Investments

Question 1

Systematic Risk

Answer 1

Non-Diversifiable Risk

Expressed by Beta

Question 2

Purchasing Power

Answer 2

Loss of purchasing power through inflation

Question 3

Reinvestment Risk

Answer 3

Proceeds available to reinvest will be invested at lower interest rates

When a CD matures investors might settle for a lower rate

Question 4

Interest Rate Risk

Answer 4

Changes in rates may cause fixed income rates to fall

Interest rates rise bond prices fall

Question 5

Market Risk

Answer 5

Risk of overall Market.

Utilizing multiple asset classes can reduce this risk

Question 6

Exchange Rate Risk

Answer 6

Changes in currency values

Prices of foreign securities rise and fall with change sin counties currency

Question 7

Credit Risk AKA Default Risk AKA Financial Risk

Answer 7

Risk that an issuer will become insolvent

Question 8

Country/Political Risk

Answer 8

uncertainty with foreign countries and politics

Question 9

Unsystematic Risk

Answer 9

Risk that can be avoided
Ex.
- Business Risk: Avoid putting your eggs in one basket. A Business could go on strike
- Financial Risk: a Business could become insolvent

Question 10

Total Risk

Answer 10

Combo of Systematic and Unsystematic Risk

Question 11

Correlation of investments

+1.0
0
-1.0

Answer 11

+ 1.0 : Securities move Exactly the Same

0: NO Correlation

-1.0: Securities move exact opposite

Question 12

Coefficient of Variation

(Def and Formula)

Answer 12

Measures Relative variability use to compare investments with widely varying rates of return and standard deviations

Standard Deviation / Average or Mean Return

Indicates Risk per unit of expected return. The higher the result the greater the relative risk

Question 13

Standard Deviation

Answer 13

Measures Variability in Return in a non-Diversified portfolio and is the measure of Total Risk

Question 14

Beta

Answer 14

Measures Volatility in Returns of a Diversified Portfolio

Measurement of systematic Risk

Market Constant Beta = 1
- Stocks are the same volatility

Beta of 1.5: Security is 50% more Volatile

Beata of .75: Security is only 75% as volatile as the average stock

Question 15

Bond Duration and change in prices

UPS and and FALLEN

Answer 15

Longer the Duration greater the price change

Ex. As interest rates go up the bond with the longest duration will decrease the most

Interest Rate UP, Shorten Duration

Interest FALL, LENghten Duration

Question 15

Bond Price Volatility Guidelines

What makes bond prices more Volatile?

Answer 15

Smaller the Coupon Greater the Volatility

Longer the term to Maturity (Duration) Greater the Volatility

When market interest rates are lower Greater the Volatility

Question 16

Convexity

Answer 16

Degree to which Duration changes as bonds YTM changes

Convexity is largest for:
- Low coupon
- Long Maturities
- Low YTM

Question 17

Book Value

Answer 17

Value of equity shown on balance sheet

= Common Stock outstanding + capital in excess of par + retained earnings

Or

Corporations Assets Reduced by Liabilities and Preferred equity common

Question 18

Modern Portfolio Theory
and it 4 Steps

Answer 18

Seeks to quantify Relationship between Risk and Return
1.Security Valuation
2.Asset Allocation Decision
3.Portfolio Optimization
4.Preformance Measurement