Free CFA Level I Portfolio Management Practice Questions

VaR represents the minimum loss that would be exceeded with a specified probability (e.g., 5%) over a given time horizon. For example, a 1-day 5% VaR of 1 million means there is a 5% chance the portfolio will lose at least 1 million in one day.
Choice B is incorrect because VaR does not measure the maximum possible loss — actual losses can (and do) exceed VaR. Choice C describes expected loss or conditional VaR (CVaR), not VaR itself, which is a threshold rather than an average.

Unique circumstances are client-specific restrictions not captured by the other LLTTU constraints, such as ethical screens, concentration limits on an employer's stock, or religious investing restrictions. Choice C describes a liquidity constraint — a specific cash need within a defined time frame. Choice B describes a tax constraint — the AMT affects after-tax returns and must be considered in security selection and tax-loss harvesting decisions.

The spending rate is 30,000 / 1,000,000 = 3.0%. The nominal return objective is 7%. The return needed for capital appreciation in nominal terms is 7% - 3% = 4%. Converting to real return: $(1.04 / 1.025) - 1 = 1.01463 - 1 = 1.46\%$, approximately 1.5%. Alternatively, the real total return is approximately $7\% - 2.5\% = 4.5\%$, and subtracting the spending rate gives $4.5\% - 3\% = 1.5\%$. However, using the Fisher equation more precisely for capital appreciation: real required return = $(1 + 0.07)/(1 + 0.025) - 1 = 4.39\%$, and net of spending = $4.39\% - 3\% = 1.39\%$. The answer 4.4% represents the total real return before spending. Choice A (1.5%) represents the real appreciation after spending. Choice B (4.5%) uses the approximate rather than exact Fisher relation.