Investment strategies & Analysis

Question 1

CAPM

Answer 1

Capital Asset Pricing Model
It’s used to Identify the expected risk-adjusted return (RR)
RR = RF + [beta * (market return - RFriskfree)]

Question 2

Modern Portfolio Theory

Answer 2

Return and Risk are connected and should be taken into account when making a portfolio for a client.

Question 3

Efficient Market Hypothesis
Strong, Semi-Strong, Weak

Answer 3

Markets are efficient in value and pricing. All factors are priced in.
Differs per levels stated above.

Question 4

Weak form

Answer 4

Discredits history/ past performance analysis (technical analysis). Says all known info is already priced in.

Question 5

Semi-Strong form

Answer 5

Disregards fundamental analysis and all known info.

Question 6

Strong form

Answer 6

Disregards ALL info. Known and unknown. Technical and fundamental analysis

Question 7

Strategic Asset Allocation

Answer 7

Adjusting portfolios to stay at the same risk/reward level that appropriate for your client.
Think of the speed limit/ cruise control example. It adjusts accordingly.

Question 8

Three asset classes

Answer 8

Stock, bonds, cash.
Mixing and matching helps with risk management.

Question 9

Portfolio Manager’s Style

Answer 9

Might lean towards certain strategies or investments. Be aware of advisors whose styles have not created gain for clients.

Question 10

Large cap

Answer 10

Less volatility in falling markets than small cap

Question 11

Alpha

Answer 11

The value brought to the portfolio from active management. (A grade given to the portfolio manager added value to the portfolio)

Question 12

Calculating Alpha

Answer 12

S&P 500 Return is 5%
Beta of 1.2
Portfolio Return is 7%
(.05*1.2 = .06) or 6%.
7% portfolio - 6% S&P 500 Beta Adjusted =
Portfolio manager’s Alpha is 1%.

But if the portfolio return is only 5.5% then the Alpha is -0.5%

Question 13

DRIPs

Answer 13

Dividend Reinvestment Plan

Question 14

Real rate of return

Answer 14

Rate of return - inflation

Question 15

S&P 500
MSCI
Russell 2000
Wiltshire 5000

Answer 15

-500 Large cap domestic & international stock
-More than 1,600 developed world stocks
-2,000 small-cap domestic stock
-Broad based index, 5,000 domestic stocks

Question 16

Rule of 72

Answer 16

72/int rate = years needed to double
72/years an amnt doubled in= int rate