AAFM Investment Analysis and Portfolio Management 1 — Questions and Answers
Question 1: Which portfolio theory was developed by Harry Markowitz to optimize risk-return trade-offs?
- Modern Portfolio Theory (Correct answer)
- Efficient Market Hypothesis
- Capital Asset Pricing Model
- Arbitrage Pricing Theory
Correct answer: Modern Portfolio Theory
Modern Portfolio Theory, developed by Markowitz in 1952, shows how investors can construct portfolios to maximize expected return for a given level of risk.
Question 2: The Sharpe ratio measures a portfolio's excess return per unit of which type of risk?
- Systematic risk
- Unsystematic risk
- Total risk (Correct answer)
- Liquidity risk
Correct answer: Total risk
The Sharpe ratio divides excess return over the risk-free rate by the portfolio's standard deviation, representing total risk.
Question 3: Beta measures a security's sensitivity to movements in which benchmark?
- The risk-free rate
- The overall market index (Correct answer)
- The sector index
- Inflation
Correct answer: The overall market index
Beta quantifies how much a security's returns move relative to a broad market index such as the S&P 500.
Question 4: Which valuation model discounts all expected future dividends to estimate a stock's intrinsic value?
- Price/Earnings Model
- Dividend Discount Model (Correct answer)
- Free Cash Flow Model
- Residual Income Model
Correct answer: Dividend Discount Model
The Dividend Discount Model values a stock as the present value of all its expected future dividends.
Question 5: Duration measures a bond's sensitivity to changes in which variable?
- Credit rating
- Interest rates (Correct answer)
- Inflation expectations
- Currency exchange rates
Correct answer: Interest rates
Duration quantifies the approximate percentage price change in a bond for a 1% change in interest rates.
Question 6: Which asset allocation strategy periodically restores a portfolio to its target weights?
- Tactical asset allocation
- Strategic asset allocation
- Dynamic asset allocation
- Rebalancing (Correct answer)
Correct answer: Rebalancing
Rebalancing involves buying or selling assets to return the portfolio to its originally intended strategic allocation.
AAFM Investment Analysis and Portfolio Management 1
Which portfolio theory was developed by Harry Markowitz to optimize risk-return trade-offs?