Investment Planning & Portfolio Management Flashcards
6 cards from real CFP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Investment Planning & Portfolio Management flashcards as text
What does 'standard deviation' measure in portfolio analysis?
Answer: The total risk of a portfolio, measuring the dispersion of returns around the mean
Standard deviation measures total risk by quantifying how widely a portfolio's returns are dispersed around its average return.
According to Modern Portfolio Theory (MPT), what is the primary benefit of diversification?
Answer: It reduces portfolio risk without necessarily sacrificing expected return by combining assets with low correlations
MPT demonstrates that combining assets with low or negative correlations can reduce portfolio risk (standard deviation) while maintaining expected return levels.
What does the Sharpe Ratio measure?
Answer: The risk-adjusted return of a portfolio, calculated as excess return per unit of total risk
The Sharpe Ratio measures risk-adjusted performance by dividing the portfolio's excess return (above the risk-free rate) by its standard deviation.
What is 'beta' in the context of portfolio management?
Answer: A measure of systematic risk that indicates how sensitive an investment is to market movements
Beta measures an investment's sensitivity to market movements; a beta of 1.0 means the investment moves in line with the market, while >1.0 indicates higher volatility.
Which of the following best describes dollar-cost averaging (DCA)?
Answer: Investing a fixed dollar amount at regular intervals regardless of market price
Dollar-cost averaging involves investing a consistent dollar amount at regular intervals, automatically buying more shares when prices are low and fewer when prices are high.
What is the efficient market hypothesis (EMH) and which form suggests that technical analysis cannot consistently produce excess returns?
Answer: Weak form, which holds that past price and volume data cannot predict future prices
The weak form of EMH asserts that all historical price and trading volume data is already reflected in current prices, making technical analysis unable to consistently generate alpha.