CFA Level I Practice Test

CFA Level I Portfolio Construction Practice Questions

Portfolio Construction makes up 4 of every 50 questions on a Tigertest CFA Level I practice test. Here are 10 of the 16 questions on it, each with the answer and the reason.

Updated 2026-11-10 by the Tigertest team. Based on CFA Institute's Level I topic weights for 2027. Original questions with four choices (the real exam has three). Not affiliated with CFA Institute.

1. 1. According to capital market theory, investors are rewarded with higher expected returns for bearing:

   • A.Total risk
   • B.Systematic risk
   • C.Unsystematic risk
   • D.Company-specific risk

   Answer: B. Unsystematic risk can be diversified away at no cost, so the market does not pay for it. Only systematic (market) risk earns a risk premium.

2. 2. The capital market line plots expected return against:

   • A.Unsystematic risk only
   • B.Time to maturity
   • C.Beta with the market
   • D.Standard deviation

   Answer: D. The CML shows efficient combinations of the risk-free asset and the market portfolio, with standard deviation on the x-axis. The security market line uses beta.

3. 3. A stock has a correlation of 0.75 with the market, a standard deviation of 30% and the market's standard deviation is 20%. Its beta is:

   • A.1.125
   • B.0.750
   • C.0.500
   • D.1.500

   Answer: A. Beta = correlation x (stock sd / market sd) = 0.75 x 30 / 20 = 1.125. Ignoring the correlation gives 1.500.

4. 4. A portfolio returned 12% with a beta of 1.6 when the risk-free rate was 4%. Its Treynor ratio is:

   • A.8.0
   • B.2.5
   • C.5.0
   • D.7.5

   Answer: C. Treynor = (portfolio return - risk-free rate) / beta = (12% - 4%) / 1.6 = 5.0. 7.5 divides the total 12% by 1.6.

5. 5. A portfolio's Sharpe ratio is 0.50. The market's standard deviation is 15% and its return 9%, and the risk-free rate is 3%. The portfolio's M-squared measure is:

   • A.7.5%
   • B.-1.5%
   • C.1.5%
   • D.10.5%

   Answer: C. M-squared = Sharpe x market sd + risk-free - market return = 0.50 x 15% + 3% - 9% = 1.5%. 10.5% is the risk-adjusted return before subtracting the market's 9%.

6. 6. Which belongs among the constraints, rather than the objectives, in an investment policy statement?

   • A.Liquidity needs
   • B.Risk tolerance
   • C.Required spending growth
   • D.Return requirement

   Answer: A. IPS objectives are return and risk. Constraints are liquidity, time horizon, tax, legal and regulatory factors and unique circumstances.

7. 7. A young professional with stable income and large savings is nervous about any loss. Her risk profile shows:

   • A.Low ability, low willingness
   • B.Low ability, high willingness
   • C.High ability, high willingness
   • D.High ability, low willingness

   Answer: D. Ability depends on finances and horizon, which are strong here; willingness is her attitude, which is low. When they conflict, the adviser usually discusses it and leans toward the lower.

8. 8. An investor's long-term policy mix of asset classes, set to meet the IPS objectives, is the:

   • A.Rebalancing range
   • B.Strategic asset allocation
   • C.Tactical asset allocation
   • D.Security selection

   Answer: B. Strategic asset allocation sets the long-term target weights. Tactical allocation makes short-term deviations from them to exploit expected market moves.

9. 9. A portfolio's one-day 5% value at risk is 2 million. This means that on 5% of days the loss is expected to be:

   • A.Never above 2 million
   • B.At least 2 million
   • C.At most 2 million
   • D.Exactly 2 million

   Answer: B. VaR is a minimum loss at a given probability: on 5% of days losses should be 2 million or more. It says nothing about how large losses in the tail can be.

10. 10. An investor believes she can pick winning stocks far better than her record shows. This is:

    • A.Status quo bias
    • B.Endowment bias
    • C.Loss aversion bias
    • D.Overconfidence bias

    Answer: D. Overconfidence leads investors to overrate their skill and trade too much; CFA Institute classes it as an emotional bias with cognitive aspects. Loss aversion is reluctance to realize losses, status quo bias is a preference for doing nothing, and endowment bias values what one already owns more highly.