Part 2: Chapter 9 - Investment Recommendations - Risks Flashcards

Question

What is Net Present Value? How is it calculated? What does it mean if the NPV of an investment is ... - Equal to the purchase price? - Less than? - Greater than?

Answer 1

A form of Discounted Cash Flow that uses Discounting for each year of an investment. (page 237) By adding a Present Value for each year of an investment. The investor will achieve ... - Their desired return - Greater than the desired return - Less than the desired return

Answer 2

The investment will be: - Profitable - Not profitable - No gain or loss

Answer 3

A formula that uses cash flows (in and out) to determine the breakeven point of an investment. Dollar Weighted Return Higher

Answer 4

NPV = $ IRR = %

Answer 5

Total Return ----------------------------- Original Investment

Answer 6

Multiplying or dividing a return as to equal what it'd be over a year.

Answer 7

The return over the period of time the investment is held. Total Return

Answer 8

Rate of Return on a 3-Month T-Bill The additional return an investor can expect for investing above risk-free investments (i.e. 3-Month T-Bill).

Answer 9

The volatility of an investment in comparison to a benchmark (i.e. S&P 500). It has the same volatility as its benchmark Less volatility More volatility It's 50% as volatile as its benchmark

Answer 10

How an investment performs relative to the risk taken. Percentage Number Beta + Alpha Returns were adequate for the risk Returns were NOT adequate for the risk Returns were adequate for the risk Under

Answer 11

Alpha = Return - (Market Return X Beta)

Answer 12

The volatility of an expected return to its actual return. Beta measures volatility as compared to a benchmark (i.e. S&P 500 Index) whereas Standard Deviation measures volatility of an investment to its own past performance. The higher a Standard Deviation, the LESS reliable the analysis. The lower the Standard Deviation, the MORE reliable the analysis.

Answer 13

Upon sale of an investment

Answer 14

The rate of return less inflation. Real Return Real Interest Rate

Answer 15

An investment's projected return based on different scenarios (i.e. Bull, Bear, or Neutral Market). By multiplying the asset's projected return by its likelihood of occurrence and then adding all resulting weighted values. For example: Mkt Projected X Likelihood = Expected -------------------------------------------------------------- Bull 15% X 40% = 6% Bear -10% X 30% = -3% Neutral 7% X 30% = 2.1% --------------------------------------------------------------- Overall Total Expected Return = 5.1%

Answer 16

It is the return of different asset classes weighted per their percentage makeup of the whole portfolio. By multiplying each asset's percentage makeup of the total portfolio by its return. Then adding all resulting weighted values. For example: Asset: Portfolio % X Return % = Weight % -------------------------------------------------------------- Equities 30% of Portfolio X 10% Return = .03 Bonds 40% of Portfolio X 25% Return = .1 --------------------------------------------------------------- Overall Total Expected Return = .13 = 13%

Answer 17

It compares the return on an investment to the risk taken. Portfolio Return - Risk Free Return -------------------------------------------------- Standard Deviation The Portfolio Return - Risk Free Return - again, the Risk Free Return is that of the 3-mont T-Bill The better the portfolio was managed or the safer the investment was.

Answer 18

It's a calculation that determines what common stock should trade at by discounting potential future dividends.

Answer 19

Used to tell how long an investor needs to double their money at a particular rate of return. 72 / Rate of Return = Years to Double *72 / Years to Double = Rate of Return

Answer 20

Lump Sum = Periodic Pmt / Return % Then divide the Return % by that frequency per year. For example, if quarterly is desired, then divide the Return % by 4. PLEASE NOTE, the Periodic Payment must also be in that denomination. So if $30,000 per year is desired, but in quarterly payments, then divide $30,000 by 4 also.

Answer 21

15-Year Loans - 5% = 70% (is the principal) - 7.5% = 60% - 10% = 52% 30-Year Loans - 5% = 52% - 7.5% = 40% - 10% = 32%

Answer 22

Means to calculate the return if a bond is purchased at current market price. CY = Annual Interest / Current Mkt $

Answer 23

YTM considers the time remaining until maturity.

Answer 24

A theory that attempts to optimize portfolio return based on risk tolerance. Security Valuation Asset Allocation (diversification) Portfolio Evaluation Performance Measurement (pg 250)

Answer 25

Analysis that seeks to identify the best portfolio combination to achieve the highest return per the risk tolerance. Above = ideal Below = NOT ideal No, this is unattainable.

Answer 26

It's impossible to beat the market because all information is available. Weak: prices reflect past information Semi-Strong: public information is reflected in prices Strong: public AND private information is reflected in prices.

Answer 27

No Coupon payments Discount rate Payment at maturity

Answer 28

Price = Annual Payout / Required Return Page 246

Answer 29

Expected Return = Risk Free Return + [Beta X (Mkt Return - Risk Free Return)]

Answer 30

1) Captial Asset Pricing Model 2) Efficient Market Hypothesis 3) Modern Portfolio Theory

Answer 31

Measure of performance that eliminates the in-flow and out-flow of cash

Part 2: Chapter 9 - Investment Recommendations - Risks Flashcards

(57 cards)