Stock Broker Portfolio Analysis & Risk Management 2

Question 1

What is the 'price-to-earnings (P/E) ratio' and how is it used in stock valuation?

Accepted Answer

A stock's current price divided by its earnings per share; used to assess whether a stock is over- or undervalued relative to peers

Answer

The P/E ratio compares a stock's market price to its earnings per share, providing a quick measure of how much investors are paying per dollar of earnings; higher P/E may indicate growth expectations or overvaluation.

Question 2

What is 'rebalancing' a portfolio and why is it done?

Accepted Answer

Periodically adjusting a portfolio back to its target asset allocation after market movements cause drift

Answer

Portfolio rebalancing involves selling assets that have grown above their target allocation and buying those that have fallen below, restoring the original intended risk profile and asset mix.

Question 3

What is 'standard deviation' as a measure of investment risk?

Accepted Answer

A statistical measure of how much returns deviate from their average, indicating the investment's volatility

Answer

Standard deviation measures the dispersion of an investment's returns around its average (mean) return, with higher standard deviation indicating greater volatility and uncertainty in future returns.

Question 4

What is 'asset allocation' and how does it relate to an investor's risk tolerance?

Accepted Answer

Deciding how to distribute investments among asset classes (stocks, bonds, cash) based on goals, time horizon, and risk tolerance

Answer

Asset allocation is the strategic distribution of investments across major asset classes; an investor's risk tolerance, time horizon, and goals determine the mix — aggressive investors hold more equities, conservative investors hold more bonds and cash.

Question 5

What is 'dollar-cost averaging' (DCA) as an investment strategy?

Accepted Answer

Investing a fixed dollar amount at regular intervals regardless of price, buying more shares when prices are low and fewer when high

Answer

Dollar-cost averaging involves investing a fixed dollar amount on a regular schedule, automatically buying more shares when prices are low and fewer when prices are high, reducing the impact of volatility.

Stock Broker Practice Test

Stock Broker Practice Test

Stock Broker Portfolio Analysis & Risk Management 2