Chartered Financial Analyst Level I Portfolio Construction

1.Ada's policy sets a 7% return, a moderate loss limit, a ten-year horizon, a taxable account, and a trust that bars options. It never mentions the house deposit she must pay in ten months. Which element is missing?

2.Ben must fund spending in three years. His manager wants a private-equity fund with a ten-year lockup as the core of the account. What should Ben do with that fund as the core?

3.Cara says she will accept an aggressive mix. She has no savings besides this account, and the account must cover a fixed pension-like spending need. Which mix belongs in the policy?

4.Drew has a large fortune and a long horizon, so his ability to take risk is high. He cannot sleep if the account falls 10%. The mean-variance mix would fall further. What should the policy do?

5.Elena's policy names a strategic mix. Her manager has kept a short-term equity tilt for two years and now treats that tilt as the normal weight, with no policy change. What is the tilt now?

6.Felix targets 60% equity with a band of 5 percentage points. A rally has taken equity to 66%. What does this band rule require?

7.Gina uses the same 60% equity target and a 5-point band. Equity is now 63%. What does the band rule require today?

8.Hiro ranks a fund with U = E(r) - 0.5 x A x variance. Expected return is 10%, so E(r) is 0.10, A is 4, and variance is 0.04. What is his utility?

9.Iris uses U = E(r) - 0.5 x A x variance on that same fund: expected return 0.10 and variance 0.04, but her A is 8. What is her utility?

10.Jules draws a capital allocation line from cash to a risky portfolio. The portfolio's excess return is 8% and its standard deviation is 16%. What is the slope of the line?

11.Keiko plots one stock by its total risk, off the line that joins the risk-free asset to the market portfolio. Is that stock a point on the capital market line?

12.Leon's stock has an expected return of 12%. The risk-free rate is 3%, beta is 1, and the market's expected return is 10%. Where does the stock sit versus the security market line?

13.Mina uses a risk-free rate of 3%, a beta of 1, and a market expected return of 10%. Her forecast for the stock is 8%, not 12%. What should she do with it as a fair-priced holding?

14.Noah's stock has a beta of 1.4. The risk-free rate is 2% and the market risk premium is 6%. What CAPM required return should he use?

15.Olga holds 60% in a fund with beta 1.0 and 40% in a fund with beta 1.5. What is the portfolio beta?

16.Paolo adds cash, which has a beta of 0, until cash is 20% of the account. The old portfolio beta was 1.2, so the risky sleeve is now 80%. What is the new beta?

17.Quinn's portfolio returned 11%. The risk-free rate is 3%, beta is 0.8, and the market's excess return is 10%, so the market itself returned 13%. What is Jensen's alpha?

18.Rosa's only risky account returned 11% with a standard deviation of 20%. The risk-free rate is 3%. What is the Sharpe ratio she should use for this whole-wealth portfolio?

19.Samir's sleeve has an excess return of 8 and a beta of 0.8. It is one piece of a larger portfolio that is already diversified. What is the Treynor ratio?

20.Talia's portfolio Sharpe ratio is 0.40. The market returned 10% with a standard deviation of 15%, and the risk-free rate is 3%. What is M-squared?

21.Uma's only account shows a positive alpha and a poor Sharpe ratio. The alpha came from one concentrated bet. What should decide whether she keeps that bet?

22.Victor mixes two assets in equal weights. Each has a Sharpe ratio of 0.4, a standard deviation of 10, and an excess return of 4. Their correlation is 0.2. What is the mix's Sharpe ratio?

23.Willa mixes those same two assets in equal weights, each with Sharpe ratio 0.4 and the same volatility, but the correlation is +1. What is the mix's Sharpe ratio?

24.Xavier's policy splits a tracking-risk budget across several named bets. The manager has spent the entire budget on one sector bet. What should happen next?

25.Yara's policy is a cheap index core plus a few active satellites. One satellite has grown to 80% of the account. What should she do?

26.Zane's strategic weights are 50% equity, 30% bonds, and 20% cash. After a rally they are 62%, 25%, and 13%. Restoring the policy means which trades?

27.Anika's taxable account is 1 point outside its equity band. Selling in December would realize a large short-term gain taxed at 30%. The risk breach is not serious. What should she do?

28.Bruno owns taxable bonds, whose interest is taxed as ordinary income, and a broad equity index, which gets a lower gains rate plus deferred gains or a step-up. Where should the taxable bonds go?

29.Celeste is about to put a municipal bond, whose interest is tax-exempt, inside a tax-deferred account. Withdrawals from that account will be taxed. Where should the bond be held if it is held at all?

30.Darius owes a 200,000 tuition bill in June. The portfolio is in illiquid funds plus 50,000 of cash. What should he do before June?

31.Estelle retired this year and is withdrawing 5% while equities fall 20%. She can take the cash from the depressed shares or from a cash bucket. Which source should she use?

32.Farid wants a cash bucket equal to two years of spending. Annual spending is 40,000, and the bucket currently holds 10,000. How much is missing?

33.Greta is paid by commission, and her future pay moves with sales, so that human capital behaves like equity. How should that shape the equity in her financial portfolio?

34.Hassan is a tenured professor. His future pay is steady, like a bond, and the rest of the policy agrees with a riskier financial mix. How should that shape his equity weight?

35.Ingrid may live to 95, and she also wants to leave capital to heirs. A plan that funds spending only to age 80 fails if she lives. What does buying a life annuity change?

36.Jamal wants a bequest of 500,000 in today's money. Inflation is 2% and the gift is 20 years away. What future nominal amount should the plan target?

37.Kira's estate tax is 40% above an exemption she has already used. The whole 743,000 bequest is taxable. How much tax is due?

38.Lars holds 20 stocks, and every one of them is in a single industry. An industry shock would hit the whole list. What is still concentrated?

39.Mei keeps 90% of her equity at home. Her spending is in that currency, which can justify the currency match. The home market is three banks and an oil company. What should she examine next?

40.Nabil bought an unhedged foreign bond fund as a safe-income holding. Currency moves have been larger than the bonds' yield. If stable income is the goal, what should he do?

41.Odette hedges a foreign bond's currency with a forward. What does the hedged position actually deliver?

42.Petra rebalances by selling what rose and buying what fell. On this path the winners have trended and have not reversed. What should she expect from the rule here?

43.Rafael has a strict risk limit. A once-a-year rebalance can sit through a 25% drift. A band rule trades when the weight leaves the band. Which control is tighter for him?

44.Soren pays 0.50% round trip, and his rebalance band is only 1%. Trading every 1% drift can cost more than the risk is worth. What do those costs argue for?

45.Thea adds monthly savings. Equity is overweight and bonds are underweight. Until the weights are back inside policy, where should the new money go?

46.Umar must withdraw cash. Equity is overweight, bonds are underweight, and taxes do not dominate the choice. Where should the withdrawal come from?

47.Vera marked aggressive on a risk questionnaire during a bull market. After a 15% drop she wants out. A pre-agreed floor has not been hit. What should happen now?

48.Wesley's written rule says that if the account falls below 800,000, equity is cut by half. The account is at 790,000. The manager wants to wait for a rebound. What does the floor require?

49.Ximena's floor is 800,000 and the account is at 860,000. She calls, nervous, and asks to cut equity in half today. What should the manager do?

50.Yusuf's Monte Carlo uses 1,000 paths and shows a 70% chance of funding spending. The model assumes a normal distribution, but his assets have crashed together before. What does the 70% depend on?

51.Zara's plan succeeds more often if spending falls from 60,000 to 45,000, with every return assumption left unchanged. Which lever does she actually control?

52.Aaron expects a nominal return of 6% and inflation of 3%. What is the exact real return?

53.Bianca spends 4% of the initial 1,000,000 and then raises that dollar amount with inflation. Year-1 spending is 40,000 and inflation is 3%. What is year-2 spending?

54.Calvin spends 4% of the current portfolio each year. After a drop, the portfolio is worth 800,000. What is spending under this rule?

55.Dahlia's pension liability has duration 15 and the assets have duration 6. Interest rates fall. What happens to the surplus?

56.Emil wants a more stable pension surplus. Liability duration is 15 and asset duration is 6. Which change closes that gap?

57.Fatima is early in her career. Her retirement need is real, linked to wages, and many years away. A retired pension she read about holds only nominal long bonds. Should her whole portfolio copy that?

58.Gavin holds two assets with correlation of -1. Their standard deviations are 10 and 20. What weight on the lower-volatility asset produces a zero-risk mix?

59.Hana was told a two-asset hedge has zero risk because correlation is -1. In a crisis that correlation rises to 0. What should the risk report say?

60.Ivan marks the left-most point on the risky-asset frontier. A line from the risk-free rate touches the frontier somewhere else. What is that left-most point?

61.Jade can lend at a risk-free rate of 8%. Every risky portfolio available to her has an expected return below 8%. What should she hold?

62.Kenji can lend along a capital allocation line with a Sharpe ratio of 0.4. Borrowing costs more, and past the tangency portfolio the slope is 0.3. What is true for a leveraged client?

63.Lila's policy bars any single stock above 5%. A legacy holding is 7%. The transition rule says to sell down to 5% over six months, to limit tax and market impact. What action does the policy name?

64.Marco's policy excludes thermal-coal producers. A coal stock screens as cheap versus the benchmark. What should the manager do with that stock?

65.Nadia's constraint drops about half the benchmark. She has not been told what that does to tracking error. What should the manager say before taking the mandate?

66.Oscar's manager wants the benchmark to be the manager's own past winning stocks. Those names were not set in advance as the opportunity set, and Oscar cannot buy that list as a strategy. What is wrong with it?

67.Nia's mandate is balanced. The policy benchmark is 60% equity index and 40% bond index. Her report judges the fund only against the equity index. What is wrong with that comparison?

68.Quentin's fund lagged the benchmark that was in force. After the year, the manager swaps in a different benchmark the fund happened to beat. Which benchmark applies to that year?

69.Rhea's active returns over four periods are 1%, -1%, 1%, and -1%. What is the sample tracking error?

70.Stefan's active return versus the benchmark is 1.5% and the tracking error is 3%. What is the information ratio?

71.Tanya's information ratio stays at 0.50. On 1% tracking error that meant 0.50% of extra return. If tracking error is 6% and the ratio holds, what expected active return follows?

72.Ulrich uses the fundamental-law guide before constraints. The information coefficient is 0.05 and breadth is 100. What unconstrained information-ratio guide does that give?

73.Valentina's manager has a strong signal, but constraints leave a transfer coefficient of 0.2. How much of that signal reaches her portfolio?

74.Warren's manager trades one signal every day and claims a breadth of 250 from those daily trades. How should that breadth claim be read?

75.Xia was promised a market-like core. The portfolio's average beta is 1.1 and its average price-to-book is far below the benchmark. What did she actually receive?

76.Yasmin holds a rules-based value index, not a manager with a thesis on one firm. Value has lagged the cap-weighted market for several years. What should the disclosure say about that lag?

77.Zeke owns three funds at 4% of his account each. One stock is 10% of each fund. Before any other holding, what look-through weight does that stock have from these funds?

78.Amara's look-through weight in a stock from her funds is 1.2%, and she also owns 3% of that stock directly. Her single-name limit is 4%. Does the limit hold?

79.Boris adds equity futures so beta rises from 0.6 to 1.0. The cash portfolio is still bonds for tax and for voting. His risk report shows beta 0.6. What is wrong?

80.Chloe's bond portfolio is fully invested and overlaid with equity futures. Equities fall and variation margin is called. What must the plan include before that happens?

81.Declan's equity manager is scored in local currency, and a separate overlay manager runs the currency hedges. Both are about to be judged only in Declan's home currency. What does that do?

82.Esme's active managers are all underweight energy relative to the policy sector weights. The completion portfolio is asked to respond. What should it buy?

83.Farah is moving from one set of funds to another, and the policy says stay invested. One plan sells everything to cash for a month. Another crosses the lists and uses futures. Which fits?

84.Giorgio sees a manager with a one-year record and a high return. The manager asks for the whole account. What can that record not yet show?

85.Helene's manager returned 16% with a beta of 1.5. The risk-free rate is 2% and the market excess return is 8%. What is the alpha?

86.Idris's manager, still at a beta of 1.5, returns -6% in a down year. The risk-free rate is 2% and the market excess return is -8%. What is the alpha?

87.Juniper's manager drifted from value to growth over three years after growth started winning, and did not tell her. The value benchmark no longer fits the holdings. What was required before that drift?

88.Khalid pays a 1.00% management fee. Expected excess return over the benchmark, before fees, is 0.40%. An index fund charges 0.05%. Which fee does this arithmetic favor?

89.Leila adds a performance fee with a high-water mark and a cap. The manager is far below the mark, so the fee is zero until it is recovered. She is also tempted to drop position limits. What should she keep?

90.Mateo's fund ranks at the 20th percentile of a peer group. The peers mix several styles, and closed funds have dropped out of the group. How should that rank be used?

91.Noor is searching for a manager. A firm says its composite is compliant, but it drops terminated accounts that lost money. How should she treat that performance number?

92.Otis compares two composites. One size cutoff was written in advance and applied every period. The other cutoff was invented after the results, to drop small accounts. Which version is usable?

93.Paloma sweeps cash out of the account every month. The manager never sees that cash and does not control it. Should the swept cash be in the manager's composite?

94.Ravi forced a large deposit just before a fall. He wants to judge the manager, not his own timing. Which return should he use?

95.Selene deposited a large sum just before a rise. She wants the number that matches her own experience, including that deposit. Which number is that?

96.Tomas's portfolio returned 8% while inflation was 3%. A plan that spends the whole 8% is under discussion. What is the real return?

97.Una wants each asset class to contribute a similar amount of volatility, which means leveraging the lower-volatility bonds. Bond and stock volatilities can jump together, and correlations can rise. What is the risk in that leverage?

98.Viktor holds 60% stocks and 40% bonds. Stock volatility is 15, bond volatility is 5, and correlation is 0. What share of portfolio variance comes from the stocks?

99.Winnie wants equal variance contributions from stocks and bonds when correlation is 0. Stock variance is 225 and bond variance is 25, before any leverage. What stock weight does that require?

100.Youssef cannot borrow. An advisor levers a 25% stock and 75% bond mix to lift expected return, then presents that levered mix as if it were the unlevered 25/75. What is wrong?

101.Zola's optimizer, fed raw historical means, puts 80% in one small asset on a noisy mean. She has no view that differs from the market. What should she do with that weight?

102.Andre builds a covariance from three years of weekly data on 100 assets. The sample is unstable, and the unconstrained mix only looks best in sample. What should he prefer out of sample?

103.Beatriz already owns 2 million of employer stock, half of her net worth, and that stake is tied to her job. The managed account is being built. What should it do with that stock and its sector?

104.Callum is trustee of a trust whose legal list allows only investment-grade bonds and listed equity. A hedge fund's return looks attractive. What happens if he buys it?

105.Dina's foundation must spend 5% of assets a year under its own rule. Inflation is 2%, and the return target is 3%. She wants the real value to last. What is missing from that target, before fees?

106.Ewan's foundation already faces that 4-point gap: spending 5%, inflation 2%, return target 3%. Fees are 0.40%. What happens to the gap if the target forgets the fee?

107.Freya's equity is underweight after a crash. The policy says rebalance, and the trade is due. The committee wants to freeze because the news is frightening. What does the written policy require?

108.Hugo's policy was written in 2019 and never reread. He has since retired, the horizon is shorter, and the liquidity need is higher. The old strategic weight is 80% equity. What should the next rebalance do?