1. When making portfolio manager hiring decisions, why do investors/clients not focus on Sharpe Ratio of PM’s portfolio? Why should PM be evaluated relatively to a benchmark or a peer group with similar strategy?
2. According to CAPM, why would market portfolio be tangency portfolio as well? What might this market portfolio look like, if CAPM is indeed correct? Would we expect S&P500 to be on the efficient frontier or be near the tangency portfolio? What about MSCI global index portfolio?
3. What are the differences between CAPM and single-factor model? Why there is no alpha in CAPM but an alpha in single-factor model?
4. What are Sharpe Ratios of S&P500, Fama-French size and value, and momentum factor portfolio? Why size, value, and momentum should be considered as separate factors, and by holding them can yield better return?
5. If a PM has a -1% Fama-French alpha, would you expect this PM to underperform or outperform the S&P500 on average over time? Please explain carefully.
6. A forecaster notes that the yield curve is steeply upwardly sloping. Comment on the likely monetary and fiscal policies in effect and the future of the economy.
7. Your interviewer is a seasoned PM. During the interview, he/she asked, “We are not using textbook Markowitz MVO in our portfolio, so our portfolio will not be on the textbook efficient frontier. Why are we so ‘dumb’ to leave money on the table?” What will be your answer?
8. When combining two investment portfolios with high Sharpe Ratios, would the resulting portfolio also have a high Sharpe Ratio? How about combining two investment strategies with high information ratios relative to S&P500 benchmark? Would the resulting portfolio have a higher IR? Please use examples or derive carefully your explanation.
9. A market-cap weighted index is considered the most representative of market conditions, especially when it is adjusted for free float. Some practitioners, however, have suggested moving away from this weighting scheme to one based on fundamentals such as sales, cash flow, dividends, etc. Why doing so might outperform market-cap weighted index?
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