Financial Investment Flashcards
7 cards from real Investment Advisor practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Investment flashcards as text
Which of the following describes the concept of 'duration' in fixed income investing?
Answer: A measure of a bond's price sensitivity to interest rate changes
Duration measures how much a bond's price will change for a 1% change in interest rates; it is expressed in years but represents price sensitivity.
An investor buys a stock at $50, receives a $2 dividend, and sells at $55. What is the total return?
Answer: 14%
Total return = (price gain + dividend) / purchase price = ($5 + $2) / $50 = 14%.
Which asset class has historically provided the best long-term hedge against unexpected inflation?
Answer: Common equities and real assets
Common stocks and real assets (real estate, commodities) tend to appreciate with inflation over the long run, unlike fixed-income instruments whose real value erodes.
What is the key difference between a closed-end fund and an open-end mutual fund?
Answer: Closed-end funds issue a fixed number of shares that trade on an exchange
Closed-end funds have a fixed share count and trade on exchanges at market-determined prices, which may differ from NAV, unlike open-end funds that issue/redeem at NAV.
A portfolio manager who selects securities based on predicted macroeconomic trends (GDP growth, inflation, interest rates) is using which approach?
Answer: Top-down investing
Top-down investing starts with macroeconomic analysis to select favorable sectors and countries before choosing individual securities within those areas.
What is the primary risk associated with callable bonds for investors?
Answer: Reinvestment risk, because bonds are typically called when rates fall
Issuers call bonds when interest rates decline so they can refinance at lower rates, forcing investors to reinvest their principal at the now-lower prevailing rates.
Modern Portfolio Theory (MPT) suggests that an investor should choose a portfolio on the efficient frontier based primarily on their:
Answer: Risk tolerance and desired return trade-off
MPT's efficient frontier shows the best possible return for each level of risk; the investor's position on it is determined by their individual risk-return preference.