Dalton Quizzes Flashcards
(148 cards)
1
Q
Often, municipal bonds are insured. One group which insures them is the:
A
Municipal Bond Insurance Association.
Another group which insures municipal bonds is the American Municipal Bond Assurance Corporation (AMBAC.)
2
Q
A call that is written as covered means the writer simply turns over the securities to the call buyer, but an uncovered (or naked) call means that the writer has to go to the market place, regardless of what the price has climbed to, buy the securities and give them to the buyer.
A
The potential upside of the market is limitless.
3
Q
remiss
A
adj. 疏忽的；怠慢的；不留心的
4
Q
broker was remiss in his or her duties
A
经纪人被辞退职务
5
Q
With the current T+2 settlement time frame,
A
the client would need to purchase 2 business days prior to record date, or the business day prior to ex-date.
6
Q
Buying a put or call option limits the investor’s loss to the premium paid.
A
With a covered call, the investor owns the underlying stock, which offsets any loss associated with selling the call. Selling a put is the most risky of the strategies listed because the stock could fall to zero.
7
Q
The Efficient Market Hypothesis weak form states that prices reflect historical information. The Efficient Market Hypothesis strong form states that stock prices reflect all information including insider information.
A
Semi-strong form of the Efficient Market Hypothesis.
“Stock prices adjust rapidly to the release of all new public information.
8
Q
Revenue generated from the project, such as a toll to pay for the bridge, that is used to repay such municipal obligations are known as revenue bonds.
A
The other municipal bonds, general obligation bonds, are backed by the taxing power of the issuing body.
9
Q
Money market securities are short-term instruments categorized by time considerations, not product. Look at this from the product to determine the classification. For example, money markets and spot markets are classified as according timing because they are either short term maturities or current price. The common component when classifying these type of securities is timing.
A
Equity and debt markets can be classified as to the order of claims in the event of liquidation. “Type of claims” simply refers to debt vs. equity and which is more senior. Bond markets, which include mortgage bonds, are divided into short, intermediate and long term markets. Each market has participants that prefer different segments of the yield curve. A participant in this case is an insurance company, bank, manufacturing company, etc. Different participants will prefer mortgage bonds over shorter term maturities.
10
Q
Which method of portfolio evaluation allows the comparison of a portfolio manager's performance to that of the over-all market using just one calculation? A)The Treynor Model. B)The Jensen Model. C)The APT Model. D)The Sharpe Model.
A
Rationale
The correct answer is “B.” Only Options “A,” “B” and “D” are models used to examine portfolio manager’s performance. Treynor and Sharpe require that one calculate the performance of the market to make a valid comparison.
11
Q
The Jensen’s measure, or Jensen’s alpha,
A
is a risk-adjusted performance measure that represents the average return on a portfolio or investment, above or below that predicted by the capital asset pricing model (CAPM), given the portfolio’s or investment’s beta and the average market return. This metric is also commonly referred to as simply alpha.
KEY TAKEAWAYS
The Jensen’s measure is the difference in how much a person returns vs. the overall market.
Jensen’s measure is commonly referred to as alpha. When a manager outperforms the market concurrent to risk, they have “delivered alpha” to their clients.
The measure accounts for the risk-free rate of return for the time period.
Alpha = R(i) - (R(f) + B x (R(m) - R(f)))
where:
R(i) = the realized return of the portfolio or investment
R(m) = the realized return of the appropriate market index
R(f) = the risk-free rate of return for the time period
B = the beta of the portfolio of investment with respect to the chosen market index
12
Q
The process of portfolio immunization entails not maturity of a security, but its duration
A
Immunization is a strategy that matches the duration of assets and liabilities, … interest rates will have virtually no impact on the value of their portfolios. … By definition, pure immunization implies that a portfolio is invested for a … of securities with specific principals, coupons, and maturities to work efficiently.
13
Q
John Risotto has a cash need at the end of nine years. Which of the following investments best meets this need and serves to immunize the portfolio initially?
I. An 11-year maturity coupon bond.
II. A 9-year maturity coupon Treasury note.
III. A series of Treasury bills.
A)I only.
B)II and III only.
C)II only.
D)I and II only.
A
Rationale
The correct answer is “A.” The process of portfolio immunization entails not maturity of a security, but its duration. Duration is based on coupon rate. The larger the coupon payment, the shorter the duration. This being the case, a bond generally pays higher interest than a note, and a note pays higher than short-term Treasury bills. Given this information, one could reasonably expect a shorter duration (than time to maturity), while receiving better immunization from the bond.
14
Q
naked put option
A
A naked put is a position in which the investor writes a put option and has no position in the underlying stock. Risk exposure is the primary difference between this position and a naked call.
A naked put is used when the investor expects the stock to be trading above the strike price at expiration.
15
Q
With the same dollar investment, which of the following strategies can cause an investor to experience the greatest loss? A)Selling a naked put option. B)Selling a naked call option. C)Writing a covered call. D)Buying a call option.
A
Rationale
The correct answer is “B.” Naked call writing (selling) is the most dangerous position in the described selection. If the market price of a stock moves against a put writer, it can fall to zero and that’s the end of it. If it moves against a call writer, the sky is the limit as to how high the price could go.
16
Q
Duration is used to estimate the price of a bond, given a change in interest rates.
A
Duration is used to estimate the price of a bond, given a change in interest rates.
17
Q
Bob and Betty have approached you looking for the right hedge against possible, expected future inflation. You suggest to them that they:
A)Invest in technology stocks.
B)Invest in commodity futures.
C)Invest in long-term U.S. Treasury issues.
D)Invest in precious metals.
A
Rationale
The correct answer is “D.” None of the choices are necessarily stellar, but in contrast to the other choices, Option “D” makes far more sense, as metals have generally performed well as inflation hedges over time.
18
Q
Beta is a measure of systematic, non-diversifiable risk.
A
Beta captures all the risk inherent in an individual security.
Rational investors will form portfolios and eliminate unsystematic risk.
19
Q
Mutual fund XYZ has a beta of 1.5, standard deviation of 12% and a correlation to the S&P 500 of .80. How much return of fund XYZ is due to the S&P 500? A)20%. B)64%. C)80%. D)100%.
A
Rationale
The correct answer is “B.” Correlation is .80, therefore r-squared is .64 (R-squared = correlation coefficient squared). Therefore 64% of mutual fund’s return is due to the S&P 500. Remember, r-squared measures the percentage of return due to the market.
20
Q
The Sharpe Ratio
A
is a financial metric often used by investors when assessing the performance of investment management products and professionals. It consists of taking the excess return of the portfolio, relative to the risk-free rate, and dividing it by the standard deviation of the portfolio’s excess returns
21
Q
The CML (Capital Market Line) uses standard deviation,
A
while the SML (Security Market Line) uses the beta as its “risk” measurement.
22
Q
the required rate of return
A
using the CAPM formula: R = Rf + B * (Rm - Rf)
23
Q
If the market risk premium were to increase, the value of common stock (everything else being equal) would:
A)NOT change because this does NOT affect stock values.
B)Increase in order to compensate the investor for increased risk.
C)Increase due to higher risk-free rates.
D)Decrease in order to compensate the investor for increased risk.
A
Rationale
The correct answer is “D.” A need for higher return to meet the onset of higher risk would drive the price of a security down (all other things being equal).
Using an example where rm is 14% and rf is 3%, and a beta of 1.1, the required return under the SML is:
r= .03 + (.14-.03)1.1 = 15.10%
Then let’s assume the most recent dividend is $2 and the growth rate is 7%. The price of the stock using the constant growth model is
V= (2 x 1.07)/(.1510 - .07) = $26.42
Now let’s increase the rm to 15%. Using the SML:
r= .03 + (.15-.03)1.1 = 16.20%
The new price under the constant growth model is:
V = (2x1.07)/(.1620 - .07) = $23.26
24
Q
The fourth market is the market where corporation and institutional investors deal directly with one another.
A
Primary market is where investment bankers and corporations meet to arrange offerings to the public. Secondary markets are where previously issued securities are sold (exchanges, etc.).
25
If a fund is diversified, use the Treynor model and the result there is arrived at by dividing the return by the beta.
In this case, fund D has the highest risk adjusted rate of return. Treynor = [(rp - rf) / (Bp)].
26
Close-end funds are traded on the secondary markets but are not passively managed.
An open-end fund is a diversified portfolio of pooled investor money that can issue an unlimited number of shares.
27
duration formula
D = (1 + y) - (1 + y) + t (c - y)
___________ ______________
y c[(1 + y)t - 1] + y
28
duration formula
D = (1 + y) - (1 + y) + t (c - y)
___________ ______________
y c[(1 + y)^(t) - 1] + y
29
participating preferred stocks.
If there are additional or extra dividends declared, the preferred shareholders have the right to share in the profits.
30
common stocks' cumulative voting rights
The preferred stock gets to cast its entire total of votes in a grouping for one seat on the board of directors if the shareholders so desire.
31
convertibility
The preferred shareholder has the option of accruing a certain number of shares and then converting them to common stock.
32
The cumulative feature on a preferred stock
If dividends are not paid in a given cycle, they cannot be paid to anyone else until they are paid to preferred shareholders.
33
Portfolios above the CML are undervalued and have outperformed the market.
Portfolios below the line are overvalued and have underperformed the market. Portfolios on the line are in equilibrium.
34
The Indifference Curve is the risk return trade-off which investors are willing to make,
Efficient Frontier is the best possible returns that could be expected from all possible portfolios. At the point of tangency, one has attained the optimal portfolio.
35
```
The form of technical analysis that utilizes Advances and Declines (also known as Breadth of the Market) as an indicator is known as:
A)Price Indicator.
B)Volume Indicator.
C)Market Indicator.
D)Charting Indicator.
```
Rationale
The correct answer is "A." Advances and declines deal with price. Volume indicates the number of shares traded. Market indicators deal with directions of the market and related averages. Charts are used as indicators and in some instances, do not use price but rather movements.
36
Which of the following statement(s) regarding bond swaps is/are true?
I. A substitution swap is designed to take advantage of anticipated and potential yield differentials between bonds that are similar with regard to coupons, rating, maturities, and industry.
II. Rate anticipation swaps utilize forecasts of general interest rate changes.
III. The yield pickup swap is designed to alter the cash flow of the portfolio by exchanging similar bonds having different coupon rates.
IV. The tax swap is made to substitute current yield in place of capital gains.
A)I, II and III only.
B)I and III only.
C)II and IV only.
D)IV only.
Rationale
The correct answer is "A." All statements are correct except for IV. The tax swap replaces bonds with offsetting capital gains and losses.
37
Which one of the following factors would be the strongest indication that interest rates might rise?
A)Selling of dollar-denominated assets by foreign investors.
B)Decreasing United States government deficits.
C)Decreasing rates of inflation.
D)Weak credit demand by the private sector of the United States economy.
Rationale
The correct answer is "A." Foreigners selling dollar-denominated assets are preparing to take advantage of higher rates by increasing their liquidity. The rest signal a decrease in rates.
38
debeture
n. 信用债券;退税证明书
Debentures are unsecured corporate debt.
it is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest.
39
Treasury shares, which are those the company has repurchased.
Unissued shares have never been held by investors to be repurchased. Authorized shares may be unissued or outstanding shares,
40
Bottom-up equity managers include:
I. Group rotation managers.
II. Value managers.
III. Market timers.
IV. Technicians.
A)I only.
B)II and III only.
C)I and III only.
D)II and IV only.
Rationale
The correct answer is "D." Options "I" and "III" are both "top down" style managers. Technicians do not follow fundamental analysis.
41
open-end funds are both passively and actively managed.
open-end fund shares are traded directly with the fund, not on the secondary market.
42
Ex-dividend date
The date on which the current dividend no longer accompanies the stock is:
43
Holder of record date
The date of record is the day on which the company checks its records to identify shareholders of the company.
An investor must be listed on that date to be eligible for a dividend payout.
The date of payment is the day the company mails out the dividend to all holders of record.
44
Treynor index
Treynor Ratio=
PR−RFR
_____
PB
```
where:
PR=Portfolio return
RFR=Risk free rate
PB=Portfolio beta
```
The Treynor Index measures the risk-adjusted performance of an investment portfolio by analyzing a portfolio's excess return per unit of risk.
45
The Federal Reserve Board is expected to sell large quantities of Treasury securities in the near future. What impact will these sales likely have on stock prices?
A)Stock prices will decrease because the dividend growth rate of stocks will increase.
B)Stock prices will decrease because the required rate of return for investors will increase.
C)Stock prices will increase because interest rates will decrease as investors compete to purchase the Treasury securities.
D)Stock prices will increase because the growth rate in dividends and earnings will increase.
Rationale
The correct answer is "B." The sale of Treasury securities results in a reduction of cash in the market place, thus a decrease in supply causing an increase in demand. This will lead to an increase in the cost of money and a lessening of funds for investment, thus a reduction in stock prices.
46
Municipal Bond Mutual Fund
Due the tendency of Muni-Bond Fund managers to attempt to maximize profits by buying and selling various bonds, there are generally taxable gains to be dealt with in most of these funds.
47
Municipal Bond Unit Trust.
Funding for Communities. Invesco Unit Trusts. A diversified portfolio of tax-exempt municipal bonds that provides investors with the potential for both reliable income and return of principle at maturity.
48
To immunize a bond portfolio over a specific investment horizon, an investor would do which of the following?
A)Match the maturity of each bond to the investment horizon.
B)Match the duration of each bond to the investment horizon.
C)Match the average weighted maturity of the portfolio to the investment horizon.
D)Match the average weighted duration of the bond portfolio to the investment horizon.
Rationale
The correct answer is "D." Duration, not maturity is used to immunize a portfolio. The average weighted duration rather than the duration of each specific bond is used for successful portfolio immunization.
49
You are faced with several fixed income investment options. Which of these bonds has the greatest reinvestment rate risk?
A)A U.S. Treasury bond with an 11.625% coupon, due in five years with a price of $1,225.39 and a yield to maturity of 6.3%.
B)A U. S. Treasury strip bond (zero-coupon) due in five years with a price of $735.12 and a yield to maturity of 6.25%.
C)A corporate B-rated bond with a 9.75% coupon, due in five years with a price of $1,038.18 and a yield to maturity of 8.79%.
D)A corporate zero coupon bond due in 5 years with a price of $750 and a yield to maturity of 5.9%.
Rationale
| The correct answer is "A." This is due to the high coupon and lack of similar rates currently.
50
The NASDAQ, the NYSE Composite, and the Wilshire all use value weighted average,
the Dow Jones Industrial is a simple price weighted average. Only Value Line uses the geometric average.
51
GNMA funds.
Ginnie Mae (GNMA) — No default risk—directly backed by the U.S. government
52
EE bonds
a.) Low-risk government-backed savings vehicle
■ May be used for funding education costs and gifting ■ Bonds issued after May 1, 2005, earn a fixed interest rate
b.) Purchased electronically and issued at face value
■ Any denomination from $25 up to $10,000 in single calendar year
c.) Redemption
■ Must be held for at least 12 months
■ Three-month interest penalty for bonds redeemed within five years of issue
d.) Taxation
■ Interest — Tax-deferred until maturity or redemption — May recognize income earlier with valid tax election — Not subject to state income tax
■ Exclusion from gross income when used for higher education costs—must meet all criteria — Bonds must be issued after 1989 — Bond owner pays qualified higher education expenses at an eligible institution; expenses must be incurred in the same tax year — Bond purchaser must be at least 24 years old — Bonds must be registered in the parent’s name — If married, joint tax return must be filed — Modified adjusted gross income (MAGI) must be below phaseout (updated annually)
53
orange grove
n. 小树林；果树园
54
A forward contract (though very specific) requires a buyer and a seller, and the grower may not know yet to whom the oranges will finally go. The farming and produce business are far too risky to be left to chance
And since the farmer has the oranges in the trees, she should be long the commodity and sell a contract (or "short" the contract.)
55
Which of the following is/are characteristics of a municipal bond unit investment trust - UIT?
I. Additional securities are NOT added to the trust.
II. Shares may be sold at a premium or discount to net asset value.
III. Shares are normally traded on the open market (exchanges.)
IV. The portfolio is self-liquidating.
A)I only.
B)I and IV only.
C)II and III only.
D)II and IV only.
Rationale
The correct answer is "B." Unit investments do not make additions to investments once the trust has been structured. Shares are not bought or sold after structuring and the portfolio is self-liquidating.
a UIT typically holds municipal bonds until maturity. UITs can also own equities.
56
Security Act of 1933
was the first major federal securities law passed following the stock market crash of 1929. The law is also referred to as the Truth in Securities Act, the Federal Securities Act, or the 1933 Act. It was enacted on May 27, 1933 during the Great Depression.
President Roosevelt stated that the law was aimed at correcting some of the wrongdoings that led to the exploitation of the public. The wrongdoings included insider trading, the sale of fraudulent securities, secretive and manipulative trading to drive up share prices, and other acts that some financial institutions and professional stock traders engaged in, to the disadvantage of ordinary individual investors.
57
The Securities Investor Protection Act of 1970 is designed to protect individual investors from losses as a result of brokerage house failures.
The Investment Advisers Act of 1940 requires that person or firms advising others about securities investment must register with the Securities and Exchange Commission.
58
Margin accounts involve security transactions performed using some amount of capital borrowed from the brokerage firm as well as some of the investor's own capital. The entity that establishes the initial margin requirement is the:
A)Securities and Exchange Commission.
B)Federal Reserve.
C)National Association of Securities Dealers.
D)Brokerage firm with which an investor is dealing.
Rationale
| The correct answer is "B." The Federal Reserve sets margin requirements for all security transactions.
59
Which of the following is NOT a similarity between preferred stock and debt instruments?
A)Preferred stock represents the same level of risk as debt to the buyer.
B)Preferred stock pays a fixed income in its dividend.
C)Preferred sharesare purchased for their income stream.
D)Preferred stock is subject to interest rate and purchasing power risks.
Rationale
The correct answer is "A." Preferred stocks are riskier than debt due to the lack of a maturity date on preferred issues.
60
The ex-dividend date is one day prior to the date of record.
An investor must purchase the stock the day before the ex-dividend date to receive the dividend.
Therefore, an investor would have to purchase the stock two days prior to the date of record to receive the dividend.
C)
61
Baa is the lowest bond rating in Moody's Rating System,
while BBB is the lowest investment grade in the S&P bond rating system.
62
```
INVESTMENT GRADE
» Aaa – highest rating, representing minimum credit risk
» Aa1, Aa2, Aa3 – high-grade
» A1, A2, A3 – upper-medium grade
» Baa1, Baa2, Baa3 – medium grade
```
SPECULATIVE GRADE
» Ba1, Ba2, Ba3 – speculative elements
» B1, B2, B3 – subject to high credit risk
» Caa1, Caa2, Caa3 – bonds of poor standing
» Ca – highly speculative, or near default
» C – lowest rating, bonds typically in default, little prospect for recovery of principal or interest
63
Serial bonds are issued in series and mature in series. Registered bonds are paid interest based on to whom the bonds are registered.
Bearer bonds pay interest to the holder of the bond. Interest rates can be reset on Reset bonds, and the U.S. government issues Treasury bonds; and both are registered.
64
You are faced with several fixed income investment options. Which of these bonds has the greatest interest rate risk?
A)A U.S. Treasury bond with an 11.625% coupon, due in five years with a price of $1,225.39 and a yield to maturity of 6.3%.
B)A U.S. Treasury strip bond (zero-coupon) due in five years with a price of $735.12 and a yield to maturity of 6.25%.
C)A corporate B-rated bond with a 9.75% coupon, due in five years with a price of $1,038.18 and a yield to maturity of 8.79%.
D)A U.S. T-bill selling for $950 due in six months.
Rationale
The correct answer is "B." With the term being equal, the bond with the lowest coupon will have the biggest duration. The longer the duration, the more sensitive the bond price is to interest rate changes. Bond B has the lowest coupon, zero.
65
Which one of the following types of investor benefits most from the tax advantage of preferred stocks?
The corporate dividend-received deductions are based on ownership.
TCJA of 2017 updated the amounts. If a corporation owns 20% or less, the have a DRD of 50%. if 20% or more (and less than 80%) of the corporation paying the dividend is owned by the company receiving the dividends, then up to 65% of the dividend is tax free.
If ownership is greater than 80% (affiliated corporations) the DRD is 100%.
66
The intrinsic value of a put option is strike price minus stock price (50-52). If the answer arrived at is negative, then the intrinsic value is zero, and the value of the put is entirely related to the time component.
In the case of a call, the intrinsic value is the stock price minus the strike price.
67
12b-1 fees.
the fees charged based on the average daily fund assets and used principally to meet marketing expenses are called
■ Fees for marketing and advertising expenses
■ Up to 0.75% of the net asset value per year
68
Front-end load
—sales charge deducted from the initial investment
69
Back-end load or deferred sales charge
■ Sales charge imposed upon withdrawal from a fund ■ Applicable sales charge is reduced ratably to zero over a period of time, generally five to eight year
70
Administrative expenses or management fees
■ Pays for general operating expenses of the mutual fund (e.g., fund manager’s salary)
■ Generally 1–2% of net asset value per year
71
municipal bond tax
Income from investing in municipal bonds is generally exempt from Federal and state taxes for residents of the issuing state.
While the interest income is tax-exempt, any capital gains distributed are taxable to the investor. Income for some investors may be subject to the Federal Alternative Minimum Tax (AMT).
72
The put option seller looks for the security price to rise and opposites the position of the put buyer who looks for a falling security price.
If the price rises or stays the same, the put seller keeps the premium.
73
The primary difference between open-end and closed-end investment companies would be:
A)Closed-end funds always sell at par value.
B)Open-end funds do not charge sales fees.
C)Closed-end funds guarantee the Net Asset Value (NAV) at the time of sale or purchase.
D)Closed-end funds sell only a limited number of shares.
Rationale
The correct answer is "D." Closed-end funds offer a limited number of shares, while open-end funds continually create new shares as new monies are obtained. Closed-end funds offer no price guarantees and do not always sell at net asset value.
74
Jack Rich has an investment portfolio equally divided among the following funds: Energy sector fund, Bond Unit Investment Trust (25-year average maturity), and a Money Market fund. He is a buy-and-hold investor. Which of the following risks is his portfolio exposed?
I. Business risk.
II. Interest rate risk.
III. Political risk
IV. Purchasing power risk.
A)I and III only.
B)II and IV only.
C)I, II and III only.
D)I, III and IV only.
Rationale
The correct answer is "D." Interest rate risk does not affect a bond investor if he or she holds the securities to maturity. This is how unit investment trusts are structured. The energy sector will be directly impacted by regulatory influences of a political nature.
75
```
Jasmine has a large paper profit in her Amalgamated Corporation shares, currently at $46 per share. She is happy with the stock, but realizes that a good thing CANNOT go on forever. She bought the stock so inexpensively that she is not worried about the downside. If she is willing to sell at $50, what strategy could you recommend to her?
A)Buy $50 call options.
B)Sell $50 call options.
C)Buy $50 put options.
D)Sell $50 put options.
```
Rationale
The answer is "B." She gains the premium from selling the call, and if the price rises, at or above the strike price of $50, her stock will be called away at $50. "C" would be a good choice, but she is not worried about the downside risk.
76
barbell
Laddered portfolio (also known as staggered maturities) 1.) Accomplished by establishing a portfolio of bonds with staggered maturities
2. ) This strategy provides two advantages:
a. ) Because there is a combination of long-term bonds and short-term bonds in the portfolio, the laddered portfolio will generally provide higher yields than a portfolio consisting entirely of short-term bonds
b. ) Because one bond matures each year, cash is available to the investor. Furthermore, the funds may be used to purchase another bond with a 10-year maturity that will maintain the original structure of the bond portfolio and minimize the risk of increasing interest rates.
3. ) One important disadvantage of the laddered strategy is that it reduces portfolio flexibility because all of the bonds may need to be liquidated in the event the investor wishes to restructure the portfolio
77
Barbell (dumbbell) strategy
| 1.) Initially acquiring a portfolio of bonds consisting of both very long-term and very short-term maturities
2.) The barbell strategy will not maintain its original structure because each year the short-term bonds mature and need to be reinvested. Thus, the maturity of the long-term bonds is reduced. An active management strategy is required to periodically rebalance the portfolio
78
Bullet strategy
1. ) Investors purchasing a series of bonds with similar maturities that are focused around one point in time
2. ) The bullet strategy is one in which the average maturity declines by one each year and may be effective in matching duration to the cash needs of an investor
3. ) Like the dumbbell strategy, to maintain the original structure, the entire portfolio may require liquidation, resulting in significant transaction costs
79
bond-ladder strategy
Bonds with maturities staggered every few years apart are purchased for inclusion in the portfolio.
80
12b-1 fees are used for marketing and distribution costs.
All other costs, such as legal, accounting and analysis are paid through management fees.
Commissions are paid using either a front load or a back load.
81
firm commitment
■ Underwriter purchases the entire issue of securities at a specified price and resells at a higher price (markup)
■ Risk shifted to the underwriter
■ Public placement
■ Registration with SEC
82
Which of the following best describes a long hedge position?
A)The investor is short the underlying commodity and short the futures contract.
B)The investor is long the underlying commodity and long the futures contract.
C)The investor is short the underlying commodity and long the futures contract.
D)The investor is long the underlying commodity and short the futures contract.
Rationale
The correct answer is "C." A long position in a futures contract is when the investor buys a futures contract. A short position in a futures contract is when the investor sells a futures contract. A long hedge means that the investor owns (buys) the futures contract to insure a certain price of a commodity that he or she does not yet own. Hedging is taking an opposite futures position than the investor's inherent underlying position.
83
3054-RQuestion 14 of 25Investment Planning Quiz 7
Which of the following are characteristics of Government National Mortgage Association (GNMA) securities?
I. Investors are guaranteed, by the U.S. government, against losses arising from investments in GMNA securities.
II. The amount received by the investor each month may vary due to prepayment by homeowners.
III. The realized yield on the certificates can be somewhat variable because of the principal prepayments.
IV. If mortgage rates decrease, prepayments may increase.
A)I and IV only.
B)II and IV only.
C)I, II, and III only.
D)II, III, and IV only.
Rationale
The correct answer is "D." GNMA is "on budget" agency debt. This means the pools of mortgages are backed by the full faith, credit, and taxing power of the U.S. government itself. The government backs the issue against default, NOT against investor loss through poor timing or poor choices. It should also be noted no U.S. government agency debt has ever defaulted.
84
Which of the following statements best describes an investment where standard deviation serves as the best measure of a portfolio's risk level?
A)When a portfolio is well diversified.
B)When a portfolio is not well diversified.
C)When portfolio is identified as being above the Capital Market Line.
D)When correlation coefficient is .85 or greater.
Rationale
The correct answer is "B." Option "A" - In a well diversified portfolio, beta can be used to measure risk. Option "C" - Securities above the CML refers to alphas, not measures of risk. Option "D" - If correlation is .85, then r-squared is .72. When r-squared is greater than or equal to .70, then the portfolio is well diversified and Beta is an appropriate measure of total risk.
85
```
A client has bought a stock for $40 per share. At the end of the first year, she purchases another share at $43 per share. At the end of the second year with the share price of $48, she sells her shares. Along the way, at the end of each year, she received a $2 per share dividend. What is the time-weighted return on her investment?
A)9.53%
B)13.5%
C)14.3%
D)16.6%
```
Rationale
The correct answer is "C." This is simply an uneven cash flow problem.
CF0 =
CF1 = $2
CF2 = $50
IRR = 14.33%
Note: Since this is a time weighted return, we are only concerned about the security's cash flow. Therefore, we ignore the second purchase at $43 per share.
86
The Investment Advisors Act of 1940 regulates the registration and provides for regulation of investment advisors.
the Act of 1934 regulates securities in the secondary markets.
The Act of 1933 regulates both IPOs and secondary offerings.
The organized exchanges and previously issued securities are governed by the Securities and Exchange Act of 1934.
87
Bond laddering consists of periodic maturities including short term, intermediate and long term bonds.
Immunizing the portfolio uses duration rather than maturity as a measure of position for implementing the strategy.
Bond-swap strategies trade different and varied maturities to meet the objective of the portfolio.
Bond barbell strategy： both very long-term bonds and very short-term bonds for a portfolio, and very few intermediate-term bonds
88
Which of the following statements concerning the S&P 500 is incorrect?
A)It has less dramatic fluctuations than the Dow Jones Industrial Average.
B)It is a reflection of broad sectors of the market.
C)It is a value-weighted index.
D)It is a broader base measure of the stock market than the Wilshire 5000 Index.
Rationale
The correct answer is "D." The DJIA tracks 30 stocks, the S&P 500 tracks 500 stocks, and the Wilshire 5,000 tracks slightly more than 6,500 stocks. The broader the stock base (or larger number of stocks), the less the fluctuation of the index.
89
Capital Asset Pricing Model (CAPM)
Beta is used as a measure of risk on the Security Market Line (SML).
90
An investor who searches for stocks selling at a low price to earnings (P/E) ratio believes that:
A)Anomalies to the Efficient Market Hypothesis exist.
B)The strong form of the Efficient Market Hypothesis is valid.
C)Such stocks have low betas.
D)The semi-strong form of the Efficient Market Hypothesis is valid.
Rationale
The correct answer is "A." The low P/E ratio stocks are an anomaly to the EMH.
Choice "B" is incorrect and the strong form of EMH is often thought to be invalid because it presumes markets are completely efficient and historical, public and private information will not help you achieve above average market returns.
Choice "C" is incorrect as the stocks could have either high or low betas.
Choice "D" is incorrect because the evaluation of P/E ratios is fundamental analysis, and the semi-strong theory rejects fundamental analysis (and technical analysis).
91
Anomalies
反常,异常的因果情况
92
An investor who searches for stocks selling at a low price to earnings (P/E) ratio believes that:
A)Anomalies to the Efficient Market Hypothesis exist.
B)The strong form of the Efficient Market Hypothesis is valid.
C)Such stocks have low betas.
D)The semi-strong form of the Efficient Market Hypothesis is valid.
Rationale
The correct answer is "A." The low P/E ratio stocks are an anomaly to the EMH. Choice "B" is incorrect and the strong form of EMH is often thought to be invalid because it presumes markets are completely efficient and historical, public and private information will not help you achieve above average market returns. Choice "C" is incorrect as the stocks could have either high or low betas.
Choice "D" is incorrect because the evaluation of P/E ratios is fundamental analysis, and the semi-strong theory rejects fundamental analysis (and technical analysis. Investors cannot utilize either technical or fundamental analysis to gain higher returns in the market).
93
The weak form of the EMH: fundamental analysis will help her achieve above average market returns.
The weak form of the EMH states that "the current price of a security reflects all historical information available on that security and does not reject fundamental analysis."
94
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A mutual fund investor who is looking for the opportunity to buy investments at a discount, so as to capture a greater portion of any capital gains, would probably decide to invest in a(n):
A)Open-end fund.
B)Closed-end fund.
C)Unit investment trust.
D)Exchange Traded Fund (ETF).
```
Rationale
The correct answer is "B." Closed-end funds generally sell at either a premium or a discount to par value. When purchased at a discount, they afford investors an opportunity to realize up-side capital appreciation.
95
A "best effort" agreement occurs when an underwriter agrees to sell what he or she can.
A "syndicate" offering occurs when an underwriter forms a team of brokerage firms. A "green shoe" agreement is a standby commitment.
96
A firm commitment.
the agreement is called that when an investment banker agrees to purchase an entire issue of securities from the issuing corporation and sell them to the general public,
97
alpha: The difference between a fund's realized return and its risk-adjusted required return.
The alpha of a security may be calculated using the Jensen Model. The Jensen formula is on the formula sheet included with the CFP® exam materials. Alpha is the fund's actual return minus the risk adjusted expected return, as measured by CAPM.
98
A stock that has produced superior earnings and rates of return but has gone mostly unnoticed by securities analysts and is often considered underpriced is said to benefit from the:
The neglected firm effect is one of the market anomalies. This anomaly is said to exist because the security in question is allowed greater potential for movement as a result of the lack of scrutiny by analysts.
99
An investor in improved land (with an office building) is concerned most with which one of the following factors?
A)Net income of investment.
B)Reselling the property within three years.
C)Real estate taxes.
D)Cash flow expected to be generated by the property.
Rationale
The correct answer is "D." An office building is purchased to rent space; therefore, cash flow is of paramount importance. Net income without the information that leads up to this final figure is not as valuable as cash flow information. Resale, commissions and taxes are secondary concerns if the property is purchased (with an office building) for cash flow.
100
Time-weighted rate of return is a compounded rate of return calculation that allows for a more accurate comparison based on the security's cash flows.
Internal rate of return is a compunded rate of return, but we need to be more specific whether to consider the security's cash flows or the investor's cash flow.
101
Lack of a definite maturity date and uncertain cash flows are the elements of risk in mortgage-backed securities.
Laddering bonds requires purchasing short and intermediate term bonds, along with long term bonds - Lower overall interest rate risk
102
Fundamental analysis includes which of the following?
I. Debt as a percent of total capital.
II. A 39 week moving average of a company's stock prices.
III. Interest rate trends.
IV. Growth rate of the industry of which a company is a part.
A)I and II only.
B)I and III only.
C)II and IV only.
D)I, III and IV only.
Rationale
The correct answer is "D." Choice "II" is a tool used by technicians to predict future prices. All the others choices are part of fundamental analysis.
103
Which one of the following is an advantage of equity REITs over mortgage REITs?
A)Equity REITs can participate in the appreciation of the underlying properties.
B)Equity REITs participate in the capital gains of the mortgages, whereas mortgage REITs receive only the coupon payments.
C)Equity REITs retain the right to the potential appreciation of a property, but mortgage REITs retain the right to only the property's rental income.
D)Equity REITs have the right to repossess the underlying property if the mortgage REIT fails to make its mortgage payments.
Rationale
The correct answer is "A." Option "B" describes mortgage REITs, not equity REITs. Option "C" is incorrect as mortgage REITs have nothing to do with "rental income." Option "D" is an incorrect statement.
104
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An investor buys a share of stock for $50. At the end of the first year, he purchases a second share for $55. At the end of the second year, the stock is worth $62 per share and the investor sells both shares. (The investor received a cash dividend of $2 per share each year.) What is the time-weighted return on this investment?
A)13.6%
B)15.2%
C)16.5%
D)18.3%
```
Rationale
The correct answer is "B." CFo = <50>, CFj = 2, CFj = 64 (62 + 2) then solve for IRR. Remember, time-weighted return is only concerned about the security's cash flow, not the investors.
105
Bond D's lower coupon makes it more volatile.
Bonds with higher coupon rates pay higher coupon payments, allowing investors to be paid back their initial investment costs sooner in terms of time value of money, and thus subjecting bond prices to interest rate change to a lesser degree.
A bond with a lower coupon rate will be more volatile than a bond with a higher coupon rate. Also, longer-term bonds are more volatile than bonds with a shorter time to maturity.
106
In general, the higher the duration, the more a bond's price will drop as interest rates rise (and the greater the interest rate risk).
As a general rule, for every 1% change in interest rates (increase or decrease), a bond's price will change approximately 1% in the opposite direction, for every year of duration.
107
Capitalization rate
is calculated by dividing a property's net operating income by the current market value. This ratio, expressed as a percentage, is an estimation for an investor's potential return on a real estate investment
108
The Chesapeake Bay apartment complex contains 60 one-bedroom apartments renting for $650 per month. In addition, the complex generates $625 per month from laundry, parking, and vending machines. Vacancy and collection losses have averaged 8% of Potential Gross Income (PGI) and are expected to continue at about the same rate in the future.
Annual expenses totaling $117,000 include:
Property taxes = $2,000
Property management = $7,000
Interest expense = $72,000
Swimming pool = $5,000
Professional fees = $8,000
Other expenses = $23,000
There is a monthly mortgage payment of $10,000 per month. Out of the $10,000 mortgage, $6,000 is interest expense and $4,000 is repayment of principal. Assuming a capitalization rate of 9%, what is the market value of the Chesapeake Bay complex?
A)$1,941,422
B)$2,884,140
C)$3,560,667
D)$4,360,667
Rationale
The correct answer is "D." Gross rental receipts ($650 x 60 x 12) = $468,000 plus non-rental income ($625 x 12) = $7,500 equals potential gross income (PGI) ($468,000 + $7,500) = $475,500. PGI minus vacancy and collection losses [$475,500 - (.08 x $475,500)] = $437,460 equals Effective Gross Income (EGI). EGI minus expenses equals net income $437,460 - $117,000 = $320,460. Next, determine net operating income by adding interest and depreciation expense back to net income.
NOI = $320,460 + $72,000 interest + $0 depreciation = $392,460.
Market value = $392,460 ÷ .09 = $4,360,667
109
American Depository Receipts (ADRs)
Allow U.S. investors to buy foreign country stock denominated in dollars.
ADRs do not eliminate currency exchange rate risk (Choice "A") or currency restrictions of foreign countries (Choice "B") and tax will be paid on capital gains (Choice "D").
D)
110
Jensen index.
Jensen's alpha is used to determine the abnormal return of a security or portfolio of securities over the theoretical expected return. It is a version of the standard alpha based on a theoretical performance instead of a market index.
Jensen's alpha = Portfolio Return − [Risk Free Rate + Portfolio Beta * (Market Return − Risk Free Rate)]
111
```
Hannah has worked for her current employer the last 3 years. She invests a small amount into her employer sponsored 401(k) plan, splitting her contribution equally amongst all of the possible investment choices. What most adequately represents her situation?
A)She exhibits familiarity bias
B)She exhibits representativeness
C)She exhibits naïve diversification
D)She exhibits belief perseverance
```
Rationale
The answer is "C" Hannah has split her investments equally amongst all her available options. This is known as naïve diversification or 1/n diversification. Nothing present leads us to thinking she has familiarity bias (investing only in companies she is familiar with), representativeness (thinking a good company is a good investment), or belief perseverance (giving the most weight to the first information she encountered during her analysis).
112
Strategic asset allocation is concerned with allocating the wealth of a client among various asset classes, consistent with the clients' investment objectives, time horizons and risk preferences.
Tactical asset allocation is concerned with shifting wealth between asset classes to take advantage of expected price level changes (timing) arising from broad movements in the business cycle.
113
What is one reason a company may call bonds that were previously issued?
A)The bonds are currently selling at a premium.
B)The bonds are currently selling at a discount.
C)The company expects interest rates to decrease.
D)The bonds are selling at par.
Rationale
The correct answer is "A." If the bonds are selling at a premium, then interest rates have decreased since the bonds were issued. The company would be motivated to retire the higher yield bonds and issue new bonds at lower market interest rates. A discount bond would indicate that interest rates of increased and the bond is paying a lower rate than current market interest rates.
114
Use uneven cash flows to determine the NPV of the stock at time period zero (today).
CF0 = 0 CF1 = 3.15 CF2 = 3.37 CF3 = 3.64 + 96.46 = 100.10 I = 10 NPV = ? Answer: $80.86
115
Use uneven cash flows to determine the NPV of the stock at time period zero (today).
CF0 = 0 CF1 = 3.15 CF2 = 3.37 CF3 = 3.64 + 96.46 = 100.10 I = 10 NPV = ? Answer: $80.86
---CF0 is not equal to 3 (current dividend payment)
116
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Holly bought a stock at the minimum margin, when the stock was trading at $10. The stock paid quarterly dividends of $.25. Holly held the stock for one year and sold the stock when it was trading at $11. What was Holly’s holding period return?
A)10%.
B)20%.
C)30%
D)40%.
```
Rationale
The correct answer is "D." The first key to this question is knowing that the “minimum margin” is 50%, which is established by the Federal Reserve.
So, Holly is required to pay $10 x .50 = $5 in cash and borrow the other $5 per share to make the investment. The question does not reference any margin interest, so it’s excluded from the calculation. The second key to this problem is that the Purchase Price in the numerator reflects both the equity contribution of $5 per share and the $5 per share that must be repaid to the broker. The Purchase Price in the denominator only needs to reflect the $5 in equity paid. HPR = (SP - PP +/- CF) ÷ PP HPR = ($11 - $10 + ($.25 x 4) ÷ ($10 x .5) HPR = 40%
117
Income limit for the Education Savings Bond Program
For joint tax filers in 2017, that threshold was $147,250. For single filers, the MAGI threshold was $93,150. Married owners are required to file joint taxes in order to receive the exemption. All payments made with bond proceeds must be reported to the IRS along with detailed receipts.
118
```
A child is 8 years old and the parents want to invest today for the child’s education. The parents have AGI of $210,000. Which investment vehicle would you recommend?
A)Series EE savings bonds.
B)S&P 500 index fund.
C)Laddered CDs
D)Money market mutual fund.
```
Rationale
The correct answer is “B.” The S&P 500 index fund is the best answer because the time horizon is long term (10 years). The parents are currently phased-out of the interest income tax exclusion benefit on the series EE savings bonds. The CDs and money market mutual fund are too conservative.
119
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Sylvia has two assets in her portfolio, asset A and asset B. Asset A has a standard deviation of 40% and asset B has a standard deviation of 20%. 50% of her portfolio is invested in asset A and 50% is invested in asset B. The correlation for asset A and asset B is .90. What is the standard deviation of her portfolio?
A)Greater than 30%.
B)Less than 30%.
C)Equal to 30%.
D)Not enough information to determine.
```
Rationale
The correct answer is "B." It’s not necessary to use the standard deviation of a two asset portfolio formula to answer this question. Since there’s a 50/50 weighting for each asset, simply take a simple average of the standard deviations (.40 + .20) / 2 = .30. Since the correlation is less than 1, the standard deviation for the portfolio will be less than the simple average. If correlation was equal to 1, then the standard deviation would be equal to 30%.
120
```
Using the constant growth dividend valuation model, calculate the intrinsic value of a stock that pays a dividend this year of $2.00 and is expected to grow at 6%. The beta for this stock is 1.5, the risk-free rate of return is 3% and the market return is 12%.
A)$48.27
B)$35.33
C)$28.75
D)$20.19
```
Rationale
The correct answer is "D." Use the constant growth dividend model to solve for intrinsic value. The question does not provide the required rate of return, however the capital asset pricing model can be used solve for required rate of return. V = D1/(r - g) V = 2 (1.06) / (.165 - .06) V = $20.19 R = Rf + b(Rm - Rf) R = .03 + 1.5(.12 - .03) R = .165
121
A Margin Requirement
is the percentage of marginable securities that an investor must pay for with his/her own cash
122
```
Robin purchased a mutual fund at NAV of $20.00 and sold it 8 months later at $21.00. During the time he owned the fund, he received a LTCG of $1.00/share and a qualified dividend distribution of $.75/share. He has a marginal tax rate of 32%. The tax on LTCG is 15%. What is his after-tax holding period return?
A)10.84%
B)11.50%
C)11.84%
D)12.30%
```
Rationale
Since this is a ST holding period, it's ordinary income at the marginal tax rate for the price increase. Since the dividend distribution is a qualified dividend, it receives capital gains tax treatment.
HPR = (SP - PP +/- CF) x (1-TR) / PP
[($21.00 - $20.00) x (1 - .32)] + [($1.00 + $.75) x (1 - .15)] / $20.00
Answer: 10.84%
(remember to follow order of operations: Parenthesis, exponents, multiplication, division, addition, subtraction)
Based on Subchapter M or pipeline theory, investment companies must payout at least 90% of their portfolio earnings. If a mutual fund sells a position they hold at a gain, it is passes the gain, like-kind, to its investors.
123
```
You purchase one put contract and pay a $3 premium that allows you to sell the stock at $50. The stock is currently trading at $48. What is the intrinsic value of your situation?
A)-$5
B)-$2
C)$0
D)$2
```
Rationale
| The correct answer is "D." Intrinsic Value of Put = Strike Price - Stock Price, therefore IV = $50 - $48 = $2.
124
```
Which securities act covers and regulates activities in the primary markets concerning itself with issuance, disclosure and registration of initial public offerings?
A)The Investment Company Act of 1940.
B)The Securities Exchange Act of 1934.
C)The Investment Advisers Act of 1940.
D)The Securities Act of 1933.
```
Rationale
The correct answer is "D." The Securities Act of 1933 covers new issues. The Securities Exchange Act of 1934 created the SEC and regulation of the secondary market. The Investment Company Act of 1940 permits the SEC to regulate UITs, managed investment companies, and variable life products. The Investment Advisers Act of 1940 regulates the actions of investment advisors.
125
David has $20,000 that is earmarked for a down payment on a house in two years. If David is in the 28% tax bracket, what should he invest the $20,000 in?
A)A 4% tax-free money market mutual fund.
B)A 5.4% corporate bond.
C)A well diversified growth mutual fund.
D)An intermediate muni-bond fund paying 4.5%.
Rationale
The correct answer is “A.” The taxable equivalent yield for the tax-free money market fund is 5.56%. TEY = .04 / (1 - .28) TEY = .0556 The taxable equivalent yield is greater than the taxable corporate bond paying 5.4%. The mutual fund and intermediate muni-bond fund are not appropriate given the investor’s time horizon.
126
To be on a corporation's books as a holder-of-record (and thus have a right to the next dividend payment), the investor must purchase stock:
Before the ex-dividend date.
As of the ex-dividend date, the stock sells without right to collect the next expected dividend due.
127
Belief perseverance is evident when people are unlikely to change their views given new information.
Herd mentality is the process of buying what and when others are buying and selling.
Hindsight bias (n. 事后聪明，后见之明；枪的照门) is a form of overconfidence related to an investor’s belief that they had predicted an event that, in fact, they did not predict.
Overconfidence suggests that investors overestimate their ability to successfully predict future market events.
128
beta
The formula for calculating beta is the covariance of the return of an asset with the return of the benchmark, divided by the variance of the return of the benchmark over a certain period.
129
voluntary negotiations
自愿谈判
130
Barring
prep. 除 ... 以外
| 动词bar的现在分词形式
131
Which of the following statements is correct with regard to the use of an arbitration clause in an investment advisory agreement?
A)The SEC and FINRA require arbitration if voluntary negotiation fails.
B)The SEC requires that such a clause be contained in any investment advisory agreement.
C)The FINRA requires that such a clause stipulate that arbitration must be conducted by non-industry organizations.
D)The clause must allow state regulations to take precedence over federal regulation.
Rationale
The correct answer is "A ." Both SEC and FINRA call for voluntary negotiations first. Barring success with this level of contact both SEC and FINRA require arbitration.
132
```
Regret avoidance (also known as the disposition effect) leads investors to take action or to refuse to act in hopes of minimizing any regret over their actions or inactions. In investments, it leads people to sell winners too soon and to hold on to losers too long.
disposition effect: 处置效果
```
Anchoring represents the investor’s inability to objectively review and analyze new information.
Anchoring results in buying securities that have fallen in value because it “must” get back up to that recent high.
n. 系泊；抛锚；锚定
Herd mentality is the process of buying what and when others are buying and selling.
Representativeness is thinking that a good company is a good investment without regard to an analysis of the investment. --is similar to anchoring
133
Cognitive dissonance n. 认知失调；认知不一致
Minimizing or forgetting past losses
Exaggerating past gains
134
Familiarity leads to overinvestment in companies that are familiar, such as employers.
Naïve diversification is the process of investing in every option available.
Risk aversion is not considered to be a behavioral bias. Rather, risk aversion is an assumption of traditional financial analysis based on the precepts of rational, utility-maximizing economic theory.
135
SIPC insures investors against losses due to bankruptcy or insolvency of brokerage firms. There is no protection against investment losses.
The Federal Reserve Bank places a limit on the amount of credit that can be used to transact the acquisition of securities.
136
covariance
= standard deviation(p) * standard deviation(m) * correlation
137
In an after-dinner conversation, your neighbor states that Hot-Flow, Inc. must certainly be a good investment now that the stock has fallen from its recent high of $80 per share. The company currently trades for $65 per share. You ask your neighbor if she has any other information on which to base her buy recommendation. “Not really,” she replies, “but if the stock was $80 per share last month, surely it will return to that level in the near future. After all,” she continues, “how much can things change in just a few months of time?”
Your neighbor’s attitude is best described as:
A)anchoring.
B)hindsight bias.
C)regret avoidance.
D)representativeness.
Rationale
Answer: A
Anchoring results in buying securities that have fallen in value because it “must” get back up to that recent high.
B is incorrect. Hindsight bias is a form of overconfidence related to an investor’s belief that they had predicted an event that, in fact, they did not predict.
C is incorrect. Regret avoidance, also known as the disposition effect, causes investors to take action (or inaction) in hopes of minimizing any regret.
D is incorrect. Representativeness is thinking that a good company is a good investment without regard to an analysis of the investment.
138
Overconfidence
Overconfidence leads to overtrading. - the high turnover fund’s management
139
A red herring is:
A)An IP that is considered a "hot" offering.
B)An underwriting that the SEC considers especially speculative.
C)A prospectus for a public offering of securities by the current shareholders of a private company.
D)A preliminary prospectus issued by the managing house of an offering.
Rationale
The correct answer is "D." The red herring is so called because of the red lettering notifying prospective investors of its status as a prospectus without prices included.
140
staggered (maturity dates)
```
adj. (形容词)
交错的
吃惊的
难以相信的
错开的
棋式布置的
非常吃惊的
错列的
叉排的
```
141
Many individuals, indeed most individuals, exhibit loss aversion. Loss aversion notes that people more strongly prefer to avoid losses than to seek gains. Loss aversion was identified by Amos Tversky and Daniel Kahneman. Kahneman received the Nobel Prize in Economics in 2002 for his work on prospect theory and loss aversion.
Note – loss aversion is not included in the pre-study materials for investments, but I’m hoping this extremely important behavioral finance concept is included in the larger set of investment planning materials used by The Dalton Review.
Anchoring represents the investor’s inability to objectively review and analyze new information.
Cognitive dissonance is a form of overconfidence because an investor’s memory of past performance is better than the actual results.
Risk aversion 风险规避 is not considered to be a behavioral bias. Rather, risk aversion is an assumption of traditional financial analysis based on the precepts of rational, utility-maximizing economic theory.
142
arbitration
仲裁
143
Unit investments do not make additions to investments once the trust has been structured. Shares are not bought or sold after structuring and the portfolio is self-liquidating
Bottom-up equity managers include:
I. Group rotation managers.
II. Value managers.
III. Market timers.
IV. Technicians.
```
A)I only.
B)II and III only.
C)I and III only.
D)II and IV only.
Rationale
The correct answer is "D." Options "I" and "III" are both "top down" style managers. Technicians do not follow fundamental analysis.
```
144
The NASDAQ, the NYSE Composite, and the Wilshire all use value weighted average, while the Dow Jones Industrial is a simple price weighted average.
Only Value Line uses the geometric average.
Anchoring results in buying securities that have fallen in value because it “must” get back up to that recent high.
145
Which of the following best describes a long hedge position?
A)The investor is short the underlying commodity and short the futures contract.
B)The investor is long the underlying commodity and long the futures contract.
C)The investor is short the underlying commodity and long the futures contract.
Rationale
The correct answer is "C." A long position in a futures contract is when the investor buys a futures contract. A short position in a futures contract is when the investor sells a futures contract. A long hedge means that the investor owns (buys) the futures contract to insure a certain price of a commodity that he or she does not yet own. Hedging is taking an opposite futures position than the investor's inherent underlying position.
D)The investor is long the underlying commodity and short the futures contract.
With the term being equal, the bond with the lowest coupon will have the biggest duration. The longer the duration, the more sensitive the bond price is to interest rate changes.
146
The fourth market is the market where corporation and institutional investors deal directly with one another.
Primary market is where investment bankers and corporations meet to arrange offerings to the public.
Secondary markets are where previously issued securities are sold (exchanges, etc.).
Third market in finance refers to the trading of exchange-listed securities in the over-the-counter market. These trades allow institutional investors to trade blocks of securities directly, rather than through an exchange, providing liquidity and anonymity to buyers.
147
Correlation is .80, therefore r-squared is .64 (R-squared = correlation coefficient squared). Therefore 64% of mutual fund's return is due to the S&P 500. Remember, r-squared measures the percentage of return due to the market.
John Risotto has a cash need at the end of nine years. Which of the following investments best meets this need and serves to immunize the portfolio initially?
I. An 11-year maturity coupon bond.
II. A 9-year maturity coupon Treasury note.
III. A series of Treasury bills.
```
A)I only.
Rationale
The correct answer is "A." The process of portfolio immunization entails not maturity of a security, but its duration. Duration is based on coupon rate. The larger the coupon payment, the shorter the duration. This being the case, a bond generally pays higher interest than a note, and a note pays higher than short-term Treasury bills. Given this information, one could reasonably expect a shorter duration (than time to maturity), while receiving better immunization from the bond.
B)II and III only.
C)II only.
D)I and II only.
```
148
equity REITs can participate in the appreciation of the underlying properties.
mortgage REITs have nothing to do with "rental income"
