Investment Planning

Question 1

Buying call

Answer 1

Buying the right to buy the underlying security at a specific price and expiration date

Question 2

Buying put

Answer 2

Buying the right to sell the underlying security at a specific price and expiration date

Question 3

Selling call

Answer 3

Obligation to sell the underlying security at a specific price and expiration date

Question 4

Selling put

Answer 4

Obligation to buy the underlying security at a specific price and expiration date

Question 5

Fundamental Analysis

Answer 5

• int rate trends
• IV of a stock using one or more stock valuation models
• overall state of economy, industry and then the specific company (top-down fundamental)

Question 6

platykurtic

Answer 6

distribution that is flatter than normal

Question 7

leptokurtic

Answer 7

distribution that is more peaked than normal

Question 8

R-squared

Answer 8

R-squared indicates the portion of a portfolio’s returns that are attributable to an index

Question 9

bond ladder strategy

Answer 9

The bond ladder strategy is an investment strategy in which equal amounts of money are invested in a series of bonds with staggered maturities.

The laddered portfolio will provide higher yields than a portfolio consisting entirely of short-term bonds.

Question 10

barbell strategy

Answer 10

The barbell strategy involves the purchase of a mixture of very long-term and very short-term bonds. The barbell strategy is generally more aggressive than the ladder strategy because the barbell strategy only utilizes short-term and long-term bonds.

Question 11

best investment strategy to protect stock from downside risk (if long a stock positino)

Answer 11

purchase a put option
for protect from downside risk

Question 12

defensive industries are

Answer 12

least affected by recessions/economic adversity

Question 13

constraints

Answer 13

Constraints limit the objectives by providing conditions that must be met by the outcomes. Constraints can be internal, such as liquidity needs and time horizon, or they can be external, such as regulations and market conditions.

Question 14

principle behind hedging strategies

Answer 14

combining 2 securities with perfect negative correlation could eliminate risk all together

Question 15

EMH

Answer 15

The efficient market hypothesis states that an investor cannot consistently outperform the market. Selecting a random set of stocks is consistent with this theory.

Question 16

R-squared

Answer 16

coefficient of determination

(correlation coefficient squared)

X of investment returns can be expained by the changes in the market

Question 17

active approach to PM is more likely to reward investors

Answer 17

Investors who follow an active approach to portfolio management will benefit most from a portfolio containing **emerging market equities **and U.S. small-cap stocks, which tend to be more volatile investments.

Question 18

total risk is measured by

Answer 18

standard deviation

Question 19

greater purchasing power risk associated with _____ term bonds

Answer 19

long term bonds

Question 20

an investment-grade bond will be subject to low ____ risk

Answer 20

low default risk

Question 21

expected return for a mutual fund is calculated by using

Answer 21

CAPM

Question 22

REMIC

Answer 22

REMICs are often structured to offer classes of bonds that mature over a period of 3–30 years. Accordingly, investors may invest in bond classes that match their investment time horizon and avoid the uncertainty of bond principal repayment.

Question 23

Attributes of an economy coming out of recession

Answer 23

• cyclical stocks will begin to move up in price
• unemployment rate will decline
• personal income will grow

Question 24

protective strategy

Answer 24

a protective strategy limits downside risk

the purchasing for a put option on a stock that is already owned - reduces downside risk

Question 25

bond subject to the greatest price volatility

Answer 25

lowest coupon highest maturity

Question 26

disadvantages of LP

Answer 26

The disadvantages of limited partnerships include: (1) they are generally riskier than bonds or exchange-traded equities; (2) they are generally illiquid; (3) limited partners cannot participate in the management; and (4) the sale of partnership interest may be restricted. In addition, the general partner has unlimited liability.

Question 27

modern portfolio theory

Answer 27

The optimal portfolio for an investor will always lie on the efficient frontier. This portfolio is found at the point of tangency of the investor's indifference curve and the efficient frontier.

Question 28

EMH

Answer 28

The efficient market hypothesis states that an investor cannot consistently outperform the market. Selecting a random set of stocks is consistent with this theory.

Question 29

immunization strategy

Answer 29

An investor who chooses a bond that has a duration equal to the investor's desired holding period is practicing immunization. Because a bond's reinvestment rate risk and price risk tend to 'offset' each other, immunization can be used to cancel out interest rate risk.

Question 30

if they think stock will rise in price - what option strategy

Answer 30

buy a call lock in price

Question 31

CML

Answer 31

The capital market line (CML) graphically depicts the relationship of risk and return for efficient well-diversified portfolios. The CML uses standard deviation as a risk measure.