Investments Review

Question 1

What are the main types of investment options?

Answer 1

Individual stocks, cash and equivalents, individual bonds, derivatives, pooled/managed investments, guaranteed investment contracts.

Question 2

What is short-selling?

Answer 2

Selling borrowed stock hoping to buy back at a lower price; requires margin account, proceeds held by broker, no time limit, must cover dividends.

Question 3

What is initial margin?

Answer 3

Minimum equity to open a margin transaction, set by Regulation T at 50% (can vary by volatility).

Question 4

What is maintenance margin?

Answer 4

Minimum equity required to avoid a margin call.

Question 5

How do you calculate margin position?

Answer 5

Equity / Fair Market Value.

Question 7

What is the ex-dividend date?

Answer 7

The date you must own stock to receive the dividend (T-1, or one day before the dividend is paid).

Question 8

What are qualified dividends?

Answer 8

Paid by US/qualifying foreign companies, held >60 days in 121-day period, taxed as capital gains.

Stock dividends are not txable to the shareholder (when a stock split occurs for example)

Question 9

How are stock splits handled?

Answer 9

Increases shares, reduces price per share (e.g., 2-for-1: double shares, half price).

Question 10

What does the Securities Act of 1933 regulate?

Answer 10

Issuance of new securities (primary market).

Question 11

What does the Securities Act of 1934 regulate?

Answer 11

Secondary market and trading; created SEC.

Question 13

What is SIPC?

Answer 13

Protects against broker failure losses ($500K max, $250K cash).

Question 14

What are examples of money market securities?

Answer 14

CDs, Treasury Bills, Commercial Paper, Bankers Acceptances.

Question 15

What are the main Investment Policy Statement (IPS) objectives and constraints?

Answer 15

Risk, Return, Time horizon, Taxes, Liquidity, Legal, Unique circumstances (RR TTLLU).

Question 16

How is the DJIA calculated?

Answer 16

Price-weighted average.

Question 17

How is the S&P 500 calculated?

Answer 17

Value-weighted (market cap).

Question 18

What does standard deviation measure?

Answer 18

Total risk of an undiversified portfolio.

Question 19

What is the coefficient of variation?

Answer 19

Standard deviation divided by mean return; higher = more risk per unit return.

Question 20

What is correlation?

Answer 20

Measures movement between two assets (-1 to +1); diversification benefit if <+1.

Question 21

What is beta?

Answer 21

Systematic risk relative to market; market beta = 1.

Question 22

What is R-squared?

Answer 22

% of return due to market; r² = (correlation coefficient)².

Question 23

What is systematic risk?

Answer 23

Market risk, undiversifiable.

Question 24

What is unsystematic risk?

Answer 24

Company-specific, diversifiable.

Question 25

What is the Efficient Frontier?

Answer 25

Curve of best possible risk/return portfolios.

Question 26

What is the Capital Market Line (CML)?

Answer 26

Shows risk/return for efficient portfolios.

Question 27

What is the Capital Asset Pricing Model (CAPM)?

Answer 27

Calculates required return: rf plus beta times (market return-risk free)

Question 28

What is the Sharpe Ratio?

Answer 28

(Portfolio return - risk-free rate) / standard deviation.

Question 29

What is the Treynor Ratio?

Answer 29

(Portfolio return - risk-free rate) / beta.

Question 30

What is Jensen’s Alpha?

Answer 30

Actual return minus expected (per CAPM).

Question 31

What is the Information Ratio?

Answer 31

(Portfolio return - benchmark return) / tracking error.

Question 32

What is Arbitrage Pricing Theory (APT)?

Answer 32

Multi-factor model for asset returns; inputs are factors and sensitivities, not standard deviation or beta.

Question 33

What is holding period return (HPR)?

Answer 33

(Selling Price – Purchase Price ± Cash Flows) / Initial Equity.

Question 34

What is effective annual rate (EAR)?

Answer 34

(1+i/n)^n-1, adjusts for compunding

Question 35

What is geometric average return?

Answer 35

Time-weighted compounded return.

Question 36

What is the Dividend Discount Model?

Answer 36

Values stock by discounting future dividends.

Question 37

What affects stock price in the DDM?

Answer 37

Higher required return ↓ price, higher dividend/growth ↑ price.

Question 38

What is the P/E ratio?

Answer 38

Price per share / earnings per share.

Question 39

What is yield to maturity (YTM)?

Answer 39

Discounted rate equating bond price to future cash flows.

Question 40

What is current yield?

Answer 40

Annual coupon / current price.

Question 41

What is bond duration?

Answer 41

Weighted average time to receive cash flows; higher duration = higher interest rate sensitivity.

Question 42

What are secured bonds?

Answer 42

Backed by assets (e.g., mortgage bonds).

Question 43

What are unsecured bonds?

Answer 43

Debentures, subordinated debentures, income bonds.

Question 44

What are municipal bonds?

Answer 44

General obligation (tax-backed), revenue (project-backed), private activity (special projects).

Question 45

What is tax equivalent yield?

Answer 45

Tax-free yield/(1−tax rate)

Question 46

What is after-tax yield?

Answer 46

Corporate Rate×(1−tax rate)

Question 47

What is a closed-end fund?

Answer 47

Fixed capitalization, trades on exchange, may trade at premium/discount to NAV.

Question 48

What is an open-end fund?

Answer 48

Unlimited capitalization, bought/redeemed at NAV.

Question 49

What is a unit investment trust?

Answer 49

Passive, self-liquidating, fixed portfolio.

Question 50

Types of Mutual Funds?

Answer 50

Index, growth, growth & income, balanced, global, international.

Question 51

Fund Share Classes?

Answer 51

A Shares: front-end load, low 12b-1. B Shares: redemption fee, convert to A shares. C Shares: no front-end load, small back-end load.

Question 52

What is an ETF?

Answer 52

Exchange-traded, index-tracking, tax-efficient, low cost.

Question 53

What is a REIT?

Answer 53

Real estate investment trust; must distribute 90% of income; equity, mortgage, or hybrid types.

Question 54

What is an ADR?

Answer 54

American Depository Receipt; foreign stock traded in USD, does not eliminate currency risk.

Question 55

What are cryptocurrencies?

Answer 55

Virtual, high risk, limited supply, not widely accepted.

Question 56

What is an option?

Answer 56

Contract giving right (not obligation) to buy/sell an asset at a set price.

Question 57

What is a call option?

Answer 57

Right to buy; intrinsic value = stock price – strike price.

Question 58

What is a put option?

Answer 58

Right to sell; intrinsic value = strike price – stock price.

Question 59

What is a straddle?

Answer 59

Buy both a call and a put; expect volatility.

Question 60

What is the Black-Scholes model?

Answer 60

Prices call options using asset price, strike price, time, risk-free rate, volatility.

Question 61

What is put-call parity?

Answer 61

Relationship between prices of puts and calls.

Question 62

What is a futures contract?

Answer 62

Obligation to buy/sell asset at set price in future; used for hedging or speculation.

Question 63

How do futures differ from options?

Answer 63

Options give right, futures impose obligation.

Question 64

How is property value calculated?

Answer 64

Value = Net Operating Income / Capitalization Rate.

Question 65

If the required rate of return decreases...

Answer 65

the stock price will increase

Question 66

If the dividend is expected to increase...

Answer 66

the stock price will increase

Question 67

If the required rate of return increases...

Answer 67

the stock price will decrease

Question 68

If the dividend is expected to decrease...

Answer 68

the stock price will decrease