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

Macaulay duration is the present-value-weighted average time to receive all cash flows, and it directly measures a bond's price sensitivity to changes in interest rates.

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

The strong form of EMH holds that prices fully incorporate all information — public and private — making it impossible to consistently earn abnormal returns even using insider information.

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

Arbitrage exploits price differences for identical or equivalent assets in different markets through simultaneous transactions, generating risk-free profit while helping to align prices.

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

An inverted yield curve has historically been one of the most reliable leading indicators of economic recession, as it reflects market expectations of future interest rate cuts by the central bank.

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

The Sharpe ratio equals the portfolio's excess return (above the risk-free rate) divided by its total risk (standard deviation), measuring reward earned per unit of total risk taken.

(CAA) Certified Actuarial Analyst Practice Test

(CAA) Certified Actuarial Analyst Practice Test

CAA Business Finance & Economics 3