Portfolio Management — CFA® Program Level I

Question 1

Aino Paasikivi holds her entire equity allocation in shares of Brennick Savings Bank. She argues that she should expect a higher return on these shares than a well-diversified investor who holds the same shares, because she bears more risk. Under capital market theory, the expected return on the Brennick shares is most likely:

Accepted Answer

the same for both investors, because it depends only on the shares' systematic risk

Answer

higher for her, because she bears the shares' total risk rather than only their market risk

Answer

equal to the market's expected return, because both investors face the same market risk

Question 2

Ngozi Ilori's research team builds equally weighted portfolios from a large universe of stocks that have similar volatilities and positive correlations with one another. As the number of stocks in a portfolio grows very large, the portfolio's variance approaches:

Accepted Answer

the average covariance between pairs of the stocks

Answer

zero, because the stocks' individual risks offset one another

Answer

the average variance of the individual stocks

Question 3

After several cyberattacks on payment processors dominated the news for weeks, Mariam Saleh sells her shares in Tolvik Payments. She estimates that Tolvik faces a far higher chance of a successful attack next year than the industry's long-run incident record suggests. Asked why, she says the attacks are all anyone talks about and she can easily recall several of them; she has not looked at any incident data. Which bias does her behavior reflect, and to which category does it belong?

Accepted Answer

Availability, an information-processing bias

Answer

Availability, a belief perseverance bias

Answer

Representativeness, a belief perseverance bias

Sample questions