Question 5

Compared with a defined benefit pension plan, a sovereign wealth fund most distinctively faces:

A. A contractual liability stream
B. A public policy mandate and political scrutiny
C. A regulatory solvency ratio
D. Mandatory annual distributions

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B. Sovereign wealth funds typically have no contractual liability but must operate under a public mandate with political and transparency constraints.

Reading: Portfolio Construction — Portfolio Management for Institutional Investors

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