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. 054What is duration, and what is effective duration?Fixed income and LDIIntermediatetechnicalAmundiRates · London · 2018

   Say this

   Macaulay duration is the weighted average time to receive the cash flows. Modified duration converts that into a price sensitivity, roughly the percentage price change for a 1 percent yield move. Effective duration is the empirical version for bonds whose cash flows change with rates, so it is the only one that works for callables, mortgages and anything with an option.

   Then walk it

   1. Modified duration equals Macaulay divided by one plus the yield per period. A modified duration of 7 means about a 7 percent price fall for a 100 basis point rise in yield, before convexity.
   2. Effective duration, sometimes called option-adjusted duration, is computed numerically: shift the whole yield curve up and down by a small amount, revalue the bond with its options repriced, and take the price difference over twice the shift.
   3. Why you need it: a callable bond's cash flows are not fixed. When yields fall, the issuer calls, so the bond does not rally as a straight bond would. Its effective duration shortens as yields fall, which is negative convexity.
   4. Mortgage-backed securities are the extreme case. Prepayments accelerate when rates fall and slow when rates rise, so effective duration extends exactly when you do not want it to. That extension risk is what made MBS books painful in 2022.
   5. Portfolio duration is the market-value weighted average of the components' durations, which is how you manage a book to a target. But a single duration number assumes a parallel shift, so I would hold key-rate durations alongside it to see curve exposure, because a barbell and a bullet with the same duration behave differently when the curve twists.
   6. The practical limitation: duration is a first-order local approximation. For a 25 basis point move it is fine, for 200 basis points you need the convexity term as well, and for anything with embedded optionality the full revaluation is the only honest answer.

   Where candidates lose it

   Defining duration as 'the time to maturity' or conflating Macaulay and modified. And if you are asked for effective duration specifically, the interviewer is testing whether you know that cash flows can change with rates. Mention callables or mortgages and negative convexity, or the answer is incomplete.

   Expect next

   • What is negative convexity and who has it?
   • Why is a single duration number not enough?
   • What is the duration of a floating rate note?

   Reported by candidates at Amundi (Rates, London, 2018). Source: Wall Street Oasis.

2. 055What is liability-driven investment, and why do pension schemes do it?Fixed income and LDIIntermediatetechnicalPension and endowment investingFixed income

   Say this

   LDI defines risk as the mismatch between assets and liabilities rather than as asset volatility, and builds the portfolio to hedge the liability's sensitivity to rates and inflation. Schemes do it because the liability is a long, inflation-linked bond, so an unhedged scheme is running a huge implicit rates position.

   Then walk it

   1. Start with the liability. Pension promises are a stream of payments stretching decades out, often indexed, discounted at a market rate. So liability value has a duration of maybe 15 to 25 years and significant inflation sensitivity.
   2. That means a scheme holding equities and short bonds is short a long-duration inflation-linked bond. A 100 basis point fall in real yields can add 20 percent to the liability value while the assets barely move, and the deficit widens even though nothing went wrong with the investments.
   3. So LDI matches the sensitivities: hold long-dated and index-linked government bonds, and top up the hedge synthetically with interest rate and inflation swaps, or with repo on gilts, so you can achieve the required duration without putting all the capital in bonds.
   4. That capital efficiency is the point and also the danger. Leverage via repo and swaps means collateral calls when yields rise. The UK in September 2022 is the case study: yields spiked, schemes faced collateral calls, gilts were sold to meet them, which pushed yields higher again. A hedging programme became a forced-selling spiral.
   5. So the design questions are the hedge ratio, usually set as a percentage of liability duration hedged and often stepped up as funding improves, the collateral waterfall, and how much liquid headroom sits behind the leverage. After 2022 schemes hold far more collateral buffer.
   6. The honest tension: hedging locks in the funding position, so a scheme that hedges fully gives up the chance of closing a deficit through market returns. That is why the hedge ratio is a governance decision about deficit tolerance, not a purely technical one.

   Where candidates lose it

   Describing LDI as 'buying long bonds'. The mechanism that matters is hedging the liability's rate and inflation sensitivity, usually synthetically with leverage, and the risk that matters is collateral. If you cannot explain the September 2022 gilt episode, you do not understand LDI as it is actually practised.

   Expect next

   • What happened to UK schemes in September 2022?
   • How would you set the hedge ratio?
   • What collateral buffer would you hold?
3. 056How would you actually match a liability stream with a bond portfolio?Fixed income and LDIHardsuperdayFixed incomePension and endowment investing

   Say this

   Three approaches, increasingly approximate. Cash flow matching buys bonds whose coupons and maturities fund each payment, which removes reinvestment risk entirely. Immunisation matches duration and present value. Duration matching on a single number is the crudest, and it only works for parallel curve shifts.

   Then walk it

   1. Cash flow matching, sometimes called dedication: build a ladder so each year's payments are met by maturing principal and coupons. It is the cleanest hedge and needs no rebalancing, but it needs bonds at every maturity, which does not exist beyond 30 years in most markets, and it is expensive.
   2. Immunisation: match present value and duration, and make sure asset convexity is at least as high as liability convexity. Then a small parallel shift leaves the surplus unchanged. It needs rebalancing because durations drift at different speeds as time passes and yields move.
   3. The gap between them is the curve. A liability with 18 years of duration can be matched by a bullet at 18 years or a barbell of 5s and 30s. Same duration, very different behaviour if the curve steepens, so I would match key-rate durations at several points rather than one summary number.
   4. Then the parts you cannot match with bonds. Longevity risk, inflation beyond the index-linked market's capacity, and any real return requirement if the scheme is in deficit. That residual is what the return-seeking portfolio and, increasingly, a longevity swap or buy-in exists to cover.
   5. Practically, most schemes do it synthetically: physical bonds for the core, plus swaps or gilt repo to extend duration to 20 or 25 years without tying up all the capital, which leaves assets free for the growth portfolio.
   6. And then the operational governance: a collateral schedule, eligible collateral, a liquidity waterfall, and a stress test asking what a 150 basis point yield rise does to collateral calls over a week. That is the part that failed in 2022, and I would present it as part of the matching design rather than an afterthought.

   Where candidates lose it

   Saying 'match the duration' and stopping. Duration matching only immunises against a parallel shift, and real liabilities are exposed to the shape of the curve, so key-rate duration matching is the expected refinement. Also name what bonds cannot hedge, longevity and the deficit, because a candidate who thinks the liability can be fully hedged has not met a real scheme.

   Expect next

   • Why does convexity need to be at least as high on the asset side?
   • How do you hedge inflation beyond the linker market's capacity?
   • What would a 150 basis point yield rise do to your collateral?
4. 057What is convexity, and why does a duration-matched portfolio still carry risk?Fixed income and LDIIntermediatetechnicalFixed incomeMulti-asset

   Say this

   Convexity is the curvature of the price-yield relationship, the second-order term. Duration alone understates the gain when yields fall and overstates the loss when they rise. A duration match still carries risk because duration is local and linear, and because the curve does not move in parallel.

   Then walk it

   1. The price change is approximately minus duration times the yield change plus half the convexity times the yield change squared. For a 25 basis point move the second term is negligible; for 200 basis points it is material and it works in your favour on a long bond.
   2. Positive convexity is a good thing you pay for through a lower yield. Low coupon, long maturity bonds have the most, which is why a 30 year zero is the most convex instrument in the government curve.
   3. Negative convexity is the interesting case. Callable bonds and mortgage-backed securities lose duration as yields fall, because the borrower refinances, so you get less of the rally and all of the sell-off. Holders are compensated with extra spread, and in 2022 that compensation turned out to be inadequate.
   4. Risk one after a duration match: the second-order term. If liability convexity exceeds asset convexity, a large move in either direction widens the deficit. So immunisation requires matching convexity as well, or at least holding more of it than the liability.
   5. Risk two, curve shape. Duration assumes a parallel shift. A barbell and a bullet with equal duration diverge when the curve steepens or flattens, which is why key-rate durations matter.
   6. Risk three, the things duration does not see at all: spread risk if you used credit rather than governments, inflation basis if the liability is indexed and the assets are nominal, and the drift in both durations as time passes, which forces periodic rebalancing.

   Where candidates lose it

   Defining convexity as a formula without saying who is short it and why. The sharp answer names negative convexity in callables and mortgages, and it says that a duration match still leaves convexity, curve shape and spread risk. Saying convexity is 'always good' is wrong: you pay for it in yield.

   Expect next

   • Who is naturally short convexity?
   • How would you hedge curve risk rather than level risk?
   • Why did mortgage portfolios suffer in 2022?
5. 059Do you hedge currency in a global equity portfolio?Currency and globalIntermediatetechnicalMulti-assetGlobal equity

   Say this

   For equities, usually only partially or not at all. For bonds, almost always. The reason is the ratio of currency volatility to asset volatility: currency is a large share of the risk in a bond portfolio and a small share in an equity one, and it has no expected return to compensate you.

   Then walk it

   1. Run the numbers. Global equities have roughly 15 to 17 percent volatility and a major currency pair maybe 8 to 10 percent, and they are imperfectly correlated, so hedging changes total risk modestly. A global bond portfolio has 4 to 6 percent volatility, so unhedged currency is the dominant risk and hedging is close to compulsory.
   2. Currency has no long-run risk premium to speak of, so unhedged exposure is uncompensated volatility. That is the theoretical argument for hedging everything.
   3. The argument against hedging equities: some currencies are natural diversifiers. The dollar and the yen strengthen in risk-off episodes, so for a non-dollar investor, unhedged US equity exposure has a built-in stabiliser. Hedging removes it and can raise the drawdown.
   4. There is also a partial natural hedge inside the companies. A Swiss pharmaceutical or a Korean exporter has earnings in other currencies, so the listing currency overstates the true exposure. That argues against precision hedging at the index level.
   5. Then the practical costs: forward roll every one to three months, operational burden, and the cash flow risk. Hedging losses are settled in cash while the equity gain is unrealised, so a hedged programme can force you to fund large margin payments in a rally. That funding mismatch caught European investors hedged into US equities in 2014 and 2022.
   6. So my policy would be a strategic hedge ratio rather than a binary choice: fully hedge developed market bonds, hedge perhaps 50 percent of developed market equities as a regret-minimising middle, leave emerging market currency unhedged because the cost of carry is high and the currency is part of the asset, and size the liquidity buffer for hedge settlement.

   Where candidates lose it

   Answering 'hedge everything, currency is uncompensated risk' with no mention of the equity-versus-bond asymmetry or the cash flow consequences. Interviewers in global mandates want the volatility ratio argument, the safe-haven diversification point, and the awareness that hedges create funding calls. A 50 percent ratio as a stated regret-minimising policy is a strong answer.

   Expect next

   • Why hedge bonds but not equities?
   • What is the cash flow risk in a hedging programme?
   • Would you hedge emerging market currency exposure?
6. 061What does it cost to hedge a currency, and where does that cost come from?Currency and globalIntermediatetechnicalMulti-assetGlobal investing

   Say this

   The cost is the interest rate differential, not a fee. Covered interest parity means the forward rate embeds the gap between the two countries' money market rates, so hedging a currency with a higher interest rate than yours costs you that gap every time you roll the forward.

   Then walk it

   1. Mechanism: the forward rate equals spot times the ratio of the two interest rates over the period. If dollar rates are 4 percent and euro rates are 2 percent, a euro investor hedging dollars pays away roughly 2 percent a year in forward points.
   2. So the hedging decision partly determines your return, not just your risk. An Indian investor hedging US equity exposure gives up the rupee-dollar rate differential, historically 3 to 5 percent a year, which is a very large share of an equity return to surrender for volatility reduction.
   3. It runs the other way too. A dollar investor hedging yen or euro exposure when their rates were near zero was collecting the differential, so hedging was a positive carry. That asymmetry explains why hedging norms differ by home currency.
   4. On top of the differential there is the real transaction cost: forward bid-offer, which is small for major pairs and material for emerging currencies, plus the operational cost of rolling and the credit or clearing cost of the derivative.
   5. Then the cross-currency basis, which is the deviation from covered interest parity. Since 2008, balance sheet constraints at banks mean hedging dollars can cost more than the rate differential implies, especially at quarter and year end. That basis was 30 to 50 basis points for the yen for long stretches and it is a real cost, not a theoretical one.
   6. And the cash flow point: forwards are marked and settled, so if the currency moves against the hedge you pay cash before the underlying gain is realised. A hedging policy needs a liquidity buffer sized for a two or three standard deviation currency move.

   Where candidates lose it

   Calling the hedge cost a fee or a premium. It is the interest rate differential, and being able to say that in terms of covered interest parity is the technical marker on this question. Then name the cross-currency basis, because that is the practitioner's detail that shows you have looked at an actual hedging cost sheet.

   Expect next

   • So does an Indian investor hedge US exposure?
   • What is the cross-currency basis and why does it exist?
   • How much liquidity would you hold behind a hedging programme?
7. 062What is implementation shortfall, and why does it matter to a portfolio manager rather than just the trader?Implementation and costsIntermediatetechnicalPortfolio implementationSystematic investing

   Say this

   It is the difference between the return of the paper portfolio you wanted and the real one you got, measured from the decision price. It matters to the manager because it includes delay and opportunity cost, which are created by the investment process, not by the execution desk.

   Then walk it

   1. Break it into four parts. Explicit costs: commission, taxes, stamp duty. Delay cost: the price move between the decision and the order reaching the market. Market impact: the price move your own trading caused. Opportunity cost: the return you missed on the part of the order you never filled.
   2. The benchmark is the decision price, the price when the manager decided, not the arrival price at the desk or the day's VWAP. That choice is deliberate, because measuring against arrival price hides the delay the investment process caused.
   3. Why the manager owns it: an idea that takes three days to be approved and sized loses the first move. On fast-decaying signals, delay cost alone can exceed the whole expected alpha. That is a research and governance problem, not a trading problem.
   4. Opportunity cost is the part everyone forgets and it can be the largest. An unfilled limit order in a stock that then rallies 8 percent cost you 8 percent on that portion, and it will never appear in a commission report.
   5. Typical magnitudes to keep in your head: large cap developed equity all-in maybe 20 to 40 basis points round trip, emerging market or small cap 100 basis points or more, and a large order in an illiquid name far beyond that. Against an expected alpha of 150 basis points, that is a big fraction of the edge.
   6. So the feedback loop is what matters: measure shortfall per strategy and per signal, and feed it back into portfolio construction so the optimiser knows what trading actually costs. That is the difference between a backtest and a track record.

   Where candidates lose it

   Describing it as commissions and spread. The components that distinguish a real answer are delay cost and opportunity cost, and the point that the benchmark is the decision price so the investment process owns part of the number. Blaming the execution desk for shortfall is the wrong frame.

   Expect next

   • How would you reduce delay cost?
   • Why is VWAP a poor benchmark for this?
   • How large is shortfall on a small cap order?
8. 063What are the components of transaction cost?Implementation and costsCorephone / first roundAsset managementPortfolio implementation

   Say this

   Explicit costs you can see on the ticket, commission, taxes, exchange fees, and implicit costs you have to measure, spread, market impact, delay and opportunity cost. The implicit ones are usually several times larger than the explicit ones, which is why cost control is a portfolio construction question.

   Then walk it

   1. Explicit: brokerage commission, exchange and clearing fees, and transaction taxes. In India that means STT, stamp duty and GST on brokerage, which together make high-turnover strategies structurally more expensive than in the US.
   2. Spread: you buy at the offer and sell at the bid, so half the spread each way is a cost even for a tiny order. In a liquid large cap that is a couple of basis points; in a small cap it can be 50.
   3. Market impact: your own order moves the price. It scales roughly with the square root of order size relative to average daily volume, so trading 20 percent of a day's volume is far more than four times as expensive as trading 5 percent.
   4. Delay and opportunity cost: the price drift between decision and execution, and the alpha lost on unexecuted quantity. These are invisible in a broker report and often the largest components for an active manager.
   5. Then the structural ones people forget: the cost of crossing the spread on the rebalance of an index at the reconstitution date, when everyone trades the same way at the same time, and the tax cost of realising gains in a taxable portfolio.
   6. Practically I would measure all of it as implementation shortfall against the decision price, break it down by strategy and market, and use it as an input to how fast and how often I am willing to trade. The right target is not zero cost, it is maximum alpha net of cost.

   Where candidates lose it

   Listing only commission and spread. Market impact and opportunity cost are the ones that matter, and the square root relationship between size and impact is the detail that shows you understand why capacity is limited. Giving Indian specifics, STT and stamp duty, is a cheap way to show you know the market you are being hired for.

   Expect next

   • How does impact scale with order size?
   • Which costs get worse in a stressed market?
   • How would you trade a large order in an illiquid stock?
9. 064What is capacity, and how would you know a strategy has run out of it?Implementation and costsHardsuperdayAsset managementMulti-manager allocation

   Say this

   Capacity is the amount of money a strategy can run before its own trading destroys the edge. You detect it by watching the cost curve and the portfolio's drift, not by watching returns, because returns tell you far too late.

   Then walk it

   1. The mechanism: as assets grow, position sizes grow relative to average daily volume, so market impact rises faster than linearly. At some point the impact on entry and exit exceeds the alpha per trade, and the strategy stops working at any skill level.
   2. Early warning sign one, portfolio drift. The manager starts holding more names, larger and more liquid names, and turning over less. That is a rational response to size, but it means you are no longer buying the strategy you diligenced.
   3. Sign two, rising implementation shortfall per trade and longer time to build positions. A manager who used to enter in a day and now takes a week has told you about capacity before the returns do.
   4. Sign three, cash drag and style creep: holding more cash because ideas cannot be sized, or moving into adjacent, more liquid strategies to deploy the money.
   5. Estimating it in advance: for a given strategy, model impact as a function of assets, then find the asset level where expected net alpha falls below the fee. For a small cap or high-turnover quant strategy that number can be surprisingly low, a few hundred million dollars; for large cap value it can be tens of billions.
   6. The incentive problem is the honest part of the answer. Fees scale with assets and performance does not, so managers have every reason to raise more than their capacity, and soft-closing is rare. As an allocator I would ask for the capacity estimate and the methodology in writing, and treat a manager who has no view on their own capacity as a warning.

   Where candidates lose it

   Answering 'when returns fall'. By then you have already lost money and the diagnosis is ambiguous. The expected answer uses leading indicators: rising shortfall, longer position build times, more names, larger caps, lower turnover. And name the incentive conflict, because it is the reason capacity limits are so often breached.

   Expect next

   • How would you estimate capacity for a small cap strategy?
   • What would you do if a manager you hold has doubled in size?
   • Why do so few managers close to new money?
10. 067Make the arithmetic case for passive investing.Active versus passiveIntermediatetechnicalAsset managementWealth management

    Say this

    Sharpe's arithmetic: before costs, the average actively managed dollar must earn exactly the market return, because active investors collectively hold the market. After costs, the average active dollar must underperform by the amount of those costs. It is an identity, not an empirical claim.

    Then walk it

    1. The logic in one step: the market is the sum of all holdings. Passive holders earn the market minus a few basis points. So the remaining, active, holdings must also earn the market gross, which means active as a group underperforms by its fee and cost load.
    2. Put the numbers on it. A 75 basis point active fee plus 30 basis points of trading cost against an index fund at 5 basis points is a 100 basis point annual handicap. Compounded over 30 years that is roughly a quarter of the terminal wealth.
    3. The evidence lines up with the arithmetic. SPIVA and Morningstar's active-passive barometer consistently show 70 to 90 percent of active funds trailing their benchmark over 10 to 15 year periods, and the survivors are partly a survivorship artefact because the worst funds close.
    4. Persistence is the second nail. Top quartile managers in one five-year period are close to randomly distributed in the next, so even if skill exists, identifying it in advance is a separate and much harder problem than establishing that it exists.
    5. The rebuttals worth knowing and conceding: the arithmetic is about the average dollar, not every dollar, so it does not prove no manager can win. It says the average client cannot, which is the relevant fact for an adviser. And it is silent on less efficient markets, smaller markets and asset classes where the index is poorly constructed.
    6. So the professional conclusion is a barbell: index the efficient, liquid core where the arithmetic is hardest to beat, and spend the fee budget only where dispersion is wide and there is a structural reason for an edge. That is what most large institutions have converged on.

    Where candidates lose it

    Arguing it purely from performance statistics. The statistics can be disputed, dataset by dataset; the arithmetic cannot. Lead with Sharpe's identity, then support it with SPIVA. And concede the limit of the argument, that it is about the average dollar, or you will sound like an ideologue rather than an analyst.

    Expect next

    • So where would you still pay for active?
    • What happens if everyone indexes?
    • Does the arithmetic hold in small cap India?

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.