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

The Efficient Market Hypothesis posits that prices always incorporate all known information, making it impossible to consistently outperform the market through analysis.

Question 2

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

Accepted Answer

A security's sensitivity to systematic (market) risk

Answer

Beta quantifies how much a security's returns move relative to the overall market; a beta of 1 means it moves in line with the market.

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

Diversification reduces idiosyncratic risk by combining assets whose returns do not move perfectly together, lowering overall portfolio volatility.

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

Duration measures a bond's price sensitivity to interest rate changes; a longer duration means greater price volatility when rates move.

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

The Sharpe ratio divides excess return (return minus risk-free rate) by the portfolio's standard deviation to show how much return is earned per unit of risk.

FA - Financial Analyst Practice Test

FA - Financial Analyst Practice Test

FA FA Investment Analysis & Portfolio Management