Securities Analysis and Valuation 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 Securities Analysis and Valuation flashcards as text
The Sharpe ratio measures portfolio performance by:
Answer: Dividing excess return over the risk-free rate by portfolio standard deviation
The Sharpe ratio = (Portfolio Return − Risk-Free Rate) ÷ Standard Deviation, expressing how much excess return is earned per unit of total risk.
In the context of portfolio performance, alpha represents:
Answer: The return above or below what is predicted by the portfolio's beta
Alpha is the excess return a portfolio generates over its expected return based on its level of systematic risk (beta), and is considered a measure of manager skill.
The Efficient Market Hypothesis (EMH) in its strong form asserts that:
Answer: Stock prices reflect all public and private (insider) information
The strong form of EMH holds that all information — including non-public insider information — is already incorporated into stock prices, making it impossible to earn consistent excess returns.
The Gordon Growth Model (constant-growth DDM) values a stock as:
Answer: Next year's dividend divided by (required return minus the constant growth rate)
The Gordon Growth Model formula is P = D1 ÷ (r − g), where D1 is the next dividend, r is the required rate of return, and g is the constant dividend growth rate.
A convertible bond allows the bondholder to:
Answer: Exchange the bond for a fixed number of common stock shares
A convertible bond gives the holder the right to convert the bond into a specified number of common shares, allowing participation in equity upside while receiving fixed income.
Correlation between two assets ranges from −1 to +1. A correlation of −1 between two holdings in a portfolio means:
Answer: The two assets move in exactly opposite directions
A correlation of −1 (perfect negative correlation) means the two assets move in exactly opposite directions by the same magnitude, providing the maximum diversification benefit.
Which of the following is an example of unsystematic (company-specific) risk that can be reduced through diversification?
Answer: A product recall affecting a single company's stock
Unsystematic risk is idiosyncratic to a particular company or industry (such as a product recall) and can be largely eliminated by holding a diversified portfolio.