CME-1 Investment Analysis & Portfolio Management

Question 1

What does 'systematic risk' (market risk) mean in investment analysis?

Accepted Answer

Risk inherent to the entire market that cannot be diversified away

Answer

Systematic risk affects all securities in the market simultaneously (e.g., recessions, interest rate changes) and cannot be eliminated through diversification.

Question 2

What is the Capital Asset Pricing Model (CAPM) used for?

Accepted Answer

Estimating the expected return of an asset based on its beta and market risk premium

Answer

CAPM determines the expected return of an asset: Expected Return = Risk-Free Rate + Beta × (Market Return − Risk-Free Rate), linking risk to required return.

Question 3

What does a beta of 1.5 indicate about a stock?

Accepted Answer

The stock is expected to move 1.5 times the market's percentage change in the same direction

Answer

A beta of 1.5 means the stock is 50% more volatile than the market; when the market rises 10% the stock tends to rise 15%, and vice versa.

Question 4

What is the Price-to-Earnings (P/E) ratio used for in equity analysis?

Accepted Answer

Comparing market price to earnings per share to assess relative valuation

Answer

The P/E ratio = Market Price ÷ Earnings Per Share. A higher P/E may indicate growth expectations or overvaluation; a lower P/E may signal value or declining prospects.

Question 5

What is 'duration' in fixed income analysis?

Accepted Answer

A measure of a bond's price sensitivity to changes in interest rates

Answer

Duration measures how much a bond's price changes for a given change in interest rates; a higher duration means greater interest rate sensitivity.

CME-1 Practice Test

CME-1 Practice Test

CME-1 Investment Analysis & Portfolio Management