Business Finance & Economics Flashcards
7 cards from real CAA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Business Finance & Economics flashcards as text
In fixed income analysis, the Macaulay duration of a bond measures:
Answer: The weighted average time to receive the bond's cash flows, indicating interest rate sensitivity
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.
The strong form of the Efficient Market Hypothesis (EMH) asserts that stock prices:
Answer: Reflect all information, including private insider information
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.
Arbitrage in financial markets is best described as:
Answer: Simultaneously buying and selling equivalent assets to profit from price discrepancies across markets
Arbitrage exploits price differences for identical or equivalent assets in different markets through simultaneous transactions, generating risk-free profit while helping to align prices.
An inverted yield curve, where short-term interest rates exceed long-term rates, is most commonly interpreted as:
Answer: A predictor of an upcoming economic recession
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.
The Sharpe ratio of a portfolio is calculated as:
Answer: Excess return above the risk-free rate divided by the portfolio's standard deviation
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.
The primary benefit of portfolio diversification is:
Answer: Reducing unsystematic (firm-specific) risk without proportionally reducing expected returns
Diversification reduces unsystematic risk because the idiosyncratic losses of some assets tend to be offset by gains in others, while expected returns are not proportionally reduced.
A forward contract obligates both counterparties to:
Answer: Exchange an asset at a future date at a price agreed upon at contract initiation
A forward contract locks in a transaction price at inception, with both parties obligated to exchange the underlying asset at that agreed price on the specified future settlement date.