Portfolio Management interview preparation

Questions

100

Traced to a firm

40

Firms

24

Updated

September 2026

Asked at

All firmsBLBlackRock4Vanguard4WMWellington Management4Amundi3ACAQR Capital Management3Neuberger Berman3SCSchroders3Man Group2MSCI2Northern Trust2AllianceBernstein1Apollo Global Management1Blackstone1BMBNY Mellon1Carlyle Group1Fidelity Investments1Goldman Sachs1Invesco1Millennium Management1MSMorgan Stanley1NUNuveen1PIMCO1SSState Street1TPTPG1

Topic

All topicsPortfolio theory5Factor models8Asset allocation11Rebalancing3Portfolio construction7Benchmarks and tracking error5Performance measurement8Risk management6Fixed income and LDI5Currency and global3Implementation and costs5Active versus passive6India markets7Brainteasers5Career and fit16

Level

AnyCoreIntermediateHard

Type

AnyTechnicalCaseMarket viewFitBrainteaser

1. 006Explain CAPM, and then tell me where it fails empirically.Factor modelsIntermediatetechnicalAsset managementQuantitative research

   Say this

   CAPM says the only risk you get paid for is covariance with the market, so expected return is the risk-free rate plus beta times the equity risk premium. Empirically the beta and return relationship is far too flat, and several characteristics that should not matter clearly do.

   Then walk it

   1. The logic is clean: idiosyncratic risk diversifies away for free, so nobody pays you for it, and the only priced risk is the part that moves with the market.
   2. Failure one, the security market line is too flat. High beta stocks earn less than CAPM predicts and low beta stocks earn more. That is the betting-against-beta result, and it is the foundation of low-volatility investing.
   3. Failure two, characteristics predict returns after controlling for beta. Small size, cheap valuation, high profitability and recent momentum all carry return premia that beta does not explain. Fama and French built their models on exactly this failure.
   4. Failure three, the market portfolio is unobservable. Roll's critique is that you cannot test CAPM at all, because the proxy you use, usually a cap-weighted equity index, is not the true market portfolio that includes human capital, housing and private assets.
   5. Failure four, the assumptions that break in practice: unlimited borrowing at the risk-free rate, no constraints, no taxes. Leverage constraints are actually the leading explanation for why the line is flat, because investors who cannot lever buy high beta instead.
   6. Where it still earns its place: as the discipline that says only undiversifiable risk is compensated, and as the cost of equity in every DCF ever built. Nobody has replaced it for that job, which is worth saying out loud.

   Where candidates lose it

   Stopping at the formula. The question has two halves and the second is the interesting one. Candidates who cannot name at least the flat security market line and the size or value anomaly sound like they learned CAPM from a textbook and never looked at data.

   Expect next

   • If the line is flat, how would you exploit that?
   • What is Roll's critique?
   • Do you still use CAPM for cost of equity, and why?
2. 007Walk me through the Fama-French three factor model, and tell me what Carhart added.Factor modelsIntermediatetechnicalQuantitative asset managementFactor investing

   Say this

   Fama-French keeps the market factor and adds size, small minus big, and value, high minus low book to market. Carhart added a fourth, momentum, winners minus losers, because the three factor model could not explain the persistence of past winners.

   Then walk it

   1. Construction is the same idea each time. Rank the universe on the characteristic, form portfolios from the extremes, and the factor return is the long-short spread, rebalanced annually for value and size and monthly for momentum.
   2. SMB is small cap minus large cap, HML is cheap minus expensive on book to price. Together with the market they explain something like 90 percent of the variation in diversified US portfolio returns, against about 70 percent for CAPM alone.
   3. Carhart's momentum factor, usually called UMD or WML, is built on 12 month returns skipping the most recent month. It matters because momentum is the most statistically robust anomaly and the hardest to explain as compensation for risk.
   4. Fama and French later went to five factors, adding profitability and investment, at which point HML becomes close to redundant. That is a useful thing to know because it tells you value is partly a profitability story.
   5. The practical use is attribution rather than prediction. Regress a fund on these factors and the intercept is what the manager added beyond cheap systematic exposures, which is the number an allocator actually pays for.
   6. The honest limitation: these are in-sample constructions on US data, the value premium has been weak for long stretches including most of 2010 to 2020, and factor timing has an awful record. So I would use them to explain returns, not to promise them.

   Where candidates lose it

   Getting the sign convention wrong or describing HML as growth minus value. Also, do not present the model as a return forecast. Its main professional use is attribution, and saying that shows you know how these models get used in a real seat rather than in a paper.

   Expect next

   • Why did they add profitability and investment?
   • What does momentum being unexplainable by risk imply?
   • How would you use these factors on Indian equities?

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.