Portfolio Management and Investment Risk Flashcards
(23 cards)
What is the ideal correlation?
- This means the two investments’ rate of return is uncorrelated. 1 means high positive correlation, and -1 is high negative correlation.
Describe Discounted Cash Flow Analysis
It’s the process which investors use to decipher the present value of an investment by calculating the future values of the investment.
How do you find the Present Value of Perpetuity?
Annual Payment divided by Annual Rate of Return
What can the Rule of 72 calculate?
Number of years for principal to double at a given rate of return, and the internal rate of return needed for an investment to double over a given number of years.
The Net Present Value (NPV) an investment is positive. Is this generally a good purchase?
Yes, the return exceeds the discount rate.
How do you calculate Net Present Value (NPV)?
Discounted Cash Flow Value minus Market Price of the Bond
Dollar-Weighted Return is the same as what?
Internal Rate of Return
Time-weighted return is good for what?
Rating the Performance of Money Managers
How do you calculate Current Yield?
Annual dividend or interest divided by the current market price.
In regard to bonds, Duration is defined as
The measure of bond price volatility.
True or False: A declining US dollar against foreign currency results in an improvement in the US balance of trade
True
True or False: A declining US dollar results in an increase of foreign imports into the US
False
True or False: A strengthening US dollar results in an increase of foreign imports into the US
True
True or False: A declining US dollar results in increased exports from the US
True
True or False: A declining US dollar results in increased imports from foreign countries
False
Is a person who effects transactions in commodities subject to registration with an administrator?
No. Commodities are not securities.
Are Forward Contracts securities?
Yes. It’s a derivative where two parties agree to buy or sell an asset at a specific price on a future date.
Are Forward Contracts negotiated?
Yes. All aspects of the contract are negotiated between the buyer and seller.
What is used as a proxy for Risk Free Rate of Return?
13-Week Treasury Bills (13-Week TBills). Due to the short term to maturity of T-bills, there’s virtually no interest-rate risk, and, since they’re a direct obligation of the U.S. government, there’s no credit risk.
What is the difference between Switching and Exchanging with regard to Mutual Fund Families?
Purchases and sales that are made in the same family of funds are referred to as “exchanges” and are not assessed sales charges. On the other hand, “switching” involves the sale and purchase of fund shares in different fund families and sales charges do apply.
If an index option is exercised, what does the buyer of the contract receive?
When index options are exercised, they utilize cash settlement. Since there is no delivery of the underlying shares, the seller delivers to the owner the cash difference between the option’s strike price and the index value.
What characteristics are true about general advertising and accreditation of investors concerning the private placement of securities being distributed under Rule 506(c) of Regulation D?
General advertising is permitted, but all investors must be accredited.
What characteristics are true about general advertising and accreditation of investors concerning the private placement of securities being distributed under Rule 506(b) of Regulation D?
No general advertising/solicitation and the issuer may sell to an unlimited number of accredited investors, but no more than 35 non-accredited investors.
