CAA Business Finance & Economics 3

Question 1

In fixed income analysis, the Macaulay duration of a bond measures:

Accepted Answer

The weighted average time to receive the bond's cash flows, indicating interest rate sensitivity

Answer

The time remaining until the bond's first coupon payment

Answer

The credit default risk embedded in the bond's spread

Answer

Solely the bond's remaining time to maturity

Question 2

The strong form of the Efficient Market Hypothesis (EMH) asserts that stock prices:

Accepted Answer

Reflect all information, including private insider information

Answer

Reflect only historical price and volume information

Answer

Reflect all publicly available information but not insider information

Answer

Are always rationally priced with no mispricing ever occurring

Question 3

Arbitrage in financial markets is best described as:

Accepted Answer

Simultaneously buying and selling equivalent assets to profit from price discrepancies across markets

Answer

Speculative trading based on anticipated market trends

Answer

Hedging a currency exposure using forward contracts

Answer

Investing long-term in fundamentally undervalued assets

Question 4

An inverted yield curve, where short-term interest rates exceed long-term rates, is most commonly interpreted as:

Accepted Answer

A predictor of an upcoming economic recession

Answer

A reliable signal of strong economic expansion ahead

Answer

An indicator of persistently high near-term inflation

Answer

A signal that investors should sell all long-term bonds

Question 5

The Sharpe ratio of a portfolio is calculated as:

Accepted Answer

Excess return above the risk-free rate divided by the portfolio's standard deviation

Answer

Total portfolio return divided by market return

Answer

The correlation of the portfolio with the market benchmark

Answer

The ratio of systematic risk to total risk in the portfolio

Question 6

The primary benefit of portfolio diversification is:

Accepted Answer

Reducing unsystematic (firm-specific) risk without proportionally reducing expected returns

Answer

Eliminating all investment risk, including market risk

Answer

Maximizing returns by concentrating capital in top-performing assets

Answer

Eliminating exposure to systematic market-wide risk

Question 7

A forward contract obligates both counterparties to:

Accepted Answer

Exchange an asset at a future date at a price agreed upon at contract initiation

Answer

Exchange an asset at a future date at the prevailing spot price on that date

Answer

Exchange periodic cash flows based on a fixed and floating rate on a notional principal

Answer

Complete a transaction only if the price moves in a favorable direction for the buyer