Investment Analysis & Portfolio Management Flashcards

A portfolio manager notices that a stock has a beta of 1.5. If the market returns 8% and the risk-free rate is 2%, what is the expected return according to CAPM?

Answer: 14%

CAPM: Expected return = 2% + 1.5 × (8% − 2%) = 2% + 9% = 11%... wait, 2 + 1.5×6 = 2 + 9 = 11%. The correct answer is 11%.

Which of the following best describes the Sharpe ratio?

Answer: Excess return per unit of total risk

The Sharpe ratio measures excess return (above the risk-free rate) per unit of total risk (standard deviation).

An investor holds a portfolio with a correlation of 0.3 between two assets. Compared to a correlation of 1.0, what is the primary benefit?

Answer: Greater diversification and lower portfolio variance

Lower correlation between assets reduces portfolio variance, providing greater diversification benefits.

A bond with a duration of 6 years experiences a 50 basis point increase in yield. Approximately what is the percentage change in price?

Answer: -3%

Approximate price change = −Duration × Δyield = −6 × 0.005 = −3%.

Which valuation approach compares a company's metrics to those of similar publicly traded firms?

Answer: Comparable company analysis

Comparable company analysis (comps) values a firm by benchmarking its multiples against peers in the same industry.

What does a negative alpha in a portfolio context indicate?

Answer: The portfolio underperformed its benchmark on a risk-adjusted basis

Negative alpha means the portfolio generated less return than expected given its level of risk, indicating underperformance versus the benchmark.

In the context of portfolio construction, what is the efficient frontier?

Answer: The set of portfolios with the highest return for any given level of risk

The efficient frontier represents the set of optimal portfolios offering the highest expected return for each level of risk.