Portfolio Management and Investment Risk Flashcards
(237 cards)
1
Q
__________ stock fluctuates with the business cycle.
A
Cyclical stock fluctuates with the business cycle (auto companies).
2
Q
____________ stock is resistant to recession.
A
Defensive stock is resistant to recession (utility companies).
3
Q
What is the proper order of liquidation for a corporation at bankruptcy? 6
A
- Unpaid workers, 2. IRS, 3. secured creditors, 4. unsecured creditors, 5. preferred, and then 6. common.
4
Q
What are TIPS?
A
Treasury Inflation-Protected Securities
5
Q
The principal value of TIPS may be adjusted based on changes to the __________________________.
A
The principal value of TIPS may be adjusted based on changes to the Consumer Price Index (CPI).
6
Q
True or False: The interest rate on TIPS is fixed, but the principal may be adjusted.
A
True
7
Q
If a stop order is activated, at what price will the trade be executed?
A
The next trade after activation.
8
Q
Do stop orders guarantee a specific price when buying or selling?
A
No, stop orders execute at the market price (which is uncertain) once they are activated.
9
Q
True or False: Stop-limit orders are guaranteed execution if the trigger is touched.
A
False. Stop-limit orders may not be executed if the limit price cannot be met.
10
Q
___________________ is the balancing of investment classes according to an investor’s investment objectives.
A
Asset allocation is the balancing of investment classes according to an investor’s investment objectives.
11
Q
______ is the measure of an asset’s volatility compared to the market as a whole.
A
Beta is the measure of an asset’s volatility compared to the market as a whole.
12
Q
What is the beta of the market (S&P 500)?
A
1
13
Q
(Current Assets - ____________) ÷ Current Liabilities = Quick Asset Ratio (or Acid Test)
A
(Current Assets - Inventory) ÷ Current Liabilities = Quick Asset Ratio (or Acid Test)
14
Q
Working Capital, Current Ratio, and the Quick Asset Ratio (Acid Test) are examples of ____________ ratios.
A
Working Capital, Current Ratio, and the Quick Asset Ratio (Acid Test) are examples of liquidity ratios.
15
Q
To find a stock’s current yield, the formula is: ____________ ÷ ____________
A
To find a stock’s current yield, the formula is: Annual Dividend ÷ Current Market Price
16
Q
What is the Capital Asset Pricing Model (CAPM)?
A
A model of the relationship between expected risk and expected return
17
Q
True or False: According to CAPM, a security’s return equals a risk-free return (T-Bill return) plus a risk premium.
A
True
18
Q
True or False: Inflation is a persistent rise in the general level of prices.
A
True
19
Q
The _______________________ is often considered the most important measure of inflation.
A
The Consumer Price Index (CPI) is often considered the most important measure of inflation.
20
Q
__________ value is the dollar amount to be invested today to meet a specific dollar objective at a set future point.
A
Present value is the dollar amount to be invested today to meet a specific dollar objective at a set future point.
21
Q
__________ value determines how much a dollar amount invested today will be worth at a set point in the future.
A
Future value determines how much a dollar amount invested today will be worth at a set point in the future.
22
Q
What is used to determine how a given present value will become a needed future value.
A
The internal rate of return (IRR)
23
Q
$10,000 has become $80,000 in 36 years. What is the internal rate of return?
A
The money doubled every 12 years. The 10 grew to 20, the 20 to 40, and the 40 to 80. Using the Rule of 72, 72 ÷ 12 = 6%.
24
Q
Modern Portfolio Theory (MPT) focuses on differing __________ of assets rather than on _____________ securities.
A
Modern Portfolio Theory (MPT) focuses on differing classes of assets rather than on individual securities.
25
What are the three main concepts underlying the Modern Portfolio Theory?
1. Expected return, 2.standard deviation, and 3. correlation
26
Define expected return.
The possible return of an asset multiplied by the likelihood of occurrence
27
Standard deviation is a measure of the dispersion of ____________ returns.
Standard deviation is a measure of the dispersion of expected returns.
28
What is the likelihood of an investment's return falling within 1, 2, and 3 standard deviation units?
67% within 1 standard deviation, 95% within 2 standard deviations, and 99% within 3 standard deviations
29
What is used as the basic measure of risk for an investment?
Standard deviation
30
The greater the dispersion of historical returns of a security, the _________ its standard deviation.
The greater the dispersion of historical returns of a security, the higher its standard deviation.
31
\_\_\_\_\_\_\_\_\_\_\_\_\_\_ measures the degree to which the movements of two variables are related.
Correlation measures the degree to which the movements of two variables are related.
32
If two investments closely track one another, this is referred to as ___________ correlation.
If two investments closely track one another, this is referred to as positive correlation.
33
If two investments go in opposite directions from one another, this is referred to as ___________ correlation.
If two investments go in opposite directions from one another, this is referred to as negative correlation.
34
If there is no relationship between the movement of two investments, they are considered to be \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.
If there is no relationship between the movement of two investments, they are considered to be uncorrelated.
35
True or False: Perfect negative correlation is -1.00, while a perfect positive correlation is 1.00.
True
36
MPT has found that having asset classes with a slight ___________ correlation provides the best long-term performance.
MPT has found that having asset classes with a slight negative correlation provides the best long-term performance.
37
What is the efficient frontier?
The line representing portfolios (excluding risk-free alternatives) showing the lowest risk for a given level of return
38
Strategic asset allocation assumes that the markets are \_\_\_\_\_\_\_\_\_\_\_\_.
Strategic asset allocation assumes that the markets are efficient.
39
True or False: With a buy and hold strategy, investors are consistently rebalancing their portfolios.
False. Buy and hold involves no rebalancing.
40
Tactical asset allocation assumes that markets are \_\_\_\_\_\_\_\_\_\_\_\_\_\_.
Tactical asset allocation assumes that markets are inefficient.
41
True or False: Diversification is one method by which an investor may avoid non-systematic risk.
True
42
If a security's beta is more than 1, is it considered more or less volatile than the market as a whole?
The higher the beta, the greater the volatility.
43
True or False: Alpha represents an investment's actual return in excess of its expected return.
True
44
Another name for a security's risk-adjusted return is its \_\_\_\_\_\_\_\_.
Another name for a security's risk-adjusted return is its alpha.
45
What is the risk of having an excessive portion of a portfolio invested in one particular security or asset class?
Concentration risk
46
\_\_\_\_\_\_\_\_\_\_\_\_ risk is the inability to sell an investment easily.
Liquidity risk is the inability to sell an investment easily.
47
What uses computer simulations to present random outcomes of an investment strategy?
Monte Carlo Simulation
48
What is considered an optimal portfolio?
One that has the highest expected return given the client's tolerance for risk
49
What measures risk-adjusted return?
Alpha and the Sharpe Ratio
50
Is market risk considered a form of diversifiable or non-diversifiable risk?
Non-diversifiable risk
51
To determine a bond's real interest rate, the bond's yield is subtracted by the rate of \_\_\_\_\_\_\_\_\_\_\_.
To determine a bond's real interest rate, the bond's yield is subtracted by the rate of inflation.
52
True or False: A low beta security would be expected to rise more than a high beta security in a bull market.
False. An asset with a low beta would be less volatile and would, therefore, be expected rise less in a rising market.
53
An investor's net return is the gross return minus ________ paid.
An investor's net return is the gross return minus taxes paid.
54
Define holding period return.
The total return received from holding an asset or portfolio of assets
55
What is the formula for determining a bond's current yield?
Annual interest ÷ current market value of the bond
56
What is the formula for determining a stock's current yield?
Annual dividend ÷ current market value of the stock
57
Identify the acronym: CPI
Consumer Price Index
58
What type of mean is used to calculate the expected return?
The weighted arithmetic mean
59
An investment earns 10%, 50%, and 30% in three years. How would the annualized average rate of return be calculated?
When calculating an annualized rate of return over time, the geometric mean is used.
60
Identify the acronym: CAPM
Capital Asset Pricing Model
61
Identify the acronym: MPT
Modern Portfolio Theory
62
What rule can be used to determine how long it takes for an amount of money to double at a given rate of return?
The Rule of 72
63
What rule can be used to determine the annual rate of return needed for funds to double if given a number of years?
The Rule of 72
64
Jim invested $25,000 in an annuity with a 6% return. How long will it take for the money to double?
Using the Rule of 72, divide 72 by the rate of return (72 ÷ 6 = 12 years).
65
\_\_\_\_\_\_\_\_\_ value projects what an investment will be worth at some point in the future.
Future value projects what an investment will be worth at some point in the future.
66
\_\_\_\_\_\_\_\_\_\_ value is the amount of money that must be invested today to result in a certain sum at a future time.
Present value is the amount of money that must be invested today to result in a certain sum at a future time.
67
A bond's inflation-adjusted rate of return may also be referred to as the _______ interest rate.
A bond's inflation-adjusted rate of return may also be referred to as the real interest rate.
68
True or False: Tactical asset allocation is considered a passive asset allocation approach.
False. Tactical asset allocation is considered an active approach.
69
True or False: Strategic asset allocation is considered an active asset allocation approach.
False. Strategic asset allocation is considered a passive approach.
70
Do those who favor market timing (active strategies) believe markets are efficient or inefficient?
Inefficient. They may alter their portfolio to take advantage of anticipated economic events.
71
What is an advantage to buy and hold portfolio management?
Transaction costs and tax consequences are minimized.
72
Identify the risk: Investors miss out on receiving a better return by placing their funds elsewhere.
Opportunity risk
73
Identify the risk: A particular enterprise may not perform well due to poor management or increased competition.
Business risk
74
What method of investing is characterized by regularly investing a set amount of money, regardless of share prices?
Dollar Cost Averaging
75
Describe a growth investor.
One seeking stocks of companies with an above-average growth rate, high P/E ratios, and low dividend payout ratios
76
Describe a value investor.
One seeking stocks that are undervalued in relation to their earnings and have low P/E ratios
77
How is market capitalization (cap) determined?
A company's current share price multiplied by the number of shares outstanding
78
Sue bought a 6% bond at par. One year later, her bond's value has fallen to $970. What is her annual return?
Sue received the 6% rate of interest, but her bond lost 3% of its value. (-$30 + 60) ÷ $1,000 = 3%.
79
Bond A yields 7.5% when inflation is 3%. Bond B yields 8% when inflation is 4%. Which has a higher real interest rate?
Bond A. Bond A's real interest rate is 4.5% (7.5% - 3%) and Bond B's real interest rate is 4% (8% - 4%).
80
"A dollar received today is worth more than a dollar received tomorrow" describes what concept?
The time value of money
81
If a bond is trading at a discount to its value based on DCF, will an investor earn more or less than a comparable bond?
A bond trading at a discount to its DCF value will earn more than comparably priced bonds.
82
If a bond is trading at a premium to its value based on DCF, will an investor earn more or less than a comparable bond?
A bond trading at a premium to its DCF value will earn less than comparably priced bonds.
83
What are two assumptions of MPT?
Investors want to minimize risk and maximize returns
84
What is the name for the graph of optimal portfolios?
The efficient frontier
85
Which would have the least risk—large-, mid-, or small-cap companies?
Large cap stocks have the least risk.
86
Which would have the most risk—large-, mid-, or small-cap companies?
Small cap stocks would have the most risk.
87
True or False: Systematic rebalancing involves buying and selling on a periodic basis.
True
88
True or False: Systematic rebalancing assumes markets are inefficient.
False
89
What is an efficient market?
A market in which prices reflect all known information; therefore, nothing will be overvalued or undervalued.
90
Name the three forms of market efficiency.
Strong-, Semi-Strong and Weak-Form
91
What type of trading strategy would be used if you believe markets are efficient?
Passive strategies, such as indexing or systematic rebalancing
92
True or False: The S&P 500 is a large-cap index.
True
93
True or False: The S&P 400 is a large-cap index.
False, the S&P 400 is a mid-cap index.
94
What type of trading strategy would be used if you believe markets are inefficient?
Active strategies, such as tactical asset allocation or sector rotation
95
Define sector rotation.
A strategy that anticipates the next turn in the business cycle and shifts assets into the sectors that will benefit.
96
Define capital structure.
A company’s issuance of debt and equity securities (both common and preferred stocks) to finance operations
97
What are two measures of liquidity?
Current ratio and the quick asset ratio (acid test) both measure a company's liquidity.
98
What is the difference between the current ratio and the quick asset ratio?
The quick asset ratio is more stringent since it excludes inventory from the current assets.
99
A company with more debt than equity outstanding is considered \_\_\_\_\_\_\_\_\_\_\_\_.
A company with more debt than equity outstanding is considered leveraged.
100
\_\_\_\_\_\_\_ investors look for stocks of companies that are intrinsically undervalued.
Value investors look for stocks of companies that are intrinsically undervalued.
101
What are some of the characteristics of a value stock?
Low P/E ratios, history of profitability, high dividend payout, and low market-to-book ratio
102
What is the formula for the P/E ratio?
Price ÷ EPS (Earnings Per Share)
103
\_\_\_\_\_\_\_ investors are concerned with a company's future earnings potential.
Growth investors are concerned with a company's future earnings potential.
104
What is a dollar-weighted return?
A dollar-weighted return is a geometric mean (average) used to measure how a portfolio performed over time.
105
What is a time-weighted return?
A time-weighted return is a geometric mean (average) that eliminates the effect of varying cash inflows (dividends).
106
What is a major disadvantage when using an arithmetic mean to measure investment performance?
Arithmetic means (averages) can misrepresent compounding effects on an investment's return.
107
True or False: Systematic risk may be avoided through diversification.
False. Systematic (non-diversifiable) risk may not be avoided through diversification.
108
Market, interest rate, and inflation risk are all types of ___________ risk.
Market, interest rate, and inflation risk are all types of systematic risk.
109
Business, regulatory, political, and liquidity risk are all types of ____________ risk.
Business, regulatory, political, and liquidity risk are all types of unsystematic risk.
110
What is the risk that certain circumstances or factors may have a negative impact on the profitability of a company?
Business risk
111
What is the risk of foreign investors losing money due to changes with a country’s government or regulatory environment?
Political risk
112
What is the risk that investors may be unable to dispose of a securities position quickly and at a fair price?
Liquidity risk
113
True or False: A country with high interest rates will generally have a stronger currency.
True
114
Define currency risk.
The risk that foreign investments will be worth less in the future due to changes in exchange rates.
115
What is the formula for the Sharpe Ratio?
(Return on Investment - Risk-Free Return) ÷ Standard Deviation
116
What is the Sharpe Ratio used to determine?
The Sharpe Ratio is used to determine if returns are from wise investments or the result of excess risk.
117
Buy limit orders are placed ________ the market.
Buy limit orders are placed below the market.
118
Sell limit orders are placed ________ the market.
Sell limit orders are placed above the market.
119
Name four asset classes.
1. Stocks, 2. Bonds, 3. Real Estate, 4. Cash
120
True or False: The S&P 500 is an asset class.
False. Stocks, bonds, real estate, and cash are asset classes.
121
What return will an investment have if its net present value is greater than zero?
The investment will generate a positive return.
122
What return will an investment have if its net present value is less than zero?
The investment will generate a negative return.
123
True or False: Dollar weighted return (DWR) takes into account the deposits into or withdrawals out of the portfolio.
True. DWR includes the weighted value of cash flows into and out of the portfolio when calculating return.
124
What is the present value of an annuity that pays $2,000 per year and earns 5% per year?
$40,000 = $2,000/.05
125
A ____________ is an annuity that never stops paying money.
A perpetuity is an annuity that never stops paying money.
126
What is a Perpetuity?
An annuity that pays out forever.
127
What is the present value of a perpetual monthly payment of $1,000 earning 5% per year?
$240,000 = ($1,000 x 12 mo)/.05
128
A __________ is a stream of cash flows that continues forever.
A perpetuity is a stream of cash flows that continues forever.
129
How much principal, compounding at 3% annually, is needed to make annual payments of $3,000 in perpetuity?
$100,000 principal = $3,000 annual payment /.03 rate of return
130
How are secured creditors treated in a liquidation?
They are given priority up to the value of their collateral and are unsecured for any remaining claim.
131
List some formulas used to measure liquidity.
Working capital, current ratio, and quick asset ratio (acid test)
132
\_\_\_\_\_\_\_\_\_\_\_\_\_ return allows an investor to compare the performance of two investment advisers.
Time-weighted return allows an investor to compare the performance of two investment advisers.
133
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ return allows an investor to measure the amount of money she has earned on her investments.
Dollar-weighted return allows an investor to measure the amount of money she has earned on her investments.
134
The quick asset ratio is calculated by excluding _________ from a company's current assets.
The quick asset ratio is calculated by excluding inventory from a company's current assets.
135
If an investment has increased in value, when would its annualized return be greater than its holding period return?
An investment's annualized return would be greater than its holding period return if it was held for less than one year.
136
Define capital risk.
The risk that an investor may lose a part or her entire investment (principal). Capital risk is a form of diversifiable risk.
137
Which return measures investment performance by including all cash inflows and outflows?
Dollar-weighted return
138
In the secondary market, a customer _____ at the bid and ____ at the ask (offer).
In the secondary market, a customer sells at the bid and buys at the ask (offer).
139
True or False: In the secondary market, a client buys at the bid and sells at the ask (offer).
False. Clients buy at the ask/offer (price at which a BD will sell) and sell at the bid (price at which a BD will buy).
140
What is the use of the Capital Asset Pricing Model (CAPM)?
To find an investor's optimal portfolio by comparing expected risk with expected rates of return
141
What is the formula for calculating the risk premium?
Risk premium = total return - risk-free rate
142
The difference between an investment's total return and the risk-free rate is the risk \_\_\_\_\_\_\_.
The difference between an investment's total return and the risk-free rate is the risk premium.
143
Define net present value (NPV).
The difference between the value of an investment's cash inflows and outflows above a discount rate
144
Two investments have the same price, but the net present value (NPV) of choice A is $50 while B's is $40. Which is best?
Investment A is better. NPV measures net cash flows above a discount rate. A greater NPV indicates more value.
145
An investor needs an IRR of 5%. Her investment has a positive NPV. Is its IRR greater than, less than, or equal to 5%?
A positive NPV would indicate than an investment has an IRR that is greater than the required rate.
146
An investor needs an IRR of 5%. His investment has a negative NPV. Is its IRR greater than, less than, or equal to 5%?
A negative NPV would indicate that an investment has an IRR that is less than the required rate.
147
An investor needs an IRR of 5%. His investment has a NPV of $0. Is its IRR greater than, less than, or equal to 5%?
A NPV of $0 would indicate that an investment has an IRR that is equal to the required rate.
148
Buying gold or gold futures may protect an investor against _________ risk.
Buying gold or gold futures may protect an investor against inflation risk.
149
Which asset class is most susceptible to interest-rate risk?
Debt (i.e., bonds)
150
A client notices that a thinly traded stock has had few daily trades effected. To what risk is it most susceptible?
Liquidity risk
151
What type of risk is liquidity risk?
It is non-systematic risk, since liquidity risk may be diversified against by buying actively traded assets.
152
What type of risk is avoided through indexing?
Business risk, since indexing involves purchasing stocks of many companies
153
The ________ rate of return is used to calculate the anticipated return for a portfolio of securities.
The expected rate of return is used to calculate the anticipated return for a portfolio of securities.
154
What strategy involves moving a client's funds from one industry to another during defined periods?
Sector rotation
155
If an investor is attempting to maximize her portfolio growth over a long period, what is her strategy called?
Capital appreciation
156
Gold coins, gold certificates, or gold futures may be purchased in an effort to avoid what type of risk?
Inflation risk
157
If a client eliminates unsystematic or diversifiable risk in his portfolio, he is willing to accept ______ risk.
If a client eliminates unsystematic or diversifiable risk in his portfolio, he is willing to accept market risk.
158
What form of asset allocation attempts to keep the asset percentages balanced over a long period?
Strategic asset allocation
159
\_\_\_\_\_\_\_\_\_\_\_ is the term that BEST describes the process used to calculate an investment's future value.
Compounding is the term that BEST describes the process used to calculate an investment's future value.
160
For a person with a diversified portfolio of large-cap stocks, what type of risk may be reduced by using index options?
Systematic risk
161
If an adviser attempts to exceed the performance of the market, it is using ______ portfolio management.
If an adviser attempts to exceed the performance of the market, it is using active portfolio management.
162
List the risks associated with investing in 30-year U.S. Treasury bonds.
Inflation risk and interest-rate risk
163
What is commonly used to measure an asset's risk-free rate of return?
The interest rate on a U.S. T-bill
164
The interest rate on a U.S. T-bill is commonly used to measure an asset's _________ rate of return.
The interest rate on a U.S. T-bill is commonly used to measure an asset's risk-free rate of return.
165
What is the risk that Congress may enact tax law changes that negatively impact the value of an investment?
Legislative risk
166
What is the risk that changes in tax law could impact securities prices?
Legislative risk
167
True or False: When the market suffers a large, general decline, most stocks are affected.
True. Stocks are subject to the risks of the market as a whole.
168
What risk is based on the possibility that new laws may have a negative impact on an investment’s value?
Legislative risk
169
What risk is based on the possibility that new regulations may have a negative impact on an investment’s value?
Regulatory risk
170
Which market is considered negotiated?
The over-the-counter (OTC) market in which market makers negotiate prices (e.g., the OTCBB)
171
Define positive financial leverage.
It is when the return achieved is greater than the cost of borrowing.
172
Define negative financial leverage.
It is when the return achieved is less than the cost of borrowing.
173
What is the fair value of a bond?
The discounted present value of the sum of the future payments
174
Highly regulated companies, such as utilities, are subject to __________ risk.
Highly regulated companies, such as utilities, are subject to regulatory risk.
175
What is the formula for determining an asset's total return?
(Ending Value - Beginning Value + Dividends/Interest) ÷ Beginning Value
176
What is the formula for determining holding period return?
(Ending Value - Beginning Value + Dividends/Interest) ÷ Beginning Value
177
What is a common method used to calculate the returns on an equity indexed annuity?
Point-to-point indexing
178
Describe positive financial leveraging.
Paying less interest than earnings received (e.g., client pays 4% on a margin loan, but earns 10% on stock gains)
179
Define range.
Range is the difference between the largest value and smallest value of a given set of numbers.
180
Identify the range from the following set of numbers: 7, 3, 5, 4, 4, 6
4. Range is calcuated by starting with the largest value (7) and then subtracting the smallest value (3).
181
Identify the range from the following set of numbers: 10, 12, 5, 1, 7, 7, 8, 4
11. Range is calcuated by starting with the largest value (12) and then subtracting the smallest value (1).
182
Both the Down Jones Industrial Average and the S&P 500 Index are \_\_\_\_\_-cap indexes.
Both the Down Jones Industrial Average and the S&P 500 Index are large-cap indexes.
183
The S&P 400 Index is a \_\_\_-cap index.
The S&P 400 Index is a mid-cap index.
184
The Russell 2000 Index is a \_\_\_\_\_-cap index.
The Russell 2000 Index is a small-cap index.
185
\_\_\_\_\_\_\_\_\_ stock pays higher than average dividends.
Income stock pays higher than average dividends (e.g., stocks of utility companies).
186
What is the formula for calculating a bond's current yield?
Annual Interest ÷ Current Market Price
187
Stop and stop-limit orders are triggered when a round lot trades at, or through, the _____ \_\_\_\_\_\_.
Stop and stop-limit orders are triggered when a round lot trades at, or through, the stop price.
188
If an investor is long stock, a sell stop order can be used to limit ___________ risk.
If an investor is long stock, a sell stop order can be used to limit downside risk.
189
If an investor is short stock, a buy stop order can be used to limit _________ risk.
If an investor is short stock, a buy stop order can be used to limit upside risk.
190
Stop orders become _________ orders once they are triggered/activated.
Stop orders become market orders once they are triggered/activated.
191
Stop-limit orders become ________ orders once they are triggered/activated.
Stop-limit orders become limit orders once they are triggered/activated.
192
If an asset outperforms the market when prices are up, but underperforms when prices are down, what is its beta?
Its beta must be greater than 1.00.
193
What ratio tests a company's ability to pay its current liabilities with its current assets, but excludes inventory?
The Quick Asset Ratio (the Acid Test)
194
Are inflationary periods characterized by rising or falling interest rates?
Rising
195
Assuming a 12% rate of return, how long will it take $50,000 to double?
Six years. Using the Rule of 72, 72 divided by the rate of return determines the number of years (72 ÷ 12 = 6 years).
196
True or False: Securities with a correlation coefficient of zero are considered uncorrelated.
True
197
True or False: Tactical asset allocation is changing a portfolio's asset mix due to impending market and economic factors.
True
198
What is another name for diversifiable risk?
Non-systematic risk
199
What is another name for non-diversifiable risk?
Systematic risk
200
What type of risk does beta measure?
Non-diversifiable
201
What types of securities tend to have a high beta?
Growth stocks
202
What types of securities tend to have a low beta?
Defensive stocks
203
In a declining market, is a high beta security expected to outperform or underperform the market as a whole?
Underperform
204
In a rising market, is a low beta security expected to outperform or underperform the market as a whole?
Underperform
205
A stock with a positive alpha is generally considered a _______ opportunity by an analyst.
A stock with a positive alpha is generally considered a buying opportunity by an analyst.
206
List some forms of business risk that apply when investing in individual equity securities.
Poor management, obsolete products, changing market conditions
207
True or False: The longer an investor's time horizon, the more concerned he is with market fluctuations.
False. The longer the time horizon, the less concerned he is with market fluctuations.
208
Which type of risk is non-diversifiable?
Market risk
209
A security has appreciated from $10 to $15 over three months and has paid no dividend. What is the annualized return?
200%, which is calculated by multiplying the holding period return (50%) by four quarters
210
True or False: The longer a bond's duration, the less sensitive the bond's price is to changes in interest rates.
False. The longer the duration, the greater a bond's price sensitivity to changes in interest rates.
211
Which is a better hedge against inflation, investing in stocks or bonds?
Historically, stocks have outperformed inflation. Since bonds are fixed income instruments, they are hurt by inflation.
212
An investor buys stock that returns 2% for the year rather than a T-Bond yielding 6%. The ____________ cost is 4%.
An investor buys stock that returns 2% for the year rather than a T-Bond yielding 6%. The opportunity cost is 4%.
213
12 years ago, Tina invested $25,000 which has now grown to $100,000. What is the annual growth rate of her investment?
In 12 years, the money doubled twice (every six years). Using the Rule of 72, 72 divided six years = 12%.
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Do investors who favor passive strategies believe markets are efficient or inefficient?
Efficient. Rather than trying to time the market, they may rebalance their portfolios periodically (e.g., quarterly).
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Is indexing considered an active or passive portfolio management strategy?
Passive, since the composition of the benchmark index generally remains the same.
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What are large-cap stocks?
Stocks of mature companies with a long history of dividend payments
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What are mid-cap stocks?
Stocks of companies that are more volatile and growth-oriented than the large-cap stocks
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What are small-cap stocks?
Typically stocks of new companies with more volatility, but also with more growth potential
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What are micro-cap stocks?
Stocks of emerging companies that would generally be suitable only for speculative investors
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Over the last three months, a stock rose from $50 to $51 and paid a $.25 dividend. What is its annualized return?
The three-month return is 2.5% ($1.25 ÷ $50). A quarterly return is annualized by multiplying by four (2.5% x 4 = 10%).
221
A bond is yielding 8% and the rate of inflation is 3%. What is the bond's real interest rate?
8% - 3% = 5%. Real interest rate measures the true yield once inflation is factored out.
222
True or False: In a weak-form efficient market, technical analysis will be useful.
False. In a weak-form efficient market, only fundamental analysis will be useful.
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True or False: Strong-form market efficiency advocates believe they can beat the market.
False. Strong-form market efficiency states that no person can beat the market.
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Which form of market efficiency declares that only insiders can regularly beat the market?
Semi-strong
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True or False: A bottom up approach to investing uses the economy as a main factor in determining which stocks to buy.
False. Bottom up investing uses company specific items (e.g., earnings and dividend payments) to pick stocks.
226
An investor who follows the __________ style of investing bets against market trends.
An investor who follows the contrarian style of investing bets against market trends.
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True or False: Investors who are planning to hold bonds until maturity have no risk.
False. Opportunity risk (the risk of missing out on a superior investment) is a risk these types of investors face.
228
Define reinvestment risk.
The risk that an investor will not be able to reinvest her principal at the same interest rate.
229
What happens to the U.S. trade deficit if the dollar is weakening?
The trade deficit will shrink as U.S. goods become cheaper for foreign consumers.
230
What is required to make the dollar weighted return and the time weighted return equal?
Remove or subtract any deposits into and/or withdrawals out of the portfolio
231
True or False: A buy-and-hold strategy is considered an active/tactical investment strategy.
False. A buy-and-hold strategy is considered a passive/strategic investment strategy.
232
A 20-year U.S. Treasury zero-coupon bond is most susceptible to _________ risk.
A 20-year U.S. Treasury zero-coupon bond is most susceptible to inflation risk.
233
A capital needs analysis is done to determine a client's _________ needs in order to fund future financial goals.
A capital needs analysis is done to determine a client's insurance needs in order to fund future financial goals.
234
What is the risk that environmental regulations could impact the prices of securities?
Regulatory risk
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What is the formula for working capital?
Total Current Assets - Total Current Liabilities
