Investment Tools and Concepts Flashcards

Which measure captures the sensitivity of a bond's price to a 1% change in yield, adjusted for the bond's current price?

Answer: Modified duration

Modified duration measures the percentage change in a bond's price for a 1% change in yield.

An analyst estimates the intrinsic value of a stock at $45 but it currently trades at $50. According to the valuation framework, the stock is:

Answer: Overvalued by $5

When market price exceeds estimated intrinsic value, the asset is considered overvalued.

The Capital Market Line (CML) plots expected return against:

Answer: Standard deviation of the portfolio

The CML uses total risk (standard deviation) on the x-axis, unlike the SML which uses systematic risk (beta).

In the context of futures contracts, 'basis' is defined as:

Answer: Spot price minus futures price

Basis = spot price − futures price; it converges to zero at contract expiration.

A portfolio with a Sharpe ratio of 1.2 and a Treynor ratio significantly higher than the market's suggests the portfolio:

Answer: Is well-diversified and has strong risk-adjusted returns

A high Sharpe (total risk) and high Treynor (systematic risk) together indicate good diversification and strong performance.

Which of the following is the primary distinction between money market securities and capital market securities?

Answer: Maturity (one year or less vs. longer-term)

Money market instruments mature in one year or less, while capital market instruments have longer maturities.

An investor uses a protective put strategy. This involves:

Answer: Buying a put option on a stock already owned

A protective put combines a long stock position with a long put to limit downside risk.