Stock Broker Portfolio Analysis & Risk Management

Question 1

What is 'diversification' in portfolio management and why is it considered beneficial?

Accepted Answer

Spreading investments across different asset classes, sectors, and geographies to reduce unsystematic risk

Answer

Investing all funds in the best-performing sector

Answer

Using leverage to amplify returns

Answer

Concentrating in one company with the strongest balance sheet

Question 2

What is 'beta' as a measure of risk in securities analysis?

Accepted Answer

A measure of a security's price volatility relative to the overall market

Answer

A measure of a company's profitability relative to peers

Answer

The interest rate sensitivity of a bond

Answer

The probability of a company defaulting on its debt

Question 3

What is 'alpha' in the context of investment performance evaluation?

Accepted Answer

The excess return of an investment relative to its expected return given its risk (beta)

Answer

The risk-free rate of return

Answer

The total return including dividends

Answer

The annualized volatility of a portfolio

Question 4

What is the 'Sharpe ratio' and what does it measure?

Accepted Answer

A measure of risk-adjusted return, calculated as excess return above the risk-free rate divided by standard deviation

Answer

A ratio of a company's earnings to its share price

Answer

The ratio of a bond's duration to its yield

Answer

The percentage of gains retained after taxes

Question 5

What is 'duration' as it relates to bond price sensitivity?

Accepted Answer

A measure of a bond's sensitivity to interest rate changes; longer duration means greater price sensitivity

Answer

The number of years until a bond matures

Answer

The frequency of coupon payments

Answer

The credit rating period of a bond

Question 6

What is 'systematic risk' (also called market risk) versus 'unsystematic risk' (also called idiosyncratic risk)?

Accepted Answer

Systematic = broad market risk that affects all investments and cannot be diversified away; unsystematic = company-specific risk that can be reduced through diversification

Answer

Systematic = company risk; unsystematic = industry risk

Answer

Systematic = interest rate risk; unsystematic = credit risk

Answer

Systematic = short-term risk; unsystematic = long-term risk