Investment Advisor Securities Analysis and Valuation 3

Question 1

The Sharpe ratio measures portfolio performance by:

Accepted Answer

Dividing excess return over the risk-free rate by portfolio standard deviation

Answer

Dividing total return by standard deviation

Answer

Comparing a portfolio's alpha to its beta

Answer

Calculating return per unit of systematic risk

Question 2

In the context of portfolio performance, alpha represents:

Accepted Answer

The return above or below what is predicted by the portfolio's beta

Answer

A portfolio's total return relative to the S&P 500

Answer

The portfolio's standard deviation relative to the market

Answer

The correlation between the portfolio and its benchmark

Question 3

The Efficient Market Hypothesis (EMH) in its strong form asserts that:

Accepted Answer

Stock prices reflect all public and private (insider) information

Answer

Stock prices reflect only publicly available information

Answer

Stock prices reflect all historical price data

Answer

Active management can consistently outperform passive indexing

Question 4

The Gordon Growth Model (constant-growth DDM) values a stock as:

Accepted Answer

Next year's dividend divided by (required return minus the constant growth rate)

Answer

Earnings per share divided by the required return

Answer

Current dividend multiplied by (1 + growth rate)

Answer

Book value per share multiplied by the P/E ratio

Question 5

A convertible bond allows the bondholder to:

Accepted Answer

Exchange the bond for a fixed number of common stock shares

Answer

Demand early repayment at a predetermined price

Answer

Convert the fixed coupon to a floating rate

Answer

Transfer the bond to another investor at par

Question 6

Correlation between two assets ranges from −1 to +1. A correlation of −1 between two holdings in a portfolio means:

Accepted Answer

The two assets move in exactly opposite directions

Answer

The two assets move in the same direction and magnitude

Answer

The two assets are completely unrelated in their movements

Answer

Combining them doubles the portfolio's volatility

Question 7

Which of the following is an example of unsystematic (company-specific) risk that can be reduced through diversification?

Accepted Answer

A product recall affecting a single company's stock

Answer

Inflation risk

Answer

Interest rate risk

Answer

A recession causing broad market declines