CFA Investment Tools and Concepts 2 — Questions and Answers
Question 1: Which measure captures the sensitivity of a bond's price to a 1% change in yield, adjusted for the bond's current price?
- Macaulay duration
- Modified duration (Correct answer)
- Convexity
- Dollar duration
Correct answer: Modified duration
Modified duration measures the percentage change in a bond's price for a 1% change in yield.
Question 2: 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:
- Undervalued by $5
- Overvalued by $5 (Correct answer)
- Fairly valued
- Undervalued by $10
Correct answer: Overvalued by $5
When market price exceeds estimated intrinsic value, the asset is considered overvalued.
Question 3: The Capital Market Line (CML) plots expected return against:
- Beta
- Standard deviation of the portfolio (Correct answer)
- Variance
- Tracking error
Correct 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).
Question 4: In the context of futures contracts, 'basis' is defined as:
- Futures price minus spot price
- Spot price minus futures price (Correct answer)
- The margin requirement
- The daily price limit
Correct answer: Spot price minus futures price
Basis = spot price − futures price; it converges to zero at contract expiration.
Question 5: A portfolio with a Sharpe ratio of 1.2 and a Treynor ratio significantly higher than the market's suggests the portfolio:
- Has high unsystematic risk relative to beta
- Is well-diversified and has strong risk-adjusted returns (Correct answer)
- Underperforms on a total-risk basis
- Has negative alpha
Correct 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.
Question 6: Which of the following is the primary distinction between money market securities and capital market securities?
- Credit quality
- Maturity (one year or less vs. longer-term) (Correct answer)
- Issuer type
- Currency denomination
Correct 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.
Question 7: An investor uses a protective put strategy. This involves:
- Selling a put option while holding the underlying stock
- Buying a put option on a stock already owned (Correct answer)
- Selling a call option on a stock already owned
- Buying a call option without owning the stock
Correct 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.
CFA Investment Tools and Concepts 2
Which measure captures the sensitivity of a bond's price to a 1% change in yield, adjusted for the bond's current price?