AAFM Investment Analysis and Portfolio Management

Question 1

Which portfolio theory was developed by Harry Markowitz to optimize risk-return trade-offs?

Accepted Answer

Modern Portfolio Theory

Answer

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?

Accepted Answer

Total risk

Answer

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?

Accepted Answer

The overall market index

Answer

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?

Accepted Answer

Dividend Discount Model

Answer

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?

Accepted Answer

Interest rates

Answer

Duration quantifies the approximate percentage price change in a bond for a 1% change in interest rates.

American Academy of Financial Management (AAFM) Practice Test

American Academy of Financial Management (AAFM) Practice Test

AAFM Investment Analysis and Portfolio Management