Investments

Question 1

Money market securities have maturities of

Answer 1

One year or less; anything longer is a capital market security

Question 2

Beta of the overall market =

Answer 2

1.0; anything less is lower risk than the overall market

Question 3

To calculate portfolio beta, use

Answer 3

Weighted averaging

Question 4

What is a REMIC?

Answer 4

Real estate mortgage conduit; self-liquidating, flow-through entity; real estate mortgages and mortgage-backed securities

REMIC issues debt securities to investors in the form of publicly traded REMIC bonds

Question 5

NOI Capitalization Approach

Answer 5

When valuing an investment in income producing property use:

V = NOI / Capitalization Rate

*When calculating vacancy rates, you use the gross rental receipts PLUS other income

Question 6

A positive Alpha indicates:

Answer 6

The investment performed better than the market on a risk-adjusted basis

Question 7

YTC Formula

Answer 7

Use TVM keys

N = Number of years to call x 2
I = ?
PV = $ amt paid for bond
PMT = Par value x coupon rate / 2
FV = Call amount

Multiply the return value for I to get YTC answer

Question 8

You cannot diversify this type of risk:

Answer 8

Systematic Risk

Question 9

Beta is the measure of this type of risk:

Answer 9

Systematic Risk

Question 10

Standard Deviation measures:

Answer 10

Measures a security’s performance relative to its expected performance

Question 11

Beta measures:

Answer 11

Relationship of a security’s movement relative to that of the market (systematic risk)

Question 12

Alpha measures:

Answer 12

The level of over or underperformance of a security relative to market expectations

Question 13

Geometric Rate of Return Calculation

Answer 13

Use TVM keys:

N: # of years after initial investment
I: ?
PV: (initial investment) (use negative)
PMT: 0
FV: Use the current value of asset

Question 14

Ideal correlation for portfolio should be:

Answer 14

-1; this means that any two assets move opposite of one another

Question 15

The indifference curve represents:

Answer 15

What level of risk an investor will accept for given levels of return

Question 16

The efficient frontier represents:

Answer 16

Which portfolios are attainable and which are unattainable

Question 17

What do the following use as a measure of risk:

1) Capital Market Line
2) Security Market Line

Answer 17

1) Standard deviation of the market
2) Beta

Question 18

Capital Market Line Formula

Answer 18

Question 19

How to determine how much of a fund’s movement is due to the movement of the market?

Answer 19

Square the correlation coefficient

Example: if correlation is .80, squre .80 to get .64. Therefore, 64% of the returns of the fund are due to movements in the market.

Question 20

Coefficient of Determination

Answer 20

R-squared

Take correlation coefficient (R) and square it to get coefficient of determination

Question 21

Value of a convertible bond as a debt instrument does not depend on the:

Answer 21

Conversion price

Question 22

Duration Formula: What do y,c, and t stand for:

Answer 22

y: yield to maturity
c: coupon rate
t: time to maturity

Question 23

This risk measures the extent to which a company uses debt securities and other forms of debt in its capital structure

Answer 23

Financial Risk

Question 24

Uneven Dividend Cash Flow Formula

Answer 24

Step 1: Use the constant dividend growth model to calculate the value for the growth %, using the last year provided for dividend earned

Step 2: Use the cash flow keys. CF0 is zero, followed by the uneven dividends. In the last year, instead of using just the dividend, use the dividend PLUS intrinsic value calculated in step 1. Enter I = the required return. Calculate for NPV

Question 25

Where are closed-end investment companies usually traded?

Answer 25

Secondary market

Question 26

Odd lot purchase levels indicate:

Answer 26

The number of small investors in the market. This theory says small investors are always wrong.

If odd lot purchases are falling relative to odd lot sales, it indicates the little guy thinks the market will fall. Since the little guy is always wrong, this would indicate a rally is coming, not a bear market.

Question 27

If the risk/return performance of a stock is above the SML, the stock is said to have a:

Answer 27

Positive Alpha