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CFP > Investments > Flashcards

Investments Flashcards

1
Q

An investment policy statement (IPS) does not include the ________?

A

Investment selection.

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2
Q

What’s is the highest rating Morningstar offers is ________?

A
  • *5** stars.
  • *1** star is the lowest rating while 5 is the highest.
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3
Q

A ________ will turn into a market order once a specified price is reached in a given security.

A

Stop order.

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4
Q

Purchasing power risk is also known as ________.

A

Inflation risk.

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5
Q

A ________ strategy includes both active and passive approaches to portfolio management.

A
  • *Co**re and satellite.
  • *Th**e core portion of this strategy is passively managed and is comprised of well-diversified holdings, while the satellite portion is typically actively managed.
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6
Q

You achieve alpha when a security is above the ________?

A

Capital markets line.

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7
Q

When would you report earning on an EE Bond?

A

When redeemed or at maturity.

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8
Q

Coefficient of determinization is also called ________?

A

R squared (R2).

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9
Q

What type of risk does Beta measure?

A

Systematic risk. Associated this with a well-diversified portfolio.

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10
Q

If the market risk premium increases, the value of common stock will typically ________?

A

Decrease. Security prices decrease to help compensate for an increase in risk.

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11
Q

Total risk is measured by ________?

A

Standard deviation.

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12
Q

The measure of the skew or peak of a curve is called ________?

A
  • *Kurto**sis.
  • *Yo**u should know the difference between positive and negative kurtosis. Positive kurtosis has a high peak because of low levels of variation. Negative kurtosis has a lower park, caused by wide dispersion of returns. Positive kurtosis is called leptokurtic and negative kurtosis is referred to as platykurtic.
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13
Q

What securities license allows an individual to sell mutual funds?

A

A series 6 license.

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14
Q

The risk return tradeoff investors are willing to make is called the ________?

A

The indifference curve.

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15
Q

As inflation increases, an investors required rate of return will ________?

A

Rise.

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16
Q

Inefficient portfolios typically fall ________ the Capital Market Line.

A

Below.

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17
Q

What is the main determinant of a portfolio total return?

A

Allocation.

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18
Q

If a portfolio is well diversified, should you use a Sharpe or Treynor measurement?

A

Treynor.

Remember both Treynor and Jensen’s Alpha both use Beta as a measure of risk, which is the measurement used in a well-diversified portfolio. With that in mind, a Sharpe index would not be an appropriate measurement of risk.

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19
Q

The fixed income strategy involves purchasing bonds with varying maturities and helps to reduce interest rate risks.

A

A bond ladder strategy.

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20
Q

________ can be used to determine which portfolios are attainable and which are not.

A

The efficient frontier.

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21
Q

When there is a cash dividend paid, what typically happens to the price of the underlying stock?

A

The price moves lower.

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22
Q

A fixed income security with a higher yield to maturity would have a ________ duration.

A

Shorter (inverse).

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23
Q

Where are closed-end funds traded?

A
  • *O**n the secondary market.
  • *Don**’t confuse this with open-end funds (mutual funds) that are traded directly with the fund company.
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24
Q

The relationship between return and systematic risk is displayed on the ________?

A
  • *Secu**rity Market Line (SML).
  • *Underv**alued portfolio rest above the SML while overvalued portfolios rest below.
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25
Q

What are the maturities on money market funds?

A

90 days or less.

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26
Q

What type of fixed income strategy will minimize the impact of interest rate changes?

A

A bond ladder strategy.

Remember that bond ladders include bonds with short and long maturities.

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27
Q

Security prices and interest rates typically move _________ to each other.

A

Inverse.

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28
Q

These two types of performance measures are considered to be relative in nature?

A

Sharpe and Treynor.

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29
Q

Treasuries Bonds are not subject to ________?

A
  • *Sta**te income tax.
  • *Th**ey are subject to Federal Income Tax.
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30
Q

GICs are similar to ________?

A
  • *Certif**icates of deposit (CDs).
  • *Subj**ect to purchasing power risk.
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31
Q

Are closed-end funds actively or passively managed?

A

Actively managed and traded on the secondary market.

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32
Q

What term describes the measure of price between two securities?

A

Covariance.

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33
Q

A fixed income security with a longer maturity, would have a ________ duration.

A

Longer.

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34
Q

Is gold bullion allowed in an IRA?

A

Yes.

Be careful, you may be asked if gold bullion can be contributed to an IRA. Gold bullion can be purchased within an IRA but it cannot be contributed to an IRA.

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35
Q

Regarding fixed income securities, what type of strategy eliminates a reinvestment rate risk?

A

A buy and hold strategy.

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36
Q

Is the Dow Jones Industrial Average a value weighted or price weighted index?

A

Price weighted.

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37
Q

When selecting new securities in a diversified portfolio, you want to add assets that have the ________?

A

Lowest correlation coefficient.

38
Q

The ________ uses standard deviation as a measure of risk while the ________ uses Beta as a measure of risk.

A
  • *Capi**tal Market Line
  • *Secu**rity market Line
39
Q

Standard deviation is a measure of ________ risk?

A

Total risk.

Beta is a measure of market risk.

40
Q

An investor with a ________ approach would rebalance their portfolio where needed.

A

Tactical approach.

This can be a tricky one to remember, especially after you’ve been testing for 3-4 hours. A good way to visualize this concept is to envision a tack laying upside down, and something balancing on the pointy end. Silly concept but we’re here for points.

41
Q

Repurchased shares are also known as ________?

A

Treasury shares.

42
Q

A fixed income security with a higher coupon rate would have a ________ duration.

A

Shorter (inverse).

43
Q

A revaluation of a currency is the same thing as ________?

A

Appreciation.

44
Q

Inflation risk is also known as ________?

A

Purchasing power risk.

45
Q

When calculating net present value (NPV), what would a positive result indicate?

A
  • *Th**at the investor’s required rate of return was achieved.
  • *I**f NPV is 0, this also indicates that the return was achieved.
46
Q

When would a company exercise the call feature on an existing bond?

A
  • *Wh**en existing bonds are trading at a premium.
  • *It**’s important to know the relationship between yield and price. This concept is tested frequently on the exam. In this case, a company would leverage the call provision because they can retire bond paying a higher rate and reissue new bonds at a lower interest rate. If rates were to drop, existing bonds become more attractive, thus leading to these bonds trading at a premium.
47
Q

To determine how much of an assets return can be attributed to the overall market, what should you identify?

A

Identify the coefficient of determination or R2.

48
Q

What would cause taxation on a municipal bond?

A

If it was sold for a profit.

49
Q

When you can offset reinvestment rate risk and interest rate risk, you have effectively ________.

A

Immunized a bond portfolio.

50
Q

If R2 is lower than .70. which risk measure should you use?

A
  • *Sha**rpe ratio.
  • *Reme**mber that a higher R2 indicates that the portfolios returns are more closely aligned with the overall market (diversified). If a portfolio is not well diversified, you should use standard deviation, which can help measure risk in an undiversified portfolio. If the portfolio is well diversified, you should use Beta.
51
Q

When comparing bonds, would a bond with a longer duration be more or less volatile when compared to a bond with a shorter duration.

A

More volatile.

52
Q

When would a stock dividend be taxed?

A

At the sale.

53
Q

Commission costs to acquire a security would effectively ________ the basis of the security.

A

Increase.

54
Q

What form of the efficient market hypothesis supports market anomalies?

A

None. If the market is efficient; anomalies should theoretically not exist.

55
Q

No more than 35 non-accredited investors describes ________?

A

Regulation D.

56
Q

What measure should you use for a non-diversified portfolio?

A
  • *Stan**dard deviation.
  • *Be**ta is used in a well-diversified portfolio.
57
Q

What measure of risk is considered to be an absolute performance measure?

A

Jensen’s Alpha.

Treynor and Sharpe are relative measures, meaning they need to be compared to other Sharpe & Treynor figures for analysis. Jensen’s Alpha alone can indicate if a manager’s performance is appropriate for the amount of risk taken.

58
Q

What measures a securities price movement relative to the market?

A

Beta.

59
Q

This term describes what level of risk an investor will accept for a given return.

A

Indifference curve.

60
Q

When calculating intrinsic value, when would you expect to see a negative number?

A

Never. An intrinsic value of a stock option cannot be negative.

61
Q

What type of municipal bond can be issues with a restrictive revenue base?

A

Limited general obligation bonds.

62
Q

Sharpe and Treynor are considered to be ________ measures of risk.

A

Relative.

63
Q

________ are typically self-liquidating and prohibit the addition of new securities after the creation of the portfolio.

A

Unit investment Trusts (UITs).

64
Q

When using the Capital Asset Pricing Model (CAPM), what should you look for in the structure of the question?

A

Whether you are provided the market risk premium or if it is provided.
You may be given all of the necessary variables independently when asked to calculate the CAPM. Make sure to understand if the question identifies the market risk premium of if you are required to calculate it independently.
CAPM = ri = rf= (rm-rf)Bi | Market risk premium alone = (rm-rf)

65
Q

Index funds trade at ________?

A

Net asset value (NAV).

66
Q

Corporations sell what type of unsecure debt?

A

Commercial paper.

Typically used to finance short term obligations such as payroll.

67
Q

Arbitrage pricing theory is considered to be a ________ model while CAPM is a ________ model.

A
  • *Multi-**factor model.
  • *Sin**gle factor.
68
Q

The ________ the coupon, the ________ the duration.

A
  • *Low**er
  • *Hig**her

These items move inverse to each other.

69
Q

Performance above the security market line indicates the achievement of ________.

A

Positive Alpha.

70
Q

At the point of ________, an individual has obtained the optimal portfolio.

A

Tangency.

71
Q

Duration is typically ________ than maturity.

A
  • *Low**er.
  • *Help**ful when eliminating incorrect answers in multiple choice questions.
  • *I**f you’re asked to calculate the duration on a 10 year bond, you could effectively eliminate any answer over 10.
72
Q

Equity REITs allow for the participation in appreciate of ________?

A

The underlying properties.

73
Q

The maximum maturity of a Treasury Note is ________.

A

10 years.

74
Q

When comparing investment opportunities, which is a better measure to consider? Net present value (NPV) or the internal rate of return (IRR)?

A

NPV.

This is a direct measure of the dollar benefit in present dollars.

75
Q

CDs with maturities of less than 1 year can be factored in ________?

A

Emergency fund calculations.

76
Q

ETFs trade at a ________.

A
  • *Disco**unt.
  • *Remin**der: index funds trade at NAV.
77
Q

Which index used a geometric return?

A

The Value Line.

78
Q

How do you immunize a bond portfolio?

A

Match the AVERAGE weighted duration with the maturity time horizon.

79
Q

When there is an increase in the supply of money, an investor’s required rate of return will ________?

A
  • *Decre**ase.
  • *Th**e money supply increases when the Federal Reserve purchases treasuries and/or lowers the discount rate.
80
Q

This measures the strength of the relationship of two variables.

A

Correlation coefficient.

81
Q

What securities license can sell a UIT?

A

Series 6.

82
Q

When do EE Bonds pay interest?

A

At maturity or when redeemed.

83
Q

Would you use the Sharpe or the Treynor ratio when measuring risk in a diversified portfolio?

A
  • *Trey**nor.
  • *Trey**nor leverages Beta in its calculation. Beta is used to measure volatility in a diversified portfolio.
84
Q

How many components in the Dow Jones Industrial average?

A

30 companies.

85
Q

Diversification benefits begin when correlation is ________?

A

Less than 1.

86
Q

What is an advisor’s role in a perfectly efficient portfolio?

A

Rebalance as necessary.

87
Q

What is a call penalty?

A

The premium that a company will pay to retire existing bonds.

88
Q

Zero coupon bonds are subject to ________ risk?

A
  • *Purch**asing power risk.
  • *Zer**os do not pay interest so they are not subject to reinvestment rate risks.
89
Q

To calculate the price per share when using dollar coast averaging, you should divide ________ by ________?

A

The total number of shares purchased by total dollar amount invested.

90
Q

To receive qualified dividends, an individual much have possession of the security for ________?

A

ou need to purchase the stock before it goes ex-dividend and then hold it at least 61 days for qualified treatment.

CFP (7 decks)

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