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

Diversification involves spreading investments across various asset classes, sectors, and regions so that poor performance in one area is offset by others, reducing unsystematic (company-specific) risk without necessarily sacrificing expected returns.

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

Beta measures the sensitivity of a security's price movements relative to the broader market; a beta of 1 moves with the market, above 1 is more volatile, and below 1 is less volatile.

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

Alpha represents the excess return a portfolio or security generates above what would be predicted by its beta (systematic risk exposure), measuring the value added by the investment manager's skill.

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

The Sharpe ratio measures risk-adjusted performance by dividing a portfolio's excess return (above the risk-free rate) by its standard deviation, showing how much return is earned per unit of total risk taken.

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

Duration measures how sensitive a bond's price is to changes in interest rates; a bond with a duration of 5 years will fall approximately 5% in price for each 1% rise in interest rates.

Stock Broker Practice Test

Stock Broker Practice Test

Stock Broker Portfolio Analysis & Risk Management