Free CFA Level III: Private Markets Portfolio Construction Practice Questions
Portfolio construction on the CFA Level III Private Markets pathway tests risk budgeting with illiquid assets, factor exposure management, and the integration of private market investments into diversified portfolios.
Sample Questions
Question 1
Easy
Price improvement occurs when:
Solution
A is correct.
Price improvement occurs when a trade executes at a price better than the prevailing quoted price for the customer. For a buy order, this means executing below the ask price, and specifically if below the midquote, the effective spread is narrower than the quoted spread. This represents a genuine cost saving for the investor.
Price improvement occurs when a trade executes at a price better than the prevailing quoted price for the customer. For a buy order, this means executing below the ask price, and specifically if below the midquote, the effective spread is narrower than the quoted spread. This represents a genuine cost saving for the investor.
Question 2
Medium
Scenario analysis and stress testing are particularly important for SWFs because:
Solution
B is correct.
SWFs face complex, interconnected risks across large, globally diversified portfolios that include both public and private assets. Traditional VaR models, which rely on historical correlations and assume normal distributions, may underestimate the probability and impact of extreme tail events. Scenario analysis and stress testing allow SWFs to evaluate the impact of specific adverse scenarios (e.g., commodity price collapses, geopolitical crises) on the entire portfolio, capturing risk interactions that VaR misses.
SWFs face complex, interconnected risks across large, globally diversified portfolios that include both public and private assets. Traditional VaR models, which rely on historical correlations and assume normal distributions, may underestimate the probability and impact of extreme tail events. Scenario analysis and stress testing allow SWFs to evaluate the impact of specific adverse scenarios (e.g., commodity price collapses, geopolitical crises) on the entire portfolio, capturing risk interactions that VaR misses.
Question 3
Hard
If Vasquez optimally blends all three uncorrelated managers, the combined expected information ratio of the multi-manager portfolio is closest to:
Solution
B is correct. Under optimal risk-proportional weighting of uncorrelated active-return sources, the squared information ratios are additive: . Using Exhibit 1, , , and . Therefore , and . The blended portfolio's IR exceeds the best single-manager IR because three uncorrelated alpha streams diversify active risk.