FA Investment Analysis & Portfolio Management Flashcards

What does the term 'alpha' represent in investment management?

Answer: Excess return generated above the benchmark after adjusting for risk

Alpha measures a manager's value-added performance above what would be expected given the portfolio's level of systematic risk.

Which fixed-income risk refers to the possibility that a bondholder will be unable to reinvest coupon payments at the original yield?

Answer: Reinvestment risk

Reinvestment risk arises when interest rates fall after a bond is purchased, forcing coupon reinvestment at lower rates and reducing total return.

What does the Price-to-Earnings (P/E) ratio tell an investor about a stock?

Answer: How much investors are willing to pay per dollar of the company's earnings

The P/E ratio shows the market's valuation of each dollar of earnings; a higher P/E implies investors expect stronger future growth.

In Modern Portfolio Theory, the 'efficient frontier' represents portfolios that:

Answer: Offer the maximum expected return for a given level of risk

The efficient frontier is the set of optimal portfolios that maximize expected return at each level of portfolio risk, as defined by Markowitz.

Which investment strategy involves buying undervalued stocks trading below their intrinsic value, with a margin of safety?

Answer: Value investing

Value investing, popularized by Benjamin Graham and Warren Buffett, seeks stocks priced below intrinsic value to provide a buffer against analytical errors.

What does the current ratio measure in financial statement analysis?

Answer: A company's ability to pay short-term liabilities with short-term assets

The current ratio (current assets ÷ current liabilities) assesses short-term liquidity; a ratio above 1 indicates the company can cover near-term obligations.