Portfolio Management Interview Questions

Portfolio management interviews typically involve an assessment of a candidate’s experience and knowledge about investments as well as their views on different approaches and strategies.  

Below we listed some of the popular questions that aim to test a candidate’s fundamental understanding of portfolio management, including performance, risk, and ongoing monitoring. 

Define the Term Active Portfolio Management  

Active portfolio management is an investment approach that involves a portfolio manager actively making investment decisions and aiming to deliver a return in excess of a pre-defined benchmark (typically a market index).  

Active management involves various aspects such as in-depth research and analysis, the selection of individual securities, and portfolio construction. Risk management is also key as portfolio managers are responsible for maintaining risk exposure within specific parameters. This can include certain volatility levels relative to the portfolio’s benchmark or diversification across various asset classes, geographies, and sectors of the economy.  

In addition, portfolio managers continuously monitor and adjust their portfolio based on the prevailing market conditions and their market outlook. Active management is typically more expensive than passive as it involves more resources at each stage, from generating investment ideas to implementation and portfolio construction. 

Overall, active portfolio managers are expected to leverage their expertise and navigate different market conditions successfully.  

Below are the key differences between active and passive portfolio management. 

What is Asset Allocation? 

Asset allocation is the distribution of investment funds across different asset classes (such as equities, bonds, real estate, or alternatives), regions, and sectors within a portfolio. There are generally two types of asset allocation: 

• Strategic – the long-term allocation of capital that is consistent with the objectives and risk profile of the portfolio. 
• Tactical – the shorter-term portfolio adjustments that a manager makes to exploit opportunities within the current market environment. 

Asset allocation can have various objectives, such as striking the optimal balance between risk and return for a particular type of investor, aiming to achieve long-term capital preservation and/or income generation, or discovering high growth opportunities within a seasonable risk framework.  

The process usually involves analysing historical performance, volatility, and correlation between different asset classes and securities. This would result in a preferred asset mix that portfolio managers use to distribute new capital or make changes following a portfolio rebalancing. 

Depending on the manager’s philosophy and investment approach, asset allocation could be either the primary driver for returns, which is typical for most top-down investors (i.e., those who prioritise allocation over security selection) or the result of a bottom-up strategy (where security selection is the focus).  

Explain Rebalancing 

Portfolio rebalancing is the process of adjusting asset weightings in a portfolio to return to a desired allocation. This usually follows a portfolio review exercise that is conducted on a regular basis, for example weekly or monthly (this depends on the investment philosophy and risk and may increase the cost of running the portfolio). In addition, rebalancing could also be done during unusual market moves during which the portfolio’s actual allocation deviates significantly from the target allocation. 

The process involves buying or selling securities within the portfolio to restore its target balance. For example, should equities do well relative to other asset classes within the portfolio, their portfolio weight would increase beyond the desired allocation level, and would therefore necessitate trimming the exposure to equity holdings. This is also known as “pro-rata” rebalancing. 

What Do You Understand by Portfolio Turnover of a Fund? 

Portfolio turnover is a measure of the manager’s trading activity and considers the frequency with which securities are bought and sold over a specific period (typically measured over one year). It is expressed as a percentage and high turnover is an indication of frequent buying and selling, while low turnover suggests a “buy-and-hold” strategy.  

Portfolio turnover may also have an impact on performance due to additional factors such as transaction costs and different tax implications. For example, excessive turnover may lead to increased expenses and erode net returns. Therefore, portfolio turnover is often considered when evaluating investment strategies. 

Portfolio Turnover Rate Formula 

The formula for calculating one year portfolio turnover is: 

What Strategies Do You Employ to Manage Risk?  

Managing risk is key in active portfolio management. It involves various techniques to identify and assess the different sources of risk in a portfolio, the results of which are then translated into different strategies to manage risk. Below are some of the most popular approaches to risk management, which however should not be reviewed in isolation to one another. 

Diversification 

Diversification refers to maintaining a good mix of investments across various asset classes, sectors of the economy, and geographical regions. It aims to reduce the negative impact of an asset, sector or single stock performing poorly on the overall portfolio. The theory of diversification is based on choosing a mix of assets whose returns are not highly correlated. 

Hedging  

Hedging involves using sophisticated financial instruments such as options and futures to offset potential losses in one position with gains in another. For example, an investor can purchase an option with the goal to protect against decline in stock prices or use forwards to hedge against fluctuations in commodity prices (as shown below).  

Hedging is also a popular approach in currency risk management. While the costs of hedging are typically high due to the complex instruments and strategies involved, it may also limit the potential returns of a portfolio.  

Stress Testing 

Stress testing involves simulating unusual and extreme market scenarios to evaluate portfolio performance under adverse conditions. By stress-testing the portfolio, investors can identify potential weaknesses and take proactive measures to enhance resilience. This also includes assessing the liquidity profile of a portfolio (i.e., how quickly the securities in it can be sold). 

Risk Budgeting  

Risk budgeting involves allocating risk budgets to different parts/components of the portfolio based on their historical and expected risk-adjusted performance. This ensures that risk is managed within acceptable limits and aligned with the risk framework of the portfolio. For example, if an equity portfolio manager favours small cap stocks and overweighs that market segment, he/she would also need to maintain some exposure to large caps to stay within their risk budget. It should be noted that risk budgets can vary and there isn’t a unified approach to it.  

Can You Explain Modern Portfolio Theory (MPT)?  

Modern Portfolio Theory (MPT) was developed by Harry Markowitz, a Nobel laureate, and suggests that investors can construct portfolios to maximize returns for a given level of risk or minimize risk for a given level of return.   

MPT emphasizes that by investing in a mix of assets with low correlations, investors can reduce the overall portfolio risk (quantified as the standard deviation of returns). It introduces the concept of the efficient frontier, representing the set of portfolios that offer the highest expected return for a given level of risk or the lowest risk for a given level of return.   

MPT revolutionized investment management by introducing rigor to portfolio construction and asset allocation.   

How Do You Evaluate the Performance of a Portfolio?  

• Portfolio performance should be measured in several different ways to help managers assess the success of their investment approach. The most important include:  
• Absolute return – the actual return that the portfolio has delivered over a specific period. This is commonly used for portfolios that aim to deliver positive returns through all market environments.   
• Total return – it measures the performance of a portfolio including price appreciation and income distributions such as dividends.  
• Relative return – this is key in measuring the performance of most mutual funds that aim to outperform a benchmark index.  
• Risk-adjusted returns – this type of measures is also fundamental in establishing where the portfolio has delivered attractive returns given the level of risk that has been assumed.  
• Portfolio attribution – this is crucial in analysing the performance driers and detractors of a portfolio. It can help assess whether the returns are a result of favourable market conditions or the manager’s skill in security selection and/or asset allocation (in active management).  

What Do You Consider to be the Most Important Qualities in a Successful Portfolio Manager?  

In addition to hard financial skills such as an excellent understanding of financial markets, asset classes, and portfolio management, a successful portfolio manager should also have very strong soft skillset. As this is a client facing role (no matter in which segment of the industry, be it in retail fund management, wealth management, or institutional investments), presenting well and being able to explain complex financial information in an easily understandable way is essential. In addition, interpersonal skills such as clear communication and the ability to build and maintain relationships with clients is also highly valuable.   

Conclusion 

Pursuing a career in portfolio management requires a solid technical understanding of investing and the concepts or risk and return, investment strategies, risk management, and ongoing portfolio monitoring and management. In addition, familiarity with the current economic climate (through interest rates, inflation, economic growth, etc.), market trends, and recent and past market events and their implications for different asset classes is necessary.