Valuation & Analysis Flashcards
6 cards from real RIA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Valuation & Analysis flashcards as text
Alpha in portfolio management represents:
Answer: Return above or below what CAPM would predict given the portfolio's risk level
Alpha measures risk-adjusted outperformance (or underperformance) relative to the return predicted by the portfolio's beta.
The Information Ratio (IR) measures:
Answer: Active return (alpha) divided by tracking error, assessing the consistency of outperformance
IR = Active Return / Tracking Error, measuring the risk-adjusted consistency of a manager's outperformance relative to benchmark.
In analyzing a company's financial health, a high current ratio (current assets/current liabilities > 2) indicates:
Answer: Strong short-term liquidity with sufficient assets to cover near-term obligations
A high current ratio (typically > 2:1) indicates good short-term liquidity—the company has ample current assets to cover its current liabilities.
Quantitative analysis in investment management involves:
Answer: Using mathematical and statistical models to identify investment opportunities and manage risk
Quantitative analysis applies mathematical models, statistical techniques, and data analysis to identify patterns, manage risk, and make investment decisions.
The Efficient Market Hypothesis (EMH) in its strong form states that:
Answer: No investor can consistently outperform the market because all information is already reflected in prices
Strong-form EMH holds that ALL information (public, private, and insider) is reflected in security prices, making it impossible to consistently earn excess returns.
When analyzing a bond's convexity, a bond with higher convexity:
Answer: Benefits more from rate decreases and loses less from rate increases than low-convexity bonds
Higher convexity means the bond gains more when rates fall and loses less when rates rise, making it more valuable all else equal.
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