FA FA Investment Analysis & Portfolio Management

Question 1

Which theory states that in an efficient market, asset prices reflect all available information?

Accepted Answer

Efficient Market Hypothesis (EMH)

Answer

Modern Portfolio Theory (MPT)

Answer

Capital Asset Pricing Model (CAPM)

Answer

Arbitrage Pricing Theory (APT)

Question 2

In the Capital Asset Pricing Model (CAPM), what does beta measure?

Accepted Answer

A security's sensitivity to systematic (market) risk

Answer

The total risk of an individual stock

Answer

A company's dividend growth rate

Answer

The risk-free rate of return

Question 3

What is the primary benefit of diversification in a portfolio?

Accepted Answer

It reduces unsystematic (company-specific) risk without necessarily sacrificing expected return

Answer

It eliminates all market risk

Answer

It guarantees higher returns than a concentrated portfolio

Answer

It increases the portfolio's beta

Question 4

Which bond characteristic measures the weighted average time to receive all cash flows, used to estimate interest rate sensitivity?

Accepted Answer

Duration

Answer

Yield to maturity

Answer

Coupon rate

Answer

Credit spread

Question 5

What is the Sharpe ratio used to measure in portfolio performance evaluation?

Accepted Answer

Risk-adjusted return per unit of total portfolio volatility

Answer

Absolute return over a benchmark index

Answer

The portfolio's correlation with the market

Answer

The maximum drawdown during a specific period

Question 6

Which asset allocation strategy systematically rebalances the portfolio back to target weights as market values drift?

Accepted Answer

Strategic asset allocation with periodic rebalancing

Answer

Tactical asset allocation

Answer

Buy-and-hold strategy

Answer

Momentum investing