CFA Investment Tools and Concepts 2

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?

Accepted Answer

Modified duration

Answer

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:

Accepted Answer

Overvalued by $5

Answer

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

Question 3

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

Accepted Answer

Standard deviation of the portfolio

Answer

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:

Accepted Answer

Spot price minus futures price

Answer

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:

Accepted Answer

Is well-diversified and has strong risk-adjusted returns

Answer

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

CFA Practice Test