CFA Investment Tools and Concepts 3

Question 1

Which statistical measure describes the degree to which two variables move together, standardized to range between -1 and +1?

Accepted Answer

Correlation coefficient

Answer

The correlation coefficient standardizes covariance by dividing by the product of the two variables' standard deviations.

Question 2

Under the Gordon Growth Model, if a stock's required return equals its dividend growth rate, the model implies the stock price is:

Accepted Answer

Undefined (infinite)

Answer

When required return equals growth rate, the denominator (r - g) equals zero, making the price undefined/infinite.

Question 3

A bond's yield to maturity (YTM) assumes that all coupon payments are:

Accepted Answer

Reinvested at the YTM rate

Answer

YTM implicitly assumes all intermediate coupon payments are reinvested at a rate equal to the YTM itself.

Question 4

Which of the following best describes a 'call option'?

Accepted Answer

Right to buy an asset at a specified price

Answer

A call option gives the buyer the right, but not the obligation, to purchase the underlying asset at the strike price.

Question 5

In portfolio construction, the minimum-variance frontier represents portfolios that:

Accepted Answer

Minimize variance for any given level of expected return

Answer

The minimum-variance frontier plots the lowest possible variance achievable for each target return level.

CFA Practice Test