Portfolio Management and Analysis Flashcards
6 cards from real Series 65 – Uniform Investment Adviser Law Exam practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Portfolio Management and Analysis flashcards as text
What does the Sharpe ratio measure?
Answer: Risk-adjusted return by dividing excess return over the risk-free rate by the portfolio's standard deviation
The Sharpe ratio measures how much excess return a portfolio earns per unit of total risk (standard deviation), rewarding portfolios that generate more return per unit of risk taken.
What is the Capital Asset Pricing Model (CAPM) used to calculate?
Answer: The expected return of an asset based on its systematic risk (beta) relative to the market
CAPM calculates the expected return of an asset using the risk-free rate, the asset's beta, and the expected market return, establishing a linear relationship between risk and return.
What is the efficient frontier in Modern Portfolio Theory?
Answer: The set of optimal portfolios that offer the highest expected return for each level of risk
The efficient frontier represents the set of portfolios that deliver the maximum expected return for a given level of risk, or minimum risk for a given expected return.
What is 'alpha' in portfolio performance measurement?
Answer: The excess return of a portfolio above the return predicted by CAPM given its level of systematic risk
Alpha measures the value an investment manager adds (or subtracts) relative to the return that would be expected given the portfolio's market risk (beta).
What does standard deviation measure in the context of investments?
Answer: The total variability or dispersion of investment returns around the average return
Standard deviation measures the degree to which returns fluctuate around their average, making it a key measure of total investment risk or volatility.
Which of the following best describes the concept of 'correlation' in portfolio construction?
Answer: A statistical measure of how two securities move in relation to each other, ranging from -1 to +1
Correlation measures the degree and direction of the relationship between two securities' returns; a correlation of -1 means they move perfectly opposite, +1 means perfectly together.