Ch. 12 Flashcards
(232 cards)
1
Q
T/F: stop limit orders are guaranteed execution of the trigger is touched.
A
False. Stop limit orders may not be executed at the limit price cannot be met.
2
Q
T/F: strategic asset allocation is considered an active asset allocation approach.
A
False. Strategic asset allocation is considered a passive approach.
3
Q
_________ risk is the inability to sell an investment easily.
A
Liquidity
4
Q
What types of securities tend to have low beta?
A
Defensive stocks
5
Q
What return will an investment have If it’s net present value is greater than zero?
A
The investment will generate a positive return
6
Q
What is the fair value of a bond?
A
The discounted present value of the sum of the future payments
7
Q
T/F: perfect negative correlation is -1.00, while a perfect positive correlation is 1.00.
A
True
8
Q
How are secured creditor treated in a liquidation?
A
They are given priority up to the value of their collateral, and our unsecured for any remaining claim
9
Q
What risk is based on the possibility of that new regulations may have a negative impact on an investment value?
A
Regulatory risk
10
Q
What type of risk is avoided through indexing?
A
Business risk, since indexing involves purchasing stocks of many companies
11
Q
Define capital structure.
A
Accompanies, issuance of debt and equity securities, both common and preferred, to finance operations
12
Q
Which would have the most risk large mid or small cab companies?
A
Small cap stocks would have the most risk
13
Q
List the risks associated with investing in 30 year US treasury bonds.
A
Inflation risk, and interest-rate risk
14
Q
T/off: in the secondary market, a client buys at the bed and sells at the ask.
A
False. Clients buy at the ask or offer price and sell at the bid price.
15
Q
The difference between an investments, total return, and the risk-free rate is the risk ________.
A
Premium
16
Q
“ a dollar received today is worth more than a dollar receive tomorrow” describes what concept?
A
The time value of money
17
Q
Which asset class is most susceptible to interest-rate risk?
A
Debt
18
Q
Strategic asset allocation assumes that the markets are __________.
A
Efficient
19
Q
If two investments go in opposite directions from one another, this is referred to as ___________ correlation.
A
Negative
20
Q
What is commonly used to measure and assess risk free rate of return?
A
The interest rate on a US T-bill
21
Q
A capital needs analysis is done to determine a clients __________
Needs in order to find future financial goals.
A
Insurance
22
Q
What is the efficient frontier?
A
The line representing portfolios, excluding risk-free alternatives, showing the lower risk for a given level of return
23
Q
Name for asset classes.
A
Stocks, bonds, real estate, and cash
24
Q
What is another name for diversifiable risk?
A
Nonsystematic risk
25
Do those who favor market timing, active strategies, believe markets are efficient or inefficient?
Inefficient. They may alter their portfolio to take advantage of anticipated, economic events.
26
Two investments have the same price, but the net present value (NPV) of choice A is $50 while B’s is $40. Which is best?
Investment A is better. NPV measures net cash flows above a discount rate. A greater NPV indicates more value.
27
T/F: securities with a correlation coefficient of zero or considered uncorrelated
True
28
What type of risk is liquidity risk?
It’s a non-systematic risk, security risk may be diversified against by buying actively traded assets.
29
T/F: in a weak form, efficient market, technical analysis will be useful.
False. In a weak form, efficient market, only fundamental analysis will be useful.
30
What is the formula for determining a Stocks current yield?
annual dividend ➗ by current market value of the stock
31
T/F: when the market suffers a large, general decline, most stocks are affected.
True. Stocks are subject to the risks of the market as a whole.
32
12 years ago, Tina ❤️ invested $25,000 which is now ground to $100,000. What is the annual growth rate of her investment?
In 12 years, the money double twice so every six years. Using the rule of 72, 72÷6 years equals 12%
33
What are large cap stocks?
Stocks of mature companies, with a long history of dividend payments
34
A bonds inflation adjusted rate of return, may also be referred to as the ________ interest rate.
Real
35
Define net present value or NPV
The difference between the value of an investment, cash inflow, and outflow’s above the discount rate
36
What is the name for a graph of optimal portfolios?
The efficient frontier
37
Which is a better hedge against inflation, investing in stocks or bonds?
Historically, stocks of outperformed inflation. Since sponsor fixed income instruments They are hurt by inflation.
38
What type of meat is used to calculate the expected return?
The weighted arithmetic mean
39
Tactical asset allocation assumes that markets are ___________.
Inefficient
40
In the secondary market, a customer _________ at the bid, and _____ at the ask (offer).
Sells; buys
41
What measures risk adjusted return?
Alpha and the sharpe ratio
42
Business, regulatory, political, and liquinity risk are all types of _______ risk.
Unsystematic
43
If an asset outperforms the market, when prices are up, but under performs, when prices are down, what is its beta?
It’s been a must be greater than one
44
What are mid-cap stocks?
Stocks of companies that are more volatile and growth oriented than large caps stocks
45
Modern portfolio theory focuses on differing _________ of assets rather than on _________ securities.
Classes; individual
46
T/F: systematic rebalancing assumes markets are inefficient.
False
47
Stop limit orders become ________ orders once they are triggered/activated.
Limit
48
T/F: a country with high interest rates will generally have a stronger currency.
True
49
T/F: tactical asset allocation is changing a portfolios asset mix due to impending market in economic factors.
True
50
T/F: The S&P 400 is a large cap index.
F; the S&P 400 is a mid cap index
51
It’s 20 year US treasury zero coupon bond is most acceptable to ________ risk.
Inflation
52
The _________ rate of return is used to calculate the anticipated return for portfolio of securities.
Expected
53
What does uses the basic measure of risk for an investment?
Standard deviation
54
Identify the risk: in particular enterprise may not perform well due to poor management, or increased competition.
Business risk
55
And investment earns 10%, 50%, and 30% in three years. How would the annualized average rate of return be calculated?
When calculating and annualized rate of return overtime, the geometric mean as used.
56
Which return measures investment performance by including all cash, inflows and outflows?
Dollar weighted returns
57
T/F: alpha, represents an investment actual return, an excess of it’s expected return.
True
58
If an advisor attempts to exceed the performance of the market, it is using _______ portfolio management.
Active
59
How much principal, compounding at 3% annually, is needed to make an annual payments of $3000 in perpetuity?
$100,000 principal = $3000 annual payment ➗ by .03 rate of return.
60
Are inflationary periods characterized by rising or falling interest rates?
Rising
61
Sue bought a 6% bond at par. One year later, her bonds value as fallen to $970. What is her annual return?
Sue receives 6% rate of interest, but her bond lost 3% of its value. (-$30 + $60)➗$1,000 = 3%
62
What is the risk that certain circumstances are factors may have a negative impact on the profitability of a company?
Business risk
63
And investor needs an IRR, a 5%. His investment has a negative NPV. Is it’s IRR greater than, less than, or equal to 5%?
A negative NPV would indicate that an investment has an IRR that is less than required rate.
64
And investor needs an IRR of 5%. His investment has an NPV of zero dollars. Is it IRR greater than, less than, or equal to 5%?
A NPV of zero dollars would indicate that an investment has an IRR that is equal to the required rate
65
If an investor is short stock, a buy stop order can be used to limit ________ risk.
Upside
66
The Russell 2000 Index is a _______-cap index.
Small
67
Define negative financial leverage
It is when they return achieved is less than the cost of borrowing
68
What type of trading would be used if you believe markets are in efficient?
Active strategies, such as tactical asset, allocation, or sector rotation
69
Is an investor is attempting to maximize her portfolio growth over a long period, what is her strategy called?
Capital appreciation
70
The _____________ is often considered the most important measure of inflation
CPI
71
Another name for security’s risk adjusted return is its ________________
Alpha
72
A client notices that a thinly traded stock has a few daily trades affected. To what risk is it most susceptible?
Liquidity risk
73
Assuming at 12% rate of return, how long will it take $50,000 to double?
Six years. Using the rule of 72, 72 divided by the rate of return determines the number of years
74
__________ value projects what an investment will be worth at some point in the future.
Future
75
_____________ measures the degree to which the movement of two variables are related.
Correlation
76
Identify the range from the following set of numbers: 10, 12, 5, 1, 7, 7, 8, 4
11. Range is calculated by starting with the largest value, and then subtracting the smallest value.
77
(Current Assets - ___________ ) ➗ Current Liabilities = Quick Asset Ratio (or Acid Test)
Inventory
78
What form of asset allocation of times to keep the asset percentage is balance over a long period?
Strategic asset allocation
79
T/s: dollar weighted returns, takes into account the deposits into or withdraws out of the portfolio.
True. Dollar weighted return includes the weighted value of cash flows into and out of the portfolio when calculating return.
80
What are TIPS?
Treasury inflation protected securities
81
__________ is the balancing of investment classes according to an investors investment objectives.
Asset allocation
82
Which form of market efficiency declares that only insiders can regularly beat the market?
Semi strong
83
_________ investors look for stocks of companies that are intrinsically undervalued.
Value
84
Identify the range from the following set of numbers: 7, 3, 5, 4, 4, 6
4
85
To find a stocks current yield, the formula is: _________➗__________
Annual Dividend ➗ Current Market Price
86
What is the formula for the sharpe ratio?
(ROI - Risk free return) ➗ standard deviation
87
What is the sharpe ratio used to determine?
The sharpe ratio is used to determine if returns are from wise investment or the result of excess risk
88
What are two assumptions of MPT
Investors want to minimize risk and maximize returns
89
What are micro cap socks?
Stocks of emergent companies that would generally be suitable only for speculative investors
90
If a securities beta is more than one, is it considered more or less volatile in the market as a whole?
The higher, the better, the greater volatility
91
What is the time weighted return?
A time we did return is a geometric mean or average that eliminates the effective varying cash inflows or dividends
92
A bond is yielding 8% and the rate of inflation is 3%. What is the bonds real interest rate?
5%. Real interest rate measures the true yield once inflation is factored out.
93
Define holding period return.
The total return receipt from holding an asset or portfolio of assets
94
What is considered an optimal portfolio?
One that has the highest expected return given the clients tolerance for risk
95
What is an advantage to buy and hold portfolio management?
Transaction cost in tax consequences are minimized
96
Sell limit orders are placed _______ the market.
Above
97
T/F: with a buy and hold strategy, investors are consistently rebalancing their portfolios.
False. Buy and hold it involves no rebalancing.
98
What is the better of the market S&P 500?
One
99
Define sector rotation.
A strategy that anticipates the next turn in the business cycle and shifts assets into the sectors that will benefit.
100
What is another name for non-diversifiable risk?
Systematic risk
101
An investor needs an IRL 5%. Her investment has a positive NPV. Is it I are are greater than, less than, or equal to 5%?
A positive NPV would indicate that an investment has an IRR that is greater than the required rate
102
The principal value of TIPS may be adjusted based on the changes to the ___________.
CPI
103
If there is no relationship between the movement of two investments, they are considered to be ____________.
Uncorrelated
104
Is market risk considered a form of diversifiable or non-diversifiable risk?
Non-diversifiable risk
105
List some formula is used to measure liquidity.
Working capital, current ratio, an quick asset ratio (acid test)
106
___________ stock fluctuates with the business cycle.
Cyclical
107
__________value is the amount of money that must be invested today to result in a certain sum at a future time
Present value
108
Identify the acronym: CPI
Consumer price index
109
_________ investors are concerned with a company’s future earnings potential.
Growth
110
In a rising market, is a low beta security, expected to outperform or under perform the market as a whole?
Underperform
111
Working capital, current ratio, and the quick asset ratio are examples of ___________ ratios.
Liquidity ratios
112
What is a major disadvantage when using an arithmetic mean to measure investment performance?
Arithmetic means or averages can misrepresent compounding effects on an investment return
113
Which market is considered negotiated?
The over-the-counter market in which market makers negotiate prices
114
To determine a bonds, real interest rate, the bonds yield is subtracted by the rate of __________.
Inflation
115
For a person with a diversified portfolio of large cap stocks, what type of risk may be reduced by using index options?
Systematic risk
116
T/F: a buy hold strategy is considered an active/tactical investment strategy.
False. By hold strategy is a passive strategy.
117
What is the formula for determining a bonds current yield?
Annual interest ➗ current market value of the bond
118
Define positive financial leverage.
It is when the return achieved is greater than the cost of borrowing
119
What are some of the characteristics of value stock?
Low PE ratios, history of profitability, high dividend payout, and low market to book ratio.
120
MPT has found that having asset classes with slight __________ correlation provides the best long-term performance.
Negative
121
A company with more debt than equity outstanding is considered __________.
Leveraged
122
What rule can be used to determine the annual rate of return needed for funds to double if given a number of years?
The rule of 72
123
___________ return allows an investor to compare the performance of two investment advisors.
Time weighted
124
What uses computer simulations to present random outcomes of an investment strategy
Monte Carlo simulation
125
Jim invested $25,000 in an annuity with a 6% return. How long will it take for the money to double?
Using the rule of 72, divide 72 by the rate of return. 12 years
126
The greater the dispersion of historical returns of a security, the __________ is standard deviation.
Higher
127
What risk is based on the possibility that new laws may have a negative impact on an investment value?
Legislative risk
128
What is the dollar weighted returns?
A dollar weighted returns a geometric mean or average used to measure how a portfolio performed overtime
129
Is indexing considered an active or passive portfolio management strategy?
Passive, since the composition of the benchmark index generally remains the same.
130
What ratio Tessa companies ability to pay its current liabilities with its current assets, but excludes inventory?
The quick asset ratio (the acid test)
131
Which type of risk is non-diversifiable?
Market risk
132
Over the last three months, a sock rose from $50-$51 and paid a $.25 dividend. What is its annualized return?
The three month return is 2.5% ($1.25➗$50). Accordingly return is annualized by multiplying by 4. (2.5 x 4= 10%)
133
A __________ is an annuity that never stops paying money
Perpetuity
134
What is the risk that changes in tax law could impact security prices?
Legislative risk
135
If an investor is long stock, a cell stop order can be used to limit what risk?
Downside
136
__________ value determines how much a dollar amount invested today will be worth at a set point in the future.
Future
137
T/F: inflation is a persistent rise in the general level of prices.
True
138
Define capital risk.
The risk that an investor may lose a part or entire investment or principal. Capital risk as a form of diversifiable risk.
139
Describe positive financial leveraging.
Paying less interest then earnings received. Example: client pays 4% on a margin loan, but earns 10% on stock gains.
140
What type of trading strategy would be used if you believe markets are efficient?
Passive strategies, such as indexing are somatic rebalancing
141
What is required to make the dollar weighted returns and the time we did return equal?
Remove or subtract any deposits into and or withdraws out of the portfolio
142
____________ return allows an investor to measure the amount of money she has earned on her investments.
Dollar weighted
143
Security is appreciated from $10-$15 over three months and his paid know Devin. What is the annualized return?
200%, which is calculated by multiplying the holding period returns (50%) by four quarters.
144
The quick asset ratio is calculated by excluding _____________ from a company’s current assets.
Inventory
145
What is the present value of a perpetual monthly payment of $1000 are in 5% a year?
$240,000 = ($1,000 x 12 mo.)/.05
146
What return will an investment have if it’s net present value is less than zero?
The investment will generate a negative return
147
Define currency risk.
The risk that for an investment will be worth less in the future due to changes in exchange rates
148
T/off: systematic, rebalancing, involves buying and selling on a periodic basis
True
149
What is the proper order of liquidation for a corporation of bankruptcy?
Secured, creditors, unpaid workers, IRS, unsecured, creditors, preferred, and then common
150
T/F: strong for market, efficiency, advocates, believe they can beat the market.
False. Strong for market efficiency states that no person can beat the market.
151
In a declining market, is a high better security expected outperform are under perform the market as a whole?
Underperform
152
Which would have the least risk large mid or small cap companies?
Large cap stocks, have a least risk
153
$10,000 has become $80,000 and 36 years. What is the internal rate of return?
The money doubled every 12 years. The 10 groups of 2020 grew to 40 and 40 go to 80 using the rule of 72, 72÷12 = 6%
154
Define expected return.
The possible return of an asset, multiplied by the likelihood of occurrence
155
What is the risk that environmental regulations could impact the prices of securities?
Regulatory risk
156
Describe a value investor.
One second stocks that are undervalued in relation to their earnings, and have a low PE ratio
157
What is the formula for determining hold period Return?
(Ending value -Beginning value + dividends/interest) ➗ beginning value
158
Center deviation is a measure of the dispersion of ___________ returns.
Expected
159
Identify the acronym: CAPM
Capital asset pricing model
160
What type of risk does beta measure?
Non-diversifiable
161
What type of security send to have a high beta?
Growth stocks
162
A stock with a positive alpha is generally considered a ________________ opportunity by an analyst.
Buying
163
T/off: an interest rate on TIPS is fixed, but the principal may be adjusted.
True
164
Bond a yield is 7.5% when inflation is 3%. Bond b yields 8% when inflation is 4%. Which has a higher real interest rate?
Bond a. The real interest rate is 4.5%.
165
What is an efficient market?
A market, in which process reflect all known information; therefore, nothing will be overvalued or undervalued.
166
What are small cap stocks?
Typically stocks of new companies with more volatility, but also with more growth potential
167
T/F: diversification, is one method by which an investor may avoid nonsystematic risk
True
168
T/F: a low beta security would be expected to rise more than a high, beta security in a Bull market.
False. An asset with a low beta would be less volatile and wood, therefore, be expected to rise in a rising market.
169
T/F: systematic risk may be avoided through diversification
False. Systematic risk may not be avoided through diversification.
170
What method of investing is characterized by regularly investing a set amount of money, regardless of share prices?
Dollar cost averaging
171
An investor buys stock that returns 2% for the year rather than a T-bond yielding 6%. The ________ cost is 4%.
Opportunity
172
The S&P 500 index is a _____-cap index.
Mid
173
Identify the acronym: MPT
Modern portfolio theory
174
The interest rate on the UST bill is completely used to measure an assets ________ rate of return.
Risk-free
175
Find gold or gold futures, may protect an investor against __________ risk.
Inflation
176
My limit orders are placed ________ the market.
Below
177
T/F: according to CAPM, a securities return equals a risk free return or T-bill return plus a risk premium.
True
178
If an investment has increased in value, when would its annualize return, be greater than it’s holding period return?
An investment annualized return would be greater than it’s holding period Return if it was held for less than one year.
179
What is the risk that congressman act a law change that negatively impacts the value of an investment?
Legislative risk
180
T/S: the S&P 500 is a large cap index
True
181
How is the market capitalization determined?
Accompanies current share price multiplied by the number of shares, outstanding
182
What are two measures of liquidity?
Current ratio in the quick asset ratio Both measure companies liquidity
183
____________ is the term that best describes the process used to calculate and investments future value.
Compounding
184
Identify the risk: investors miss out on receiving a better return by placing their funds elsewhere.
Opportunity risk
185
What is the formula for calculating the risk premium?
Risk premium = total return - risk free rate
186
A _________ is a stream of cash flows that continues forever
Perpetuity
187
Do investors who favor, passive strategies, believe marketer, efficient, or inefficient?
Efficient. Rather than trying to time the market, they rebalance to portfolios periodically.
188
T/F: the longer bonds duration, the less sensitive the bonds prices is to changes in interest rates.
False. The longer the duration, the greater the bonds price sensitivity to changes in interest rates.
189
What is the risk of having an excessive portion of a portfolio invested in one particular security or asset class?
Concentration risk
190
T/F: the S&P 500 is an asset class.
False. Stocks, bonds real estate and cash are all asset classes.
191
T/F: bottom of approach to investing uses the economy as a main factor in determining which stocks to buy.
False. Bottom up, investing uses company, specific items, such as earnings and dividend payments to pick stocks.
192
What are the three main concepts underlying the modern portfolio theory?
Expected, return quote, standard deviation, and correlation
193
Market, interest rate, and inflation risk are all types of _________ risk.
Systematic
194
T/S: investors who are planning to hold bonds until maturity, have no risk
False. Opportunity risk, or the risk of missing out on a superior investment is a risk these types of investors face.
195
If a bond is trading at a discount to its value, based on DCF, will an investor earn more or less than a comparable bond?
About trading at a discount to its DCF value will earn more than a comparably priced bond
196
If a bond is trading at a premium to its value, based on DCF, will an investor and more or less than a comparable bond?
A bond trading at a premium to his DCF value will earn less than a comparably priced bond
197
What is the formula for calculating a bonds current yield?
Annual interest divided by current market price
198
What is used to determine how a given present value will become a needed future value.
The internal rate of return or IRR
199
T/F: the longer and investors time horizon, the more concerned he is with the market fluctuations.
False. The longer the time horizon, the less concerned, he is with market fluctuations.
200
What is the present value of an annuity that pays $2000 per year in earns 5% a year?
$40,000= $2,000/.05
201
Stop orders become __________ order once they are triggered/activated.
Market
202
What is the difference between the current ratio in the quick asset ratio?
The quick asset ratio is more stringent since it excludes inventory from the current assets
203
____________ value is the dollar amount to be invested today to meet a specific dollar objective at a set future point.
Present
204
What is the risk of foreign investors losing money due to changes with a country’s government or regulatory environment?
Political risk
205
What is the capital asset pricing model?
A model of the relationship between expected risk and expected return
206
What is a common method used to calculate the returns on an equity indexed annuity?
Point-to-point indexing
207
Stop and stop limit orders are triggered when a round lot trades at, or through, the ________.
Stop price
208
If two investments, closely track, one another, this is referred to as ___________ correlation.
Positive
209
What is the formula for PE ratio?
Price divided by earnings per share
210
What happens to the US trade deficit if the dollar is weakening?
The trade deficit will shrink as US goods become cheaper for foreign customers
211
List, some forms of business risk that apply when investing in individual equity securities
Poor management, obsolete products, changing market conditions
212
________ is the measure of an asset volatility compared to the market as a whole.
Beta
213
T/F: tactical asset allocation is considered a passive asset allocation approach
False. Tactical asset allocation is considered an active approach.
214
An investor, who follows the ________ style of investing bets against market trends.
Contrarian
215
And investors not return is the gross return minus _______ paid.
Taxes
216
Define range.
Range is the difference between the largest value in the smallest value of a given set of numbers.
217
If a client, illuminates, unsystematic, or diversifiable risk in his portfolio, he is willing to accept_______ risk.
Market
218
What is the formula for determining and assets Total return?
(Ending value - beginning value + dividends/interest) ➗ beginning value
219
Highly regulated companies, such as utilities, Are subject to__________ risk.
Regulatory
220
Gold coins, gold certificates, or gold futures may be purchased in an effort to avoid what type of risk?
Inflation risk
221
What is the use of the capital asset pricing model?
To finding investors optimal portfolio by comparing expected risk with expected rate of return
222
Name the three forms of market efficiency.
Strong, semi strong and weak form
223
What is a perpetuity?
An annuity that pays out forever
224
What is the risk our investors may be unable to dispose of securities position quickly and at a fair price?
Liquidity risk
225
Both the Dow Jones industrial average in the S&P 500 index are______ cap indexes
Large
226
Describe a growth investor.
One seeking stocks of companies with an above average growth rate, high PE, ratios, and low dividend payout ratio’s.
227
To stop orders guarantee a specific price when buying or selling?
No, stop orders, execute at the market price, which is uncertain once they are activated
228
What’s strategy involves moving a clients funds from one industry to another during defined periods?
Sector rotation
229
___________ stock is resistant to recession.
Defensive
230
If a stop order is activated, at what price for the trade be executed?
The next trade after activation
231
_________ stock pays higher than average dividends.
Income
232
What rule can be used to determine how long it takes for an amount of money to double at a given rate of return?
The rule of 72
