FA Investment Analysis & Portfolio Management Flashcards

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

Answer: Efficient Market Hypothesis (EMH)

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

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

Answer: A security's sensitivity to systematic (market) risk

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.

What is the primary benefit of diversification in a portfolio?

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

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

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

Answer: Duration

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

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

Answer: Risk-adjusted return per unit of total portfolio volatility

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.

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

Answer: Strategic asset allocation with periodic rebalancing

Periodic rebalancing sells outperforming assets and buys underperforming ones to restore the intended risk profile and target allocation.