Series 66 Chapter 6: Investment Analysis

Question 1

Three Contrarian Investing strategies

Answer 1

Odd Lot Theory Short Interest Put/ Call Ratio

Question 2

Current Yield Formula

Answer 2

Annual Interest or dividends / Market (purchase) Price

Question 3

If an investor reduces risk by selling an option they are?

Answer 3

Producing income or creating a partial hedge

Question 4

Short Interest Theory

Answer 4

Short sellers must eventually buy back, therefore when short interest increases, Bullish

Question 5

Risk adjusted return compared to standard deviation. Compares the actual rate of return to the risk free return on a T-Bill and to the standard deviation.

Answer 5

Sharpe Ratio

Question 6

Sharpe Ratio Formula

Answer 6

SR = (actual rate of return - risk free rate of return) / SD

Question 7

A method of evaluation an investment by estimating future cash flows while taking into consideration the time value of money.

Answer 7

Discounted Cash Flow

Question 8

an imaginary portfolio of securities that are not actually held by the investor

Answer 8

Benchmark Portfolio

Question 9

Used to create an optimal portfolio or efficient frontier (highest rate of return for the amount of risk in the portfolio)

Answer 9

Modern Portfolio Theory

Question 10

Measure the rate of return on an investment company portfolio compared with a benchmark portfolio or index.

Answer 10

Active Rate of Return

Question 11

Measure volatility of a stock in relation to the S&P 500

Answer 11

Beta

Question 12

When must a margin account risk disclosure account be signed?

Answer 12

At or prior to opening account.

Question 13

Who creates Forward Contracts? How are they traded?

Answer 13

Investors or traders. Privately, OTC. Not liquid or marginable

Question 14

Put/ Call Ratio

Answer 14

More calls than puts - Bearish More calls than puts - Bullish

Question 15

CAPM formula

Answer 15

CAPM = T-Bill Return + [(S&P 500 expected return - T-Bill) x Beta]

Question 16

Percentage return that would be realized if an investment is held for a full calendar year.

Answer 16

Annualized Return

Question 17

Total Return Formula

Answer 17

Net gains + income + appreciation - depreciation / amount invested

Question 18

Formula for Annualized Return?

Answer 18

ROI x (365/days held)

Question 19

Evaluates percentage earned on investments in one year period. Considers the gains made on the investment, the appreciation, and the amount of income received.

Answer 19

Total Return

Question 20

Estimated rate of return based on the probability of a bullish, bearish, or normal market?

Answer 20

Expected Return

Question 21

A trial and error process to calculate IRR without a calculator.

Answer 21

Iteration

Question 22

the percentage of earned investments over an entire holding period. In this case, the investment is held over 1 year.

Answer 22

Holding Period Return

Question 23

Used to compare actual rate of return to required rate of return.

Answer 23

Net Present Value

Question 24

Passive Rate of Return?

Answer 24

Index rate of return

Question 25

Contracts that allow institutional investors to exchange risk on loans or bonds?

Answer 25

SWAP

Question 26

What is maintenance call is cash account?

Answer 26

25%

Question 27

Measures price volatility of bonds.

Answer 27

Bond Duration

Question 28

What is the formula for Future value?

Answer 28

FV= PV x (1 + R) (raised to the t)

Question 29

The rate of return necessary to obtain the future value required with the money presently invested.

Answer 29

Internal Rate of Return

Question 30

Risk Adjusted Return formula?

Answer 30

Stock appreciation - T-Bill with shortest maturity

Question 31

Formula for Alpha

Answer 31

Alpha = ROI / Beta

Question 32

Look at Page 97 and 98

Answer 32

Look at page 97 and 98

Question 33

If you have to find the investment with the highest NPV look for what?

Answer 33

The investment that pays the most in the shortest amount of time.

Question 34

Holding Period Return Formula

Answer 34

Gain-Loss / amount invested

Question 35

If an investor reduces risk by buying an option they are?

Answer 35

Hedging or protecting

Question 36

A transaction between two entities to buy or sell a specific commodity at a specific time in the future. Not liquid.

Answer 36

Forward Contracts

Question 37

the rate of return on an investment compared to the market risk of the security and is one way to measure risk adjusted return.

Answer 37

Alpha

Question 38

Based on the rate of return on T-Bills

Answer 38

Risk Free Rate of Return

Question 39

Odd Lot Theory

Answer 39

As odd lot volumes increase - Bearish As odd lot volumes decrease - Bullish

Question 40

Real Rate of Return formula

Answer 40

Actual return on investment - inflation

Question 41

What is maintenance call is margin account?

Answer 41

30%

Question 42

Rate of income return based on the market price of the security.

Answer 42

Current Yield

Question 43

Percentage earned compared to inflation

Answer 43

Real Rate of Return

Question 44

Risk of investing in stocks vs US Gov.bonds

Answer 44

Risk Adjusted Return