Unit 15

Question 1

A capital needs assessment analyzes a client’s future goals and needs. What are some the main things that will be considered?

Answer 1

-retirement planning
-college funding
-risk of death before meeting a saving goal
-life expectancy
-rate of inflation
-earnings

Question 2

The Contrarian style of investing is one that bets against market trends and does not adhere to the prevailing consensus opinion. This particular investment style usually focuses on companies that are out of the mainstream and that have _____________.

Answer 2

low P/E ratios

Question 3

Taxable equivalent yield for a tax-free bond calculation:

Answer 3

Tax-free yield ÷ (100% - Tax rate %)

Question 4

Net Present Value Calculation

Answer 4

Present Value - Current Market Price = NPV
If the NPV is greater than zero, the investment will increase the investor’s wealth

Question 5

Weak form efficient market

Answer 5

All past prices and data are fully reflected in current prices

Question 6

Semi-strong form efficient market

Answer 6

All public data, including historical pricing, is reflected in current prices

Question 7

Strong form efficient market

Answer 7

Both public and non-public information is reflected in current prices

Question 8

________ is a measurement of a security’s volatility as compared to an index such as the S&P 500 Stock Index.

Answer 8

Beta

A high beta (greater than one) indicates that a company is more volatile than the benchmark index. Utilities and other defensive industry stocks tend to have low betas.

Question 9

When is the internal rate of return (IRR) used?

Answer 9

When determining the rate that makes the net present value of an investment zero

Question 10

The dividend discount model attempts to estimate the true value of stock prices by calculating the _________ value of _________ dividend payments.

Answer 10

present; future

Question 11

The inflation-adjusted rate of return, also referred to as the real interest rate, is calculated as follows:

Answer 11

yield minus inflation rate

Question 12

__________________ states that financial markets are efficient and that the prices of securities reflect all known information; therefore, it is impossible to outperform or time the market.

Answer 12

Efficient Market Hypothesis (Theory)

Question 13

What is alpha?

Answer 13

a measure of non-systematic risk

Question 14

______ risk represents the day-to-day potential for an investor to experience losses due to market fluctuations in securities’ prices.

Answer 14

Market risk

Question 15

_____ risk refers to the negative effects that rising interest rates may have on the value of existing bonds

Answer 15

Interest-rate risk

Question 16

_________ bonds, since they are generally long-term and have no interest payment, are extremely vulnerable to interest-rate risk.

Answer 16

Zero-coupon

Question 17

_______ risk exists when an investment provides investors with a fixed payment

Answer 17

Inflation risk (also known as purchasing-power risk)

Question 18

_____ risk is the risk that a bond investor will not be able to reinvest the principal amount at the same interest rate after the bond is called or matures.

Answer 18

Reinvestment risk

Question 19

_____ risk is the risk that a significant event will cause a substantial decline in the market value of all securities (i.e. Covid, 9/11)

Answer 19

Event risk

Question 20

______ risk is the risk that certain circumstances or factors may negatively impact the operation or profitability of a given company.

Answer 20

Business risk

Question 21

______ risk is the risk that regulatory changes may have a negative impact on an investment’s value.

Answer 21

Regulatory risk

Question 22

____ risk is the risk that new laws may have a negative impact on an investment’s value.

Answer 22

Legislative risk

Question 23

_____ risk is the risk that an investment’s return may suffer as a result of political changes or instability in a country. This risk is typically associated with emerging markets countries and may include acts of war, terrorism, and military coups.

Answer 23

Political risk

Question 24

_____ risk is the risk that investors may be unable to dispose of a securities position quickly and at a price that’s closely related to recent transactions. T

Answer 24

Liquidity risk

Question 25

_____ risk is defined as the loss of benefits that an investor could have received by taking an alternative action.

Answer 25

Opportunity risk (opportunity cost)

Question 26

_____ risk is the possibility that the value of foreign investments will decrease in the future due to changes in exchange rates

Answer 26

Currency risk (exchange-rate risk)

Question 27

_____ risk is the risk that an investor could lose all or a portion of her investment. This is the risk that’s assumed when an investor buys any security other than a risk-free security.

Answer 27

Capital risk

Question 28

_____ risk is the risk that a bond issuer will not make payments as promised.

Answer 28

Credit risk

Question 29

_____ risk is the risk that a bond issuer may decide to redeem its bonds and repay the bondholders prior to maturity.

Answer 29

Call risk

Question 30

____ risk is the risk that an investment’s structure is complicated enough that predicting future gains and losses will be difficult or impossible.

Answer 30

Complexity risk

Question 31

An investor might purchase a stock with a high P/E ratio because _________________

Answer 31

they expect higher future earnings

Question 32

Under the Capital Asset Pricing Model, risk is defined as:

Answer 32

Deviation in returns

Question 33

The _________, which is also referred to as the time-weighted return, is the best way to measure the performance of a mutual fund.

Answer 33

geometric mean

Question 34

A stock’s beta is a measure of its ______ risk.

Answer 34

market

Question 35

Modern Portfolio Theory is based on the following two assumptions:

Answer 35

1) Investors will try to maximize their returns, and 2) Investors generally seek to assume as little risk as possible.

Question 36

Is market risk diversifiable?

Answer 36

No

(Market risk is also called Non-diversifiable risk)

Question 37

_____________ measure the performance of an investor’s actual investment over a defined period.

Answer 37

Dollar-weighted returns

Question 38

_____________ assume that a fixed-dollar amount was invested and then measure how that amount would have performed over a defined period.

Answer 38

Time-weighted returns