Portfolio Management and Investment Risk

Question 1

Working Capital

Answer 1

Total Current Assets - Total Current Liabilities = Working Capital

Question 2

Current Ratio

Answer 2

Measure of liquidity

Total Current Assets/Total Current Liabilities

Question 3

Quick Asset (Acid Test) Ratio

Answer 3

Total Current Assets - Inventory
_________________________

Total Current Liabilities

Question 4

Debt to Equity Ratio

Answer 4

Bonds + Preferred Stock
__________________________________________

Common Stock at Par + Capital Surplus + Retained Earnings

Question 5

Large Cap Stocks

Answer 5

Mature companies with market cap above $10 mil and history of consistent dividend payments

Question 6

Mid Cap Stocks

Answer 6

Growth companies with market cap from $2 bil to $10 bil

Question 7

Small Cap Stocks

Answer 7

Newer growth companies with market cap from $300 mil to $2 bil

Question 8

Micro Cap Stocks

Answer 8

Speculative companies with market cap from $50 mil to $300 mil

Question 9

Order of payment to creditors and owners when forced to liquidate

Answer 9

Secured debt
Unsecured Debt
Preferred Stock
Common Stock

Question 10

Earnings Per Share

Answer 10

Net Income - Preferred Dividends
___________________________

Number of Outstanding common shares

Question 11

Price/Earnings Ratio

Answer 11

Market Price/Earnings Per share

Question 12

Growth Analysis

Answer 12

High P/E Ratio
High retained earnings
Low dividend payout ratios

Question 13

Value Analysis

Answer 13

Low P/E
History of Profits
High dividend yield
Low price to book ratio

Question 14

Top Down Approach

Answer 14

Analyze economy first, then specific industries

Question 15

Bottom Up Approach

Answer 15

Evaluate company, then determine if company is undervalued relative to its peers

Question 16

Modern Portfolio Theory

Answer 16

Theory that analyzes relationship between risk, correlation, diversification, and returns.

Assumes investors are risk averse

Question 17

Expected Return

Answer 17

Possible return on investment weighted by likelihood that return will occur

Sum of all possible returns multiplied by probability of return

Question 18

Standard Deviation

Answer 18

Measure of risk as evidenced by the variability between returns

Question 19

Correlation

Answer 19

Degree to which different investments move in the same direction

Question 20

Monte Carlo Simulation

Answer 20

Risk analysis simulation that identifies list of economic factors that may affect an investment and assigns each factor a range of values.

Question 21

Optimal Portfolio according to MPT

Answer 21

Diversified assets with no correlation

Question 22

Capital Asset Pricing Model (CAPM)

Answer 22

Describes relationship between risk and expected returns with focus on two types of risk: Diversifiable and Non-Diversifiable

Question 23

Diversifiable Risk

Answer 23

Business or non-systematic risk specific to a particular security or sector

Question 24

Non-Diversifiable Risk

Answer 24

Systematic or market risk

Question 25

Beta

Answer 25

Measure of volatility

Question 26

Risk Free Return

Answer 26

Rate of return attributed to an investment with zero risk, usually a T Bill

Question 27

Risk Premium

Answer 27

Additional return above risk free return

Question 28

Alpha

Answer 28

Risk adjusted return

Question 29

Sharpe Ratio

Answer 29

Risk adjusted return measurement (Ri - Rrf)/Oi

Question 30

Efficient Market Hypothesis

Answer 30

If markets are efficient, then prices will reflect all known information

Question 31

Weak Form Efficiency

Answer 31

All past market prices and data are fully reflected in securities prices

Question 32

Semistrong Form Efficiency

Answer 32

Security prices reflect all publicly available information and investors would receive no benefit from using either technical or fundamental analysis

Question 33

Strong Form Efficiency

Answer 33

Price of stock incorporates all current information including both public and private information

Question 34

Passive Strategies

Answer 34

Strategic asset allocation

Question 35

Future Value

Answer 35

Pn = P0(1+r)^n

Question 36

Present Value

Answer 36

P0 = Pn/(1+r)^n

Question 37

Capital Needs

Answer 37

A capital goal that needs to be achieved within a specific period

Question 38

Internal Rate of Return

Answer 38

Compounded interest rate or yield used to calculate present value, future value, and discounted cash flows

Question 39

Dollar Weighted Return

Answer 39

Solves for rate of return that makes present value equal to present value of future cash flows

Question 40

Time Weighted Return

Answer 40

Compounded growth over period being measured, used to rate performance of money managers

Question 41

Annualized Return

Answer 41

Total return/Periods = Annualized Returns

Question 42

Inflation Adjusted Return

Answer 42

Yield - Inflation = Inflation adjusted return

Question 43

After Tax Yield

Answer 43

Taxable Interest Rate x (100% - Tax %)

Question 44

Taxable Equivalent Yield

Answer 44

Tax Free Interest Rate/(100% - Tax bracket %)

Question 45

Total Return

Answer 45

(Ending Value - Beginning Value + Investment Income)/Beginning Value

Question 46

Market Order

Answer 46

Buy or sell stock at current market price

Question 47

Limit Order

Answer 47

Buy or sell stock at specified price or better

Question 48

Stop Order

Answer 48

Buy or sell stock once market price reaches specific price