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

The Sharpe ratio = (Portfolio Return − Risk-Free Rate) ÷ Standard Deviation, expressing how much excess return is earned per unit of total 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

Alpha is the excess return a portfolio generates over its expected return based on its level of systematic risk (beta), and is considered a measure of manager skill.

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

The strong form of EMH holds that all information — including non-public insider information — is already incorporated into stock prices, making it impossible to earn consistent excess returns.

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

The Gordon Growth Model formula is P = D1 ÷ (r − g), where D1 is the next dividend, r is the required rate of return, and g is the constant dividend growth rate.

Question 5

A convertible bond allows the bondholder to:

Accepted Answer

Exchange the bond for a fixed number of common stock shares

Answer

A convertible bond gives the holder the right to convert the bond into a specified number of common shares, allowing participation in equity upside while receiving fixed income.

Investment Advisor Practice Test

Investment Advisor Practice Test

Investment Advisor Securities Analysis and Valuation 3