CFAI 5 - Corporate Finance and Portfolio Managment Flashcards
1
Q
Tipos de projetos: Replacement projects Expansion projects New products and services Regulatory, safety, and environmental projects Other.
A
- Replacement projects. These are among the easier capital budgeting decisions. If a piece of equipment breaks down or wears out, whether to replace it may not require careful analysis. If the expenditure is modest and if not investing has significant implications for production, operations, or sales, it would be a waste of resources to overanalyze the decision. Just make the replacement. Other replacement decisions involve replacing existing equipment with newer, more efficient equipment, or perhaps choosing one type of equipment over another. These replacement decisions are often amenable to very detailed analysis, and you might have a lot of confidence in the final decision.
- Expansion projects. Instead of merely maintaining a company’s existing business activities, expansion projects increase the size of the business. These expansion decisions may involve more uncertainties than replacement decisions, and these decisions will be more carefully considered.
- New products and services. These investments expose the company to even more uncertainties than expansion projects. These decisions are more complex and will involve more people in the decision-making process.
- Regulatory, safety, and environmental projects. These projects are frequently required by a governmental agency, an insurance company, or some other external party. They may generate no revenue and might not be undertaken by a company maximizing its own private interests. Often, the company will accept the required investment and continue to operate. Occasionally, however, the cost of the regulatory/safety/environmental project is sufficiently high that the company would do better to cease operating altogether or to shut down any part of the business that is related to the project.
- Other. The projects above are all susceptible to capital budgeting analysis, and they can be accepted or rejected using the net present value (NPV) or some other criterion. Some projects escape such analysis. These are either pet projects of someone in the company (such as the CEO buying a new aircraft) or so risky that they are difficult to analyze by the usual methods (such as some research and development decisions).
2
Q
NPV
IRR
payback period
discounted payback period
Average Accounting Rate of Return
Profitability Index
A
NPV é os cash flow do investimento atualizados - o custo no presente
IRR é a taxa de desconto à qual se atualiza os cash flow do projeto que nos dá um valor do projeto igual ao seu custo. N
The payback period has many drawbacks—it is a measure of payback and not a measure of profitability. By itself, the payback period would be a dangerous criterion for evaluating capital projects. Its simplicity, however, is an advantage. The payback period is very easy to calculate and to explain. The payback period may also be used as an indicator of project liquidity. A project with a two-year payback may be more liquid than another project with a longer payback
igual ao anterior contudo os cf são atualizados
Averagenetincome / Averagebookvalue
The advantages of the AAR are that it is easy to understand and easy to calculate. The AAR has some important disadvantages, however. Unlike the other capital budgeting criteria discussed here, the AAR is based on accounting numbers and not based on cash flows. This is an important conceptual and practical limitation. The AAR also does not account for the time value of money, and there is no conceptually sound cutoff for the AAR that distinguishes between profitable and unprofitable investments. The AAR is frequently calculated in different ways, so the analyst should verify the formula behind any AAR numbers that are supplied by someone else. Analysts should know the AAR and its potential limitations in practice, but they should rely on more economically sound methods like the NPV and IRR.
The profitability index (PI) is the present value of a project’s future cash flows divided by the initial investment.
1+NPV / Initialinvestment
3
Q
The Gerhardt Corporation investment (discussed earlier) had an outlay of €50 million, a present value of future cash flows of €63.136 million, and an NPV of €13.136 million. The profitability index is
A
1.26
.
4
Q
NPV profile
A
É importante para comparar diferentes projetos de investimento. Reflete o NPV em função da discount rate usada.
5
Q
Multiple IRR problem quando é que ocorre ou pode ocorrer?
A
For conventional projects that have outlays followed by inflows—negative cash flows followed by positive cash flows—the multiple IRR problem cannot occur. However, for nonconventional projects, as in the example above, the multiple IRR problem can occur
6
Q
Freitag Corporation is investing €600 million in distribution facilities. The present value of the future after-tax cash flows is estimated to be €850 million. Freitag has 200 million outstanding shares with a current market price of €32.00 per share. This investment is new information, and it is independent of other expectations about the company. What should be the effect of the project on the value of the company and the stock price?
A
The NPV of the project is €850 million − €600 million = €250 million. The total market value of the company prior to the investment is €32.00 × 200 million shares = €6,400 million. The value of the company should increase by €250 million to €6,650 million. The price per share should increase by the NPV per share, or €250 million / 200 million shares = €1.25 per share. The share price should increase from €32.00 to €33.25.
7
Q
An investment of $100 generates after-tax cash flows of $40 in Year 1, $80 in Year 2, and $120 in Year 3. The required rate of return is 20 percent. The net present value is closest to: A.$42.22. B.$58.33. C.$68.52. .
A
B is correct.
8
Q
An investment of $150,000 is expected to generate an after-tax cash flow of $100,000 in one year and another $120,000 in two years. The cost of capital is 10 percent. What is the internal rate of return?
A.28.39 percent.
B.28.59 percent.
C.28.79 percent.
A
C is correct. The IRR can be found using a financial calculator or with trial and error. Using trial and error, the total PV is equal to zero if the discount rate is 28.79 percent.
9
Q
•Kim Corporation is considering an investment of 750 million won with expected after-tax cash inflows of 175 million won per year for seven years. The required rate of return is 10 percent. Expressed in years, the project’s payback period and discounted payback period, respectively, are closest to:
A.4.3 years and 5.4 years.
B.4.3 years and 5.9 years.
C.4.8 years and 6.3 years.
A
B is correct.
10
Q
•An investment of $20,000 will create a perpetual after-tax cash flow of $2,000. The required rate of return is 8 percent. What is the investment’s profitability index?
A.1.08.
B.1.16.
C.1.25.
A
C is correct.
11
Q
Erin Chou is reviewing a profitable investment project that has a conventional cash flow pattern. If the cash flows for the project, initial outlay, and future after-tax cash flows all double, Chou would predict that the IRR would:
A.increase and the NPV would increase.
B.stay the same and the NPV would increase.
C.stay the same and the NPV would stay the same.
A
B is correct. The IRR would stay the same because both the initial outlay and the after-tax cash flows double, so that the return on each dollar invested remains the same. All of the cash flows and their present values double. The difference between total present value of the future cash flows and the initial outlay (the NPV) also doubles.
12
Q
An investment has an outlay of 100 and after-tax cash flows of 40 annually for four years. A project enhancement increases the outlay by 15 and the annual after-tax cash flows by 5. As a result, the vertical intercept of the NPV profile of the enhanced project shifts:
A.up and the horizontal intercept shifts left.
B.up and the horizontal intercept shifts right.
C.down and the horizontal intercept shifts left.
A
A is correct. The vertical intercept changes from 60 to 65 (NPV when cost of capital is 0%), and the horizontal intercept (IRR, when NPV equals zero) changes from 21.86 percent to 20.68 percent.
13
Q
Wilson Flannery is concerned that this project has multiple IRRs.
Year 0 1 2 3 Cash flows −50 100 0 −50
How many discount rates produce a zero NPV for this project?
A.One, a discount rate of 0 percent.
B.Two, discount rates of 0 percent and 32 percent.
C.Two, discount rates of 0 percent and 62 percent.
A
C is correct. Discount rates of 0 percent and approximately 61.8 percent both give a zero NPV.
14
Q
With regard to the net present value (NPV) profiles of two projects, the crossover rate is best described as the discount rate at which:
A.two projects have the same NPV.
B.two projects have the same internal rate of return.
C.a project’s NPV changes from positive to negative.
A
A is correct. The crossover rate is the discount rate at which the NPV profiles for two projects cross; it is the only point where the NPVs of the projects are the same.
15
Q
With regard to capital budgeting, an appropriate estimate of the incremental cash flows from a project is least likely to include:
A.externalities.
B.interest costs.
C.opportunity costs.
A
B is correct. Costs to finance the project are taken into account when the cash flows are discounted at the appropriate cost of capital; including interest costs in the cash flows would result in double-counting the cost of debt.
16
Q
O custo de um projeto para uma empresa deve ser considerado o WACC? não há ajustamentos?
A
For an average-risk project, the opportunity cost of capital is the company’s WACC. If the systematic risk of the project is above or below average relative to the company’s current portfolio of projects, an upward or downward adjustment, respectively, is made to the company’s WACC
If we choose to use the company’s WACC in the calculation of the NPV of a project, we are assuming that the project:
◾has the same risk as the average-risk project of the company, and
◾will have a constant target capital structure throughout its useful life.
17
Q
Para quantificar o custo da dívida temos duas alternativas:
A
Market value of debt, por aí tiramos a ytm no mercado.
Caso não seja possível … debt rating aproach
Based on a company’s debt rating, we estimate the before-tax cost of debt by using the yield on comparably rated bonds for maturities that closely match that of the company’s existing debt.
18
Q
Para além do CAPM podemos calcular o Ke recorrendo a um modelo de fatores múltiplos que consiste …
A
Ke= rf+ B1(Factor risk premium)+B2*(Factor risk premium 2)….
Neste caso o Beta é a sensibilidade da ação ao fator que pode ser um dado macro como a inflação ou o PIB. O factor risk premium é o risk premium subjacente no mercado para esse fator.
19
Q
Para calcular o ERP podemos ir por vários caminhos, três dos quais são:
A
There are several ways to estimate the equity risk premium, though there is no general agreement as to the best approach. The three we discuss are the historical equity risk premium approach, the dividend discount model approach, and the survey approach.
DDM:
P0 = D1/(Ke-g) (constant growth)
g- taxa anual de crescimento dos dividendos
20
Q
Como é que calculamos a sustainable growth rate dos dividendos?
A
Para calcular devemos primeiro obter o ROE da empresa, depois devemos saber qual é taxa de retenção dos resultados. E temos que g= ROE *retenção
Sendo que g= ROE*(1 - dividend payout ratio)
dividend payout ratio = Dividends/EPS
21
Q
Quanto é que é o Beta da dívida?
Se precisarmos de estimar um Beta não alavancado através de um concorrente para posteriormente chegarmos ao Beta alavancado como é que procedemos? PURE PLAY METHOD
A
é 0
Primeiro Bun= Bdebt* D(1-T)/(E+D(1-T) + Beq * E/(D(1-T)+E)
Visto que Bdebt é 0…
Bun= Beq* 1/(1+(1-T)*(D/E))
Tiramos o Bun e posteriormente usamos o T e o (D/E) para tirar o Beq da empresa que pretendemos.
22
Q
Suppose that the beta of a publicly traded company’s stock is 1.3 and that the market value of equity and debt are, respectively, C$540 million and C$720 million. If the marginal tax rate of this company is 40 percent, what is the asset beta of this company?
A
0,7222222222
BAAAAMOOOOOOSSSS
23
Q
Raymond Cordier is the business development manager of Aerotechnique S.A., a private Belgian subcontractor of aerospace parts. Although Aerotechnique is not listed on the Belgian stock exchange, Cordier needs to evaluate the levered beta for the company. He has access to the following information:
◾The average levered and average unlevered betas for the group of comparable companies operating in different European countries are 1.6 and 1.0, respectively.
◾Aerotechnique’s debt-to-equity ratio, based on market values, is 1.4.
◾Aerotechnique’s corporate tax rate is 34 percent
A
1,924
24
Q
Miles Avenaugh, an analyst with the Global Company, is estimating a country risk premium to include in his estimate of the cost of equity capital for Global’s investment in Argentina. Avenaugh has researched yields in Argentina and observed that the Argentinean government’s 10-year bond is 9.5 percent. A similar maturity US Treasury bond has a yield of 4.5 percent. The annualized standard deviation of the Argentina Merval stock index, a market value index of stocks listed on the Buenos Aires Stock Exchange, during the most recent year is 40 percent. The annualized standard deviation of the Argentina dollar-denominated 10-year government bond over the recent period was 28 percent.
What is the estimated country risk premium for Argentina based on Avenaugh’s research?
A
Countryriskpremium=0.05(0.4/0.28)=0.05(1.4286)=0.0714or7.14percent
25
Flotation cost o que são? na ótica de novo capital
São as comissões cobradas pelos bancos de investimento para que as empresas possam angariar novo capital.
So, if it is preferred to deduct the flotation costs as part of the net present value calculation, why do we see the adjustment in the cost of capital so often in textbooks? The first reason is that it is often difficult to identify particular financing associated with a project. Using the adjustment for the flotation costs in the cost of capital may be useful if specific project financing cannot be identified. Second, by adjusting the cost of capital for the flotation costs, it is easier to demonstrate how costs of financing a company change as a company exhausts internally generated equity (i.e., retained earnings) and switches to externally generated equity (i.e., a new stock issue).
Geralmente podem ser deduzidas na componente de um outlay que é financiada por equity.
Por exemplo se num projeto outlay de 10k é equity e os flotation cost são 5% logo temos que adicionar 500 ao outlay de equity que passa a ser 10.5k.
26
2 tipos principais de falência
reorganization - é feito um plano de pagamentos e uma reestruturação.
Liquidation - a empresa vende os seus ativos e para de existir.
Geralmente empresas com DFL elevado, empresas com muita alavancagem financeira são mais propensas a reorganizarem porque alteram as suas estruturas de capitais para se tornarem viáveis.
27
Leverage,
Business Risk
Financial risk
Leverage is the use of fixed costs in a company’s cost structure. Business risk is the risk associated with operating earnings and reflects both sales risk (uncertainty with respect to the price and quantity of sales) and operating risk (the risk related to the use of fixed costs in operations). Financial risk is the risk associated with how a company finances its operations (i.e., the split between equity and debt financing of the business).
28
breakeven point
| operational breakeven point
Bep = (F+C)/(P-V)
Bep O = F/(P-V)
F - fixed Cost
C - Interest Cost
P - Valor de venda
V - Variable Cost
29
DOL
DFL
DTL
Degree of operational leverage:
Q*(P-V)/(Q*(P-V)-F)
Degree of financial leverage:
(Q*(P-V)-F)/(Q*(P-V)-F-C)
Degree of Total leverage:
DOL*DFL
30
•Using the dividend discount model, what is the cost of equity capital for Zeller Mining if the company will pay a dividend of C$2.30 next year, has a payout ratio of 30 percent, a return on equity (ROE) of 15 percent, and a stock price of C$45?
A.9.61 percent.
B.10.50 percent.
C.15.61 percent.
C is correct. First calculate the growth rate using the sustainable growth calculation, and then calculate the cost of equity using the rearranged dividend discount model:
31
•Dot.Com has determined that it could issue $1,000 face value bonds with an 8 percent coupon paid semi-annually and a five-year maturity at $900 per bond. If Dot.Com’s marginal tax rate is 38 percent, its after-tax cost of debt is closest to:
A.6.2 percent.
B.6.4 percent.
C.6.6 percent.
C is correct.
32
A financial analyst at Buckco Ltd. wants to compute the company's weighted average cost of capital (WACC) using the dividend discount model. The analyst has gathered the following data:
Before-tax cost of new debt 8 percent
Tax rate 40 percent
Target debt-to-equity ratio 0.8033
Stock price $30
Next year's dividend $1.50
Estimated growth rate 7 percent
Buckco’s WACC is closest to:
A.8 percent.
B.9 percent.
C.12 percent.
B is correct.
33
Wang Securities had a long-term stable debt-to-equity ratio of 0.65. Recent bank borrowing for expansion into South America raised the ratio to 0.75. The increased leverage has what effect on the asset beta and equity beta of the company?
A.The asset beta and the equity beta will both rise.
B.The asset beta will remain the same and the equity beta will rise.
C.The asset beta will remain the same and the equity beta will decline.
B is correct. Asset risk does not change with a higher debt-to-equity ratio. Equity risk rises with higher debt
34
Trumpit Resorts Company currently has 1.2 million common shares of stock outstanding and the stock has a beta of 2.2. It also has $10 million face value of bonds that have five years remaining to maturity and 8 percent coupon with semi-annual payments, and are priced to yield 13.65 percent. If Trumpit issues up to $2.5 million of new bonds, the bonds will be priced at par and have a yield of 13.65 percent; if it issues bonds beyond $2.5 million, the expected yield on the entire issuance will be 16 percent. Trumpit has learned that it can issue new common stock at $10 a share. The current risk-free rate of interest is 3 percent and the expected market return is 10 percent. Trumpit’s marginal tax rate is 30 percent. If Trumpit raises $7.5 million of new capital while maintaining the same debt-to-equity ratio, its weighted average cost of capital is closest to:
A.14.5 percent.
B.15.5 percent.
C.16.5 percent.
B is correct.
35
RESOLVER COM TEMPO 5 perguntas prai.....
Jurgen Knudsen has been hired to provide industry expertise to Henrik Sandell, CFA, an analyst for a pension plan managing a global large-cap fund internally. Sandell is concerned about one of the fund's larger holdings, auto parts manufacturer Kruspa AB. Kruspa currently operates in 80 countries, with the previous year's global revenues at €5.6 billion. Recently, Kruspa’s CFO announced plans for expansion into China. Sandell worries that this expansion will change the company's risk profile and wonders if he should recommend a sale of the position.
Sandell provides Knudsen with the basic information. Kruspa’s global annual free cash flow to the firm is €500 million and earnings are €400 million. Sandell estimates that cash flow will level off at a 2 percent rate of growth. Sandell also estimates that Kruspa’s after-tax free cash flow to the firm on the China project for next three years is, respectively, €48 million, €52 million, and €54.4 million. Kruspa recently announced a dividend of €4.00 per share of stock. For the initial analysis, Sandell requests that Knudsen ignore possible currency fluctuations. He expects the Chinese plant to sell only to customers within China for the first three years. Knudsen is asked to evaluate Kruspa’s planned financing of the required €100 million with a €80 public offering of 10-year debt in Sweden and the remainder with an equity offering.
Additional information:
Equity risk premium, Sweden 4.82
percentRisk-free rate of interest, Sweden 4.25 percentIndustry debt-to-equity ratio 0.3
Market value of Kruspa’s deb t€900million Market value of Kruspa’s equity €2.4 billion
Kruspa’s equity beta 1.3
Kruspa’s before-tax cost of debt 9.25 percent
China credit A2 country risk premium 1.88 percentCorporate tax rate37.5 percentInterest payments each yearLevel
•Using the capital asset pricing model, Kruspa’s cost of equity capital for its typical project is closest to:
A.7.62 percent.
B.10.52 percent.
C.12.40 percent.
•Sandell is interested in the weighted average cost of capital of Kruspa AB prior to its investing in the China project. This weighted average cost of capital (WACC) is closest to:
A.7.65 percent.
B.9.23 percent.
C.10.17 percent.
•In his estimation of the project's cost of capital, Sandell would like to use the asset beta of Kruspa as a base in his calculations. The estimated asset beta of Kruspa prior to the China project is closest to:
A.1.053.
B.1.110.
C.1.327.
•Sandell is performing a sensitivity analysis of the effect of the new project on the company's cost of capital. If the China project has the same asset risk as Kruspa, the estimated project beta for the China project, if it is financed 80 percent with debt, is closest to:
A.1.300.
B.2.635.
C.3.686.
•As part of the sensitivity analysis of the effect of the new project on the company's cost of capital, Sandell is estimating the cost of equity of the China project considering that the China project requires a country equity premium to capture the risk of the project. The cost of equity for the project in this case is closest to:
A.10.52 percent.
B.19.91 percent.
C.28.95 percent.
•In his report, Sandell would like to discuss the sensitivity of the project's net present value to the estimation of the cost of equity. The China project's net present value calculated using the equity beta without and with the country risk premium are, respectively:
A.€26 million and €24 million.
B.€28 million and €25 million.
C.€30 million and €27 million.
•B is correct.
WACC = [(€900/€3300) .0925 (1 − 0.375)] + [(€2400/€3300)(0.1052)] = 0.0923 or 9.23%
•A is correct.
Asset beta = Unlevered beta = 1.3/(1 + [(1−0.375)(€900/€2400)] = 1.053
•C is correct.
Project beta = 1.053 {1 + [(1 − 0.375)(€80/€20)]} = 1.053 {3.5} = 3.686
•C is correct.
re = 0.0425 + 3.686(0.0482 + 0.0188) = 0.2895 or 28.95%
•C is correct.
36
The marginal cost of capital for TagOn, based on an average asset beta of 2.27 for the industry and assuming that new stock can be issued at $8 per share, is closest to:
A.20.5 percent.
B.21.0 percent.
C.21.5 percent.
C is correct.
37
Two years ago, a company issued $20 million in long-term bonds at par value with a coupon rate of 9 percent. The company has decided to issue an additional $20 million in bonds and expects the new issue to be priced at par value with a coupon rate of 7 percent. The company has no other debt outstanding and has a tax rate of 40 percent. To compute the company's weighted average cost of capital, the appropriate after-tax cost of debt is closest to:
A.4.2%.
B.4.8%.
C.5.4%.
A is correct. The relevant cost is the marginal cost of debt. The before-tax marginal cost of debt can be estimated by the yield to maturity on a comparable outstanding. After adjusting for tax, the after-tax cost is 7(1 − 0.4) = 7(0.6) = 4.2%.
38
An analyst gathered the following information about a private company and its publicly traded competitor:
Comparable Companies
Tax Rate (%)
Debt/Equity
Tax Rate Debt/Eq Equity Beta
Private company 30.0 1.00 N.A.
Public company 35.0 0.90 1.75
Using the pure-play method, the estimated equity beta for the private company is closest to:
A.1.029.
B.1.104.
C.1.877.
•C is correct. Inferring the asset beta for the public company: unlevered beta = 1.75/[1 + (1 − 0.35) (0.90)] = 1.104. Relevering to reflect the target debt ratio of the private firm: levered beta = 1.104 × [1 + (1 − 0.30) (1.00)] = 1.877.
utilizar.
39
An analyst gathered the following information about the capital markets in the United States and in Paragon, a developing country.
Selected Market Information (%)
Yield on US 10-year Treasury bond 4.5
Yield on Paragon 10-year government bond 10.5
Annualized standard deviation of Paragon stock index 35.0
Annualized standard deviation of Paragon dollar-denominated government bond 25.0
Based on the analyst’s data, the estimated country equity premium for Paragon is closest to:
A.4.29%.
B.6.00%.
C.8.40%.
•C is correct. The country equity premium can be estimated as the sovereign yield spread times the volatility of the country’s stock market relative to its bond market. Paragon’s equity premium is (10.5% – 4.5%) × (35%/25%) = 6% × 1.4 = 8.40%.
40
•If two companies have identical unit sales volume and operating risk, they are most likely to also have identical:
A.sales risk.
B.business risk.
C.sensitivity of operating earnings to changes in the number of units produced and sold.
•C is correct. The companies’ degree of operating leverage should be the same, consistent with C. Sales risk refers to the uncertainty of the number of units produced and sold and the price at which units are sold. Business risk is the joint effect of sales risk and operating risk.
41
•Degree of operating leverage is best described as a measure of the sensitivity of:
A.net earnings to changes in sales.
B.fixed operating costs to changes in variable costs.
C.operating earnings to changes in the number of units produced and sold.
•C is correct. The degree of operating leverage is the elasticity of operating earnings with respect to the number of units produced and sold. As an elasticity, the degree of operating leverage measures the sensitivity of operating earnings to a change in the number of units produced and sold.
42
•The Fulcrum Company produces decorative swivel platforms for home televisions. If Fulcrum produces 40 million units, it estimates that it can sell them for $100 each. Variable production costs are $65 per unit and fixed production costs are $1.05 billion. Which of the following statements is most accurate? Holding all else constant, the Fulcrum Company would:
A.generate positive operating income if unit sales were 25 million.
B.have less operating leverage if fixed production costs were 10 percent greater than $1.05 billion.
C.generate 20 percent more operating income if unit sales were 5 percent greater than 40 million.
•C is correct. Because DOL is 4, if unit sales increase by 5 percent, Fulcrum’s operating earnings are expected to increase by 4 × 5% = 20%. The calculation for DOL is:
43
Myundia Motors now sells 1 million units at ¥3,529 per unit. Fixed operating costs are ¥1,290 million and variable operating costs are ¥1,500 per unit. If the company pays ¥410 million in interest, the levels of sales at the operating breakeven and breakeven points are, respectively:
A.¥1,500,000,000 and ¥2,257,612,900.
B.¥2,243,671,760 and ¥2,956,776,737.
C.¥2,975,148,800 and ¥3,529,000,000.
B is correct.
.
44
The most appropriate response to Cho’s question regarding a description of the degree of total leverage is that degree of total leverage is:
A.the percentage change in net income divided by the percentage change in units sold.
B.the percentage change in operating income divided by the percentage change in units sold.
C.the percentage change in net income divided by the percentage change in operating income.
A is correct. Degree of total leverage is defined as the percentage change in net income divided by the percentage change in units sold.
45
Dividend Reivestment Plans o que são? quais são as formas de DRP?
Basicamente o accionista comunica à empresa que pretende um DRP e os dividendos desse accionista são reinvestidos de uma de 3 maneiras:
1- compra de ações em mercado secundário pela empresa.
2- Emissão de novas ações com o intuito de satisfazer o DRP.
3- Misto de ambos
O DRP permite que a empresa se financie sem custos de intermediação e também faz com que os pequenos accionistas se mantenham leais à empresa. Geralmente pelo DRP as ações são compradas a desconto. Uma das desvantagens é que os accionistas são taxados mesmo não tendo recebido o dinheiro.
46
extra dividend
stock dividend
é um dividendo que é pago fora do período regular. Geralmente empresas cíclicas usam este dividendo extra quando os resultados são muito bons.
stock dividend é um dividendo pago numa nova emissão de ações
47
EX- dividend date
Holder of record date
Ex dividend date é a data limite para comprar ações e receber dividendos. Nesta data a ação já abre com um preço descontado do dividendo.(A data é dada pela bolsa onde transacciona).
Holder of record date, geralmente é dois dias após o ex dividend date, é a data em que são apurados os donos das ações para posteriormente lhes destribuir dividendos. (A data é determinada pela empresa)
48
razões para as empresas fazerem share repurchase
◾to communicate that management perceives shares in the company to be undervalued in the marketplace or more generally to support share prices—this motivation was the most frequently mentioned by US chief financial officers in one survey;
◾flexibility in distributing cash to shareholders—share repurchases permit the company’s management flexibility as to amount and timing and are not perceived as establishing an expectation that a level of repurchase activity will continue in the future;
◾tax efficiency in distributing cash, in markets in which the tax rate on cash dividends exceeds the tax rate on capital gains; and
◾to absorb increases in shares outstanding resulting from the exercise of employee stock options.
Other motivations for a share repurchase are also possible. For example, share repurchase might merely reflect that the corporation has accumulated more cash than it has profitable uses for and does not want to pay an extra cash dividend.
49
4 formas diferentes da empresa recomprar ações.
* Buy in the open market. This method of share repurchase is the most common, with the company buying its own shares as conditions warrant in the open market. The open market share repurchase method gives the company maximum flexibility. Open market repurchases are the most flexible option for a company because there is no legal obligation to undertake or complete the repurchase program—a company may not follow through with an announced program for various reasons, such as unexpected cash needs for liquidity, acquisitions, or capital expenditures. In the United States, open market transactions do not require shareholder approval. Because shareholder approval is required in Europe, Vermaelen (2005) suggested that all companies have such authorization in place in case the opportunity to buy back undervalued shares occurs in the future.19 Authorizations to repurchase stock can last for years. In many shareholders’ minds, the announcement of a repurchase policy provides support for the share price. If the share repurchases are competently timed to minimize price impact and to exploit perceived undervaluation in the marketplace, this method is also relatively cost effective.
* Buy back a fixed number of shares at a fixed price. Sometimes a company will make a fixed price tender offer to repurchase a specific number of shares at a fixed price that is typically at a premium to the current market price. For example, in Australia, if a stock is selling at A$37 a share, a company might offer to buy back 5 million shares from current shareholders at A$40. If shareholders are willing to sell more than 5 million shares, the company will typically buy back a pro rata amount from each shareholder. By setting a fixed date, such as 30 days in the future, a fixed price tender offer can be accomplished quickly.
* Dutch Auction. A Dutch auction is also a tender offer to existing shareholders, but instead of specifying a fixed price for a specific number of shares, the company stipulates a range of acceptable prices. A Dutch auction uncovers the minimum price at which the company can buy back the desired number of shares with the company paying that price to all qualifying bids. For example, if the stock price is A$37 a share, the company would offer to buy back 5 million shares in a range of A$38 to A$40 a share. Each shareholder would then indicate the number of shares and the lowest price at which he or she would be willing to sell. The company would then begin to qualify bids beginning with those shareholders who submitted bids at A$38 and continue to qualify bids at higher prices until 5 million shares had been qualified. In our example, that price might be A$39.20 Shareholders who bid between A$38 and A$39, inclusive, would then be paid A$39 per share for their shares. Like Method 2, Dutch auctions can be accomplished in a short time period.21
* Repurchase by direct negotiation. In some markets, a company may negotiate with a major shareholder to buy back its shares, often at a premium to the market price. The company may do this to keep a large block of shares from overhanging the market (and thus acting to dampen the share price). A company may try to prevent an “activist” shareholder from gaining representation on the board of directors. In some of the more infamous cases, unsuccessful takeover attempts have ended with the company buying back the would-be suitor’s shares at a premium to the market price in what is referred to as a greenmail transaction, often to the detriment of remaining shareholders.22 Vermaelen (2005) reported, however, that 45 percent of private repurchases between 1984 and 2001 were actually made at discounts, indicating that many direct negotiation repurchases are generated by the liquidity needs of large investors who are in a weak negotiating position.
50
Share repurchase increase or decrease the EPS?
In summary, a share repurchase may increase, decrease, or have no effect on EPS. The effect depends on whether the repurchase is financed internally or externally. In the case of internal financing, a repurchase increases EPS only if the funds used for the repurchase would not earn their cost of capital if retained by the company.26 In the case of external financing, the effect on EPS is positive if the earnings yield exceeds the after-tax cost of financing the repurchase. In Example 7, when the after-tax borrowing rate equaled the earnings yield of 5 percent, EPS was unchanged as a result of the buyback. Any after-tax borrowing rate above the earnings yield would result in a decline in EPS, whereas an after-tax borrowing rate less than the earnings yield would result in an increase in EPS.
These relationships should be viewed with caution so far as any valuation implications are concerned. Notably, to infer that an increase in EPS indicates an increase in shareholders’ wealth would be incorrect. For example, the same idle cash could also be distributed as a cash dividend. Informally, if one views the total return on a stock as the sum of the dividend yield and a capital gains return, any capital gains as a result of the boost to EPS from the share repurchase may be at the expense of an offsetting loss in terms of dividend yield.
51
Florida Citrus (FC) common shares sell at $20, and there are 10 million shares outstanding. Management becomes aware that Kirk Parent recently purchased a major position in its outstanding shares with the intention of influencing the business operations of FC in ways the current board does not approve. An adviser to the board has suggested approaching Parent privately with an offer to buy back $50 million worth of shares from him at $25 per share, which is a $5 premium over the current market price. The board of FC declines to do so because of the effect of such a repurchase on FC’s other shareholders. Determine the effect of the proposed share repurchase on the wealth of shareholders other than Parent.
With $50 million, FC could repurchase $50 million/$25 = 2 million shares from Parent. The post-repurchase share price would be $18.75, which can be calculated as the market value of equity after the $50 million share repurchase divided by the shares outstanding after the share repurchase, or [(10 million)($20) − $50 million]/(10 million − 2 million) = $150 million/8 million = $18.75. Shareholders other than Parent would lose $20 − $18.75 = $1.25 for each share owned. Although this share repurchase would conserve total wealth (including Parent’s), it effectively transfers wealth to Parent from the other shareholders.
52
If the buyback market price is greater (less) than the book value, the book value will decline (increase).
A. True
B. False
A
53
The payment of a 10 percent stock dividend by a company will result in an increase in that company’s:
A.current ratio.
B.financial leverage.
C.contributed capital.
C is correct. A stock dividend is accounted for as a transfer of retained earnings to contributed capital.
54
All other things being equal, the payment of an internally financed cash dividend is most likely to result in:
A.a lower current ratio.
B.a higher current ratio.
C.the same current ratio.
A is correct. By reducing corporate cash, a cash dividend reduces the current ratio, whereas a stock dividend (whatever the size) has no effect on the current ratio.
55
The calendar dates in Column 1 are potentially significant dates in a typical dividend chronology. Column 2 lists descriptions of these potentially significant dates (in random order).
Column 1
Column 2
Friday, 10 June A. Holder-of-record dateThursday,
23 June B. Declaration dateFriday,
24 June C. Payment dateTuesday,
28 June D. Ex-dividend dateSunday,
10 July E. Last day shares trade with the right to receive the dividend
colocar por orden cronologica
b,e,d,a,c,
56
Mary Young intends to take a position in Megasoft Industries once Megasoft begins paying dividends. A dividend of C$4 is payable by Megasoft on 2 December. The ex-dividend date for the dividend is 10 November, and the holder-of-record date is 12 November. What is the last possible date for Young to purchase her shares if she wants to receive the dividend?
A.9 November.
B.10 November.
C.12 November.
A is correct. To receive the dividend, one must purchase before the ex-dividend date.
57
A company has 1 million shares outstanding and earnings are £2 million. The company decides to use £10 million in idle cash to repurchase shares in the open market. The company’s shares are trading at £50 per share. If the company uses the entire £10 million of idle cash to repurchase shares at the market price, the company’s earnings per share will be closest to:
A.£2.00.
B.£2.30.
C.£2.50.
C is correct. At the current market price, the company can repurchase 200,000 shares (£10 million/£50 = 200,000 shares). The company would have 800,000 shares outstanding after the repurchase (1 million shares − 200,000 shares = 800,000 shares).
58
Devon Ltd. common shares sell at $40 a share and their estimated price-to-earnings ratio (P/E) is 32. If Devon borrows funds to repurchase shares at its after-tax cost of debt of 5 percent, its EPS is most likely to:
A.increase.
B.decrease.
C.remain the same.
•B is correct. If the P/E is 32, the earnings-to-price ratio (earnings yield or E/P) is 1/32 = 3.125 percent. When the cost of capital is greater than the earnings yield, earnings dilution will result from the buyback.
59
A company can borrow funds at an after-tax cost of 4.5 percent. The company’s stock price is $40 per share, earnings per share is $2.00, and the company has 15 million shares outstanding. If the company borrows just enough to repurchase 2 million shares of stock at the prevailing market price, that company’s earnings per share is most likely to:
A.increase.
B.decrease.
C.remain the same.
•A is correct. The company’s earnings yield (E/P) is $2/$40 = 0.05. When the earnings yield is greater than the after-tax cost of borrowed funds, EPS will increase if shares are repurchased using borrowed funds.
60
Crozet Corporation plans to borrow just enough money to repurchase 100,000 shares. The following information relates to the share repurchase:
Shares outstanding before buyback3.1 millionEarnings per share before buyback$4.00Share price at time of buyback$50After-tax cost of borrowing6%
Crozet’s earnings per share after the buyback will be closest to:
A.$4.03.
B.$4.10.
C.$4.23.
•A is correct.
Total earnings before buyback: $4.00 × 3,100,000 shares = $12,400,000
Total amount of borrowing: $50 × 100,000 shares = $5,000,000
After-tax cost of borrowing the amount of funds needed: $5,000,000 × 0.06 = $300,000
Number of shares outstanding after buyback: 3,100,000 – 100,000 = 3,000,000
EPS after buyback: ($12,400,000 – $300,000)/3,000,000 shares = $4.03
The P/E before the buyback is $50/$4 = 12.5; thus, the E/P is 8 percent. The after-tax cost of debt is 6 percent; therefore, EPS will increase.
61
A company with 20 million shares outstanding decides to repurchase 2 million shares at the prevailing market price of €30 per share. At the time of the buyback, the company reports total assets of €850 million and total liabilities of €250 million. As a result of the buyback, that company’s book value per share will most likely:
A.increase.
B.decrease.
C.remain the same.
•C is correct. The company’s book value before the buyback is €850 million in assets − €250 million in liabilities = €600 million. Book value per share is €600 million/20 million = €30 per share. The buyback will reduce equity by 2 million shares at the prevailing market price of €30 per share. The book value of equity will be reduced to €600 million − €60 million = €540 million, and the number of shares will be reduced to 18 million; €540 million/18 million = €30 book value per share. If the prevailing market price is equal to the book value per share at the time of the buyback, book value per share is unchanged.
62
An analyst gathered the following information about a company:
Number of shares outstanding10 millionEarnings per share$2.00P/E20Book value per share$30
If the company repurchases 1 million shares at the prevailing market price, the resulting book value per share will be closest to:
A.$26.
B.$27.
C.$29.
•C is correct. The prevailing market price is $2.00(20) = $40.00 per share; thus, the buyback would reduce equity by $40 million. Book value of equity before the buyback is $300 million. Book value of equity after the buyback would be $300 million − $40 million = $260 million. The number of shares outstanding after the buyback would be 9 million. Thus, book value per share after the buyback would be $260 million/9 million = $28.89.
63
A company has positive free cash flow and is considering whether to use the entire amount of that free cash flow to pay a special cash dividend or to repurchase shares at the prevailing market price. Shareholders’ wealth under the two options will be equivalent unless the:
A.company’s book value per share is less than the prevailing market price.
B.company’s book value per share is greater than the prevailing market price.
C.tax consequences and/or information content for each alternative is different.
C is correct. For the two options to be equivalent with respect to shareholders’ wealth, the amount of cash distributed, the taxation, and the information content must be the same for both options.
64
Float factor, o que é?
Given the following data, compute a float factor for this company bank account.
Total deposits for the month: $3,360,900
Number of days in month: 30 days
Average daily float: $154,040
gives the average number of days it took deposited checks to clear.
Averagedailydeposit=($3,360,900)/30=$112,030
Floatfactor=Averagedailyfloat/Averagedailydeposit=$154,040/$112,030=1.375
65
Quais são os principais motivos para uma empresa ter inventários altos? são 3...
The major motives include the transactions motive, the precautionary motives, and the speculative motive.
The transactions motive reflects the need for inventory as part of the routine production–sales cycle. Inventory need is equal to the planned manufacturing activity, and the approach to inventory will be dictated by the manufacturing plan.
Precautionary stocks also may be desirable to avoid any stock-out losses, which are profits lost from not having sufficient inventory on hand to satisfy demand. Managing inventory well means keeping extra inventory, especially if it could become obsolete quickly, at a minimum. To do this, a company must have a reliable forecast and a flexible inventory approach. In addition, many companies that do not have a reliable forecast maintain a reserve as a precaution for shortfalls in the plan. Of course, how much stock is determined by the lead time for additional inventory purchases, the length of time it takes to deliver final products to the market, and how much can be spent on extra inventory.
In certain industries, managers may acquire inventory for speculative reasons, such as ensuring the availability and pricing of inventory. Inventory managers working together with purchasing managers can benefit from out-of-the-ordinary purchases. For instance, if a publisher is certain that paper costs will be increasing for the next year, it can buy more paper in the current year and store it for future use. This decision assumes that the storage costs are not greater than the savings.
66
2 formas de gerir o inventário....
To control inventory costs, a company should adopt the appropriate approach for its inventory. The two basic approaches are the economic order quantity and just-in-time.
Many companies use the classical approach, economic order quantity–reorder point (EOQ–ROP), at least for some portion of their inventory. This method is based on expected demand and the predictability of demand, and it requires determining the level of inventory at which new inventory is ordered. This ordering point is determined based on the costs of ordering and carrying inventory, such that the total cost associated with inventory is minimized. The demand and lead times determine the inventory level. For EOQ–ROP to work well, there must be a reliable short-term forecast. Often, a company may use EOQ–ROP for smaller items that have low unit costs.
Por sua vez o EOQ- ROP divide-se em safety stocks e antecipation stock.
safety stock e antecipation stock é a bottom line na qual são executadas novas ordens de inventário.
The just-in-time (JIT) method is a system that minimizes in-process inventory stocks—raw materials and in production—by evaluating the entire system of the delivery of materials and production. Materials are ordered, for example, at a point at which current stocks of material reach a reorder point, a point determined primarily by historical demand. Materials or manufacturing resource planning (MRP) systems incorporate production planning into inventory management. The analysis of production and materials needed for production are incorporated into an analysis that provides both a materials acquisition schedule and a production schedule. Combining the JIT and MRP methods can provide a broader base for integrating inventory into the company’s supply chain management and effectively reduce inventory levels
67
You are asked to select one of the following choices as the best offer for borrowing $5,000,000 for one month:
1. Drawing down on a line of credit at 6.5 percent with a 1/2 percent commitment fee on the full amount. Note: One-twelfth of the cost of the commitment fee (which gives an option to borrow any time during the year) is allocated to the first month.
2. A banker’s acceptance at 6.75 percent, an all-inclusive rate.
3. Commercial paper at 6.15 percent with a dealer’s commission of 1/8 percent and a backup line cost of 1/4 percent, both of which would be assessed on the $5 million of commercial paper issued.
Line cost 7.00 percent
Banker’s acceptance cost 6.79 percent
Commercial paper cost 6.56 percent
Valores anualizados
68
working capital é influenciado por fatores internos e externos como...
Internos:
estrutura
sofisticação
```
Externos:
serviço bancário
novas tech. e produtos
Int. rates
economia
competição
```
69
drag on liquidity
pull on liquidity
quando os pagamentos se atrasam e geram pressão na empresa para pagar os seus custos.
quando as obrigações financeiras são pagas antes de receber das vendas, o que gera pressão para a empresa.
70
current ratio
quick ratio
nº days receiv.
current assets
current ratio = current assets/current liabillities
quick ratio =(receiv. + cash+ short term mkt securities)/current liabillities
nº days receiv. = acc receivables *365/ Credit sales
current assets = inventory+ receiv. + cash+ short term mkt securities
71
operating cycle e net operating cycle
operating cycle = inventory days+ receivable days
Net operating cycle = inventory days+ receivable days - days payable.
72
```
Discounted securities:
Qual é o preço de uma treasury com face value de 1M$ r=5% e que vence em um mês?
A. 1M$
B. 0,9988M$
C 0,9958M$
```
e se fosse uma interest bearing securitie?
A.0,95$M
B.0,98$M
C.1,04$M
C
1M - 1M *(1/12)*5% =0,9958
C
73
Para calcular money market yield com que rácio devemos anualizar?
A. 365/(nº de dias para maturidade)
B. 360/(nº de dias investido)
C.360/(nº de dias para maturidade)
C
74
For a 91-day $100,000 US T-bill sold at a discounted rate of 7.91 percent, calculate the following:
1. Money market yield.
2. Bond equivalent yield.
Purchaseprice=$100,000−[(.0791)(91/360)($100,000)]=$98,000.53
Solution to 1:
Moneymarketyield=[1,999.47/98,000.53]×[360/91]=8.07percent
7,9099%?
Solution to 2:
Bondequivalentyield=[1,999.47/98,000.53]×[365/91]=8.18percent
8,02%?
75
Investment policy de uma empresa
é uma linha onde estão expostas as regras de investimento para a empresa. Deve dar as regras de investimento com % máxima ou valor absoluto por emitente, ratings onde investir, etc...
76
Suppose a company has a current ratio of 2.5 times and a quick ratio of 1.5 times. If the company’s current liabilities are €100 million, the amount of inventory is closest to:
A.€50 million.
B.€100 million.
C.€150 million.
B is correct.
Current ratio = Current assets/Current Liabilities = Current assets/ €100 million = 2.5
Therefore, current assets = €250 million
Quick ratio = (Current assets − Inventory)/ Current Liabilities = (€250 million − Inventory)/€100 million = 1.5
Therefore, Inventory = €100 million
77
Given the following financial statement data, calculate the operating cycle for this company.
In Millions ($)
Credit sales 25,000
Cost of goods sold 20,000
Accounts receivable 2,500
Inventory—Beginning balance 2,000
Inventory—Ending balance 2,300
Accounts payable 1,700
The operating cycle for this company is closest to:
A.42.0 days.
B.47.9 days.
C.78.5 days.
C is correct.
Number of days of inventory = $2,300/($20,000/365) = 41.975 days
Number of days of receivables = $2,500/($25,000/365) = 36.5 days
Operating cycle = 41.975 + 36.5 days = 78.475 days
Note: The net operating cycle is 47.9 days.
Purchases = $20,000 + $2,300 − $2,000 = $20,300
Number of days of payables = $1,700/($20,300/365) = 30.567 days
The net operating cycle is 78.475 − 30.567 = 47.908 days
78
•The bond equivalent yield for a 182-day US Treasury bill that has a price of $9,725 per $10,000 face value is closest to:
A.5.44%.
B.5.53%.
C.5.67%.
C is correct.
| Bond equivalent yield = [($10,000 − 9,725)/$9,725 ] × (365/182) = 5.671 percent
79
•A company increasing its credit terms for customers from 1/10, net 30 to 1/10, net 60 will most likely experience:
A.an increase in cash on hand.
B.a higher level of uncollectible accounts.
C.an increase in the average collection period.
C is correct. A higher level of uncollectible accounts may occur, but a longer average collection period will certainly occur.
80
•Suppose a company uses trade credit with the terms of 2/10, net 50. If the company pays its account on the 50th day, the effective borrowing cost of skipping the discount on day 10 is closest to:
A.14.9%.
B.15.0%.
C.20.2%.
C is correct.
Cost=(1+0.020.98)365/40−1=20.24percent
81
•William Jones is evaluating three possible means of borrowing $1 million for one month:
◾Drawing down on a line of credit at 7.2 percent with a 1/2 percent commitment fee on the full amount with no compensating balances.
◾A banker’s acceptance at 7.1 percent, an all-inclusive rate.
◾Commercial paper at 6.9 percent with a dealer’s commission of 1/4 percent and a backup line cost of 1/3 percent, both of which would be assessed on the $1 million of commercial paper issued.
Which of these forms of borrowing results in the lowest cost of credit?
A.Line of credit.
B.Banker’s acceptance.
C.Commercial paper.
7. 7percent
7. 14percent
7. 53 percent
B
82
Mary Gonzales is evaluating companies in the office supply industry and has compiled the following information:
Credit Sales ($) =CS
Average receivables balance = AR
20X1 20X2
CS AR CS AR
A 5.0 1.0 6.0 1.2
B 3.0 1.2 4.0 1.5
C 2.5 0.8 3.0 1.0
D 0.5 0.1 0.6 0.2
Industry 25.0 5.0 28.0 5.4
8.Which of the companies had the highest number of days of receivables for the year 20X1?
A.Company A.
B.Company B.
C.Company C.
9.Which of the companies has the lowest accounts receivable turnover in the year 20X2?
A.Company A.
B.Company B.
C.Company D.
10.The industry average receivables collection period:
A.increased from 20X1 to 20X2.
B.decreased from 20X1 to 20X2.
C.did not change from 20X1 to 20X2.
11.Which of the companies reduced the average time it took to collect on accounts receivable from 20X1 to 20X2?
A.Company B.
B.Company C.
C.Company D.
12.Mary determined that Company A had an operating cycle of 100 days in 20X2, whereas Company D had an operating cycle of 145 days for the same fiscal year. This means that:
A.Company D’s inventory turnover is less than that of Company A.
B.Company D’s inventory turnover is greater than that of Company A.
C.Company D’s cash conversion cycle is shorter than that of Company A.
8 •B is correct.
Company A: $1.0 million/($5.0 million/365) = 73.0 days
Company B: $1.2 million/($3.0 million/365) = 146.0 days
Company C: $0.8 million/($2.5 million/365) = 116.8 days
Company D: $0.1 million/($0.5 million/365) = 73.0 days
9 •B is correct.
Company A: $6.0 million/$1.2 million = 5.00
Company B: $4.0 million/$1.5 million = 2.67
Company C: $3.0 million/$1.0 million = 3.00
Company D: $0.6 million/$0.2 million = 3.00
10 •B is correct.
20X1: 73 days
20X2: 70.393
Note: If the number of days decreased from 20X1 to 20X2, the receivable turnover increased.
11 •A is correct.
12 B is correct.
Company A number of days of inventory = 100 − 73 = 27 days
Company D number of days of inventory = 145 − 121.67 = 23.33 days
Company A’s turnover = 365/27 = 13.5 times
Company D’s inventory turnover = 365/23.3 = 15.6 times
83
Cumulative voting is best described as:
A.a mechanism for suppressing hostile takeovers.
B.a means of offsetting the negative consequences of super-voting rights shares.
C.enhancing the likelihood that shareowners’ interests are represented on the Board.
C is correct. Cumulative voting enhances the likelihood that shareowner interests are represented on the Board.
84
Regarding corporate governance, for which of the following areas of responsibility is a board committee least likely to be created?
A.Ethics.
B.Nominations to the Board.
C.Compensation of executive management.
A is correct. While important, ethics does not generally merit a separate Board committee and is normally a responsibility of management.
85
o que é um investment policy statment na hora de fazer uma carteira para um cliente?
define os objetivos e limitações da gestão da carteira, como retornos pretendidos, risco , etc pode até definir uma benchmark e deve ser atualizado p.e. 3 em 3 anos
86
Para gerir a relação com o cliente quais são os 3 passos principais e subpassos?
1. Planeamento
- perceber a necessidade do cliente
- preparar o Investment policy statment
2. Execution
- Asset allocation
- Análise dos ativos
- Construção portfólio
3. Feedback
- Monitorização e balanceamento
- Medição de performance e report
87
Qual é a maior diferença entre mutual funds e ETFs?
entre Mutual Fund e ETF, quando investe num Mutual Fund as Ups são compradas ao fundo diretamente e os investimentos estão ao net asset value.
Num ETF as UPs são compradas a outros investidores, o preço pode ser ou não igual ao NET ASSET VALUE!!!!!!
Geralmente o preço é próximo do net asset value. Dividendos são pagos e não reinvestidos nos ETF.
88
Separately managed acc
É um serviço de gestão personalizado às necessidades de uma entidade/indivíduo.
89
Which of the following is the best reason for an investor to be concerned with the composition of a portfolio?
A.Risk reduction.
B.Downside risk protection.
C.Avoidance of investment disasters.
A is correct. Combining assets into a portfolio should reduce the portfolio’s volatility. The portfolio approach does not necessarily provide downside protection or guarantee that the portfolio always will avoid losses.
90
A defined benefit plan with a large number of retirees is likely to have a high need for
A.income.
B.liquidity.
C.insurance.
A is correct. Income is necessary to meet the cash flow obligation to retirees. Although defined benefit plans have a need for income, the need for liquidity typically is quite low. A retiree may need life insurance; however, a defined benefit plan does not need insurance.
91
Which of the following investment products is most likely to trade at their net asset value per share?
A.Exchange traded funds.
B.Open-end mutual funds.
C.Closed-end mutual funds.
B is correct. Open-end funds trade at their net asset value per share, whereas closed-end funds and exchange traded funds can trade at a premium or a discount.
92
Which of the following financial products is least likely to have a capital gain distribution?
A.Exchange traded funds.
B.Open-end mutual funds.
C.Closed-end mutual funds.
A is correct. Exchange traded funds do not have capital gain distributions. If an investor sells shares of an ETF (or open-end mutual fund or closed-end mutual fund), the investor may have a capital gain or loss on the shares sold; however, the gain (or loss) from the sale is not a distribution.
93
Which of the following pooled investments is most likely characterized by a few large investments?
A.Hedge funds.
B.Buyout funds.
C.Venture capital funds.
B is correct. Buyout funds or private equity firms make only a few large investments in private companies with the intent of selling the restructured companies in three to five years. Venture capital funds also have a short time horizon; however, these funds consist of many small investments in companies with the expectation that only a few will have a large payoff (and that most will fail).
94
Money wheigthed return = IRR em que situações deve ser usado ? (calculado pela máquina)
Pode ser um método melhor que a média geométrica se o capital investido aumentar.
95
Ulli Lohrmann and his wife, Suzanne Lohrmann, are planning for retirement and want to compare the past performance of a few mutual funds they are considering for investment. They believe that a comparison over a five-year period would be appropriate. They are given the following information about the Rhein Valley Superior Fund that they are considering.
Year Assets Under Managment EUR Net Return %
1 30 15
2 45 -5
3 20 10
4 25 15
5 35 3
The Lohrmanns are interested in aggregating this information for ease of comparison with other funds.
1. Compute the holding period return for the five-year period.
2. Compute the arithmetic mean annual return.
3. Compute the geometric mean annual return. How does it compare with the arithmetic mean annual return?
4. The Lohrmanns want to earn a minimum annual return of 5 percent. Is the money-weighted annual return greater than 5 percent?
Reading 42 exemplo 1
Sol1
42,35%
Sol2
7,6%
Sol3
7,32%
Sol4 (fazer o IRR pela máquina) tem que se determinar os cash flow
5,86%
96
London Arbitrageurs, PLC employs many analysts who devise and implement trading strategies. Mr. Brown is trying to evaluate three trading strategies that have been used for different periods of time.
◾Keith believes that he can predict share price movements based on earnings announcements. In the last 100 days he has earned a return of 6.2 percent.
◾Thomas has been very successful in predicting daily movements of the Australian dollar and the Japanese yen based on the carry trade. In the last 4 weeks, he has earned 2 percent after accounting for all transactions costs.
◾Lisa follows the fashion industry and luxury retailers. She has been investing in these companies for the last 3 months. Her return is 5 percent.
Mr. Brown wants to give a prize to the best performer but is somewhat confused by the returns earned over different periods. Annualize returns in all three cases and advise Mr. Brown.
(Institute 176)
Institute, CFA. 2015 CFA Level I Volume 4 Corporate Finance and Portfolio Management. Wiley Global Finance, 2014-07-14. VitalBook file.
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Reading 42 exemplo 2
97
London Arbitrageurs, PLC employs many analysts who devise and implement trading strategies. Mr. Brown is trying to evaluate three trading strategies that have been used for different periods of time.
◾Keith believes that he can predict share price movements based on earnings announcements. In the last 100 days he has earned a return of 6.2 percent.
◾Thomas has been very successful in predicting daily movements of the Australian dollar and the Japanese yen based on the carry trade. In the last 4 weeks, he has earned 2 percent after accounting for all transactions costs.
◾Lisa follows the fashion industry and luxury retailers. She has been investing in these companies for the last 3 months. Her return is 5 percent.
Mr. Brown wants to give a prize to the best performer but is somewhat confused by the returns earned over different periods. Annualize returns in all three cases and advise Mr. Brown.
Solution:
Annualized return for Keith: RKeith = (1 + 0.062)*365/100 – 1 = 0.2455 = 24.55%
Annualized return for Thomas: RThomas = (1 + 0.02)*52/4 – 1 = 0.2936 = 29.36%
Annualized return for Lisa: RLisa = (1 + 0.05)4 – 1 = 0.2155 = 21.55%
98
Assume that as a US investor, you decide to hold a portfolio with 80 percent invested in the S&P 500 US stock index and the remaining 20 percent in the MSCI Emerging Markets index. The expected return is 9.93 percent for the S&P 500 and 18.20 percent for the Emerging Markets index. The risk (standard deviation) is 16.21 percent for the S&P 500 and 33.11 percent for the Emerging Markets index. What will be the portfolio’s expected return and risk given that the covariance between the S&P 500 and the Emerging Markets index is 0.5 percent or 0.0050? Note that units for covariance and variance are written as %2 when not expressed as a fraction. These are units of measure like squared feet and the numbers themselves are not actually squared.
The portfolio’s expected return is 11.58 percent and the portfolio’s risk is 15.10 percent.
99
características da distrubuição normal:
1+-Dvpad
2+-Dvpad
3+-Dvpad
1. 68%
2. 95%
3. 99%
100
skewness & kurtosis
negative skewness or left skewness
Há mais desvios negativos da média
Kurtosis
Kurtosis refers to fat tails or higher than normal probabilities for extreme returns and has the effect of increasing an asset’s risk that is not captured in a mean–variance framework, as illustrated in Exhibit 10. Investors try to evaluate the effect of kurtosis by using such statistical techniques as value at risk (VAR) and conditional tail expectations.5 Several market participants note that the probability and the magnitude of extreme events is underappreciated and was a primary contributing factor to the financial crisis of 2008
101
Função utilidade de um investimento
U= E(r) - 0,5A*DesvP^2
102
As curvas de indiferença de retorno/desvio padrão de um investimento dão-nos o que?
Uma curva mais inclinada o que significa relativamente ao perfil de risco do investido?
As curvas de indiferença de retorno/desvio padrão de um investimento dão-nos as combinações de retorno e risco para a qual o investidor tem a mesma utilidade. Quanto maior for a inclinação maior é a aversão ao risco do investidor.
103
Assume that you are given an investment with an expected return of 10 percent and a risk (standard deviation) of 20 percent, and your risk aversion coefficient is 3.
1. What is your utility of this investment?
2. What must be the minimum risk-free return you should earn to get the same utility?
Solution to 1:
U = 0.10 – 0.5 × 3 × 0.202 = 0.04.
Solution to 2:
A risk-free return’s σ is zero, so the second term disappears. To get the same utility (0.04), the risk-free return must be at least 4 percent. Thus, in your mind, a risky return of 10 percent is equivalent to a risk-free return or a guaranteed outcome of 4 percent.
104
Two fund separation theorem
Consiste em escolher um portfólio de risco e posteriiormente obter o nível de Retorno e risco pretendidos através da junção do ativo sem risco e do portfólio de risco podendo alavancar à taxa rf.
105
An analyst observes the following annual rates of return for a hedge fund:
Year Return (%)
2008 22
2009 -25
2010 11
The hedge fund’s annual geometric mean return is closest to:
A.0.52%.
B.1.02%.
C.2.67%.
•A is correct. [(1 + 0.22)(1 − 0.25)(1 + 0.11)] (1/3) − 1 = 1.0157(1/3) − 1 = 0.0052 = 0.52%
106
Which of the following return calculating methods is best for evaluating the annualized returns of a buy-and-hold strategy of an investor who has made annual deposits to an account for each of the last five years?
A.Geometric mean return.
B.Arithmetic mean return.
C.Money-weighted return.
•A is correct. The geometric mean return compounds the returns instead of the amount invested.
107
An investor evaluating the returns of three recently formed exchange-traded funds gathers the following information:
ETF Time Since Inception Return Since Inception
1 146 dias 4,61%
2 5 semanas 1,1%
3 15 meses 14,35%
The ETF with the highest annualized rate of return is:
A.ETF 1.
B.ETF 2.
C.ETF 3.
•B is correct. The annualized rate of return for ETF 2 is 12.05% = (1.0110 52/5) − 1, which is greater than the annualized rate of ETF 1, 11.93% = (1.0461 365/146) − 1, and ETF 3, 11.32% = (1.1435 12/15) − 1. Despite having the lowest value for the periodic rate, ETF 2 has the highest annualized rate of return because of the reinvestment rate assumption and the compounding of the periodic rate.
108
An analyst observes the following historic geometric returns:
```
Asset Class Geometric Return (%)
equities 8
corporate B. 6,5
T. Bills 2,5
Inflation 2,1
```
```
•The real rate of return for equities is closest to:
A.5.4%.
B.5.8%.
C.5.9%.
•The real rate of return for corporate bonds is closest to:
A.4.3%.
B.4.4%.
C.4.5%.
•The risk premium for equities is closest to:
A.5.4%.
B.5.5%.
C.5.6%.
•The risk premium for corporate bonds is closest to:
A.3.5%.
B.3.9%.
C.4.0%.
```
* B is correct. (1 + 0.080)/(1 + 0.0210) = 5.8%
* A is correct. (1 + 0.065)/(1 + 0.0210) = 4.3%
* A is correct. (1 + 0.080)/(1 + 0.0250) = 5.4%
* B is correct. (1 + 0.0650)/(1 + 0.0250) = 3.9%
109
With respect to trading costs, liquidity is least likely to impact the:
A.stock price.
B.bid–ask spreads.
C.brokerage commissions.
C is correct. Brokerage commissions are negotiated with the brokerage firm. A security’s liquidity impacts the operational efficiency of trading costs. Specifically, liquidity impacts the bid–ask spread and can impact the stock price (if the ability to sell the stock is impaired by the uncertainty associated with being able to sell the stock).
110
•With respect to the mean–variance portfolio theory, the capital allocation line, CAL, is the combination of the risk-free asset and a portfolio of all:
A.risky assets.
B.equity securities.
C.feasible investments.
A is correct. A risk-free asset has a variance of zero and is not dependent on whether the investor is risk neutral, risk seeking or risk averse. That is, given that the utility function of an investment is expressed as U=E(r)−12Aσ2
, where A is the measure of risk aversion, then the sign of A is irrelevant if the variance is zero (like that of a risk-free asset).
111
24 •With respect to the mean–variance portfolio theory, the capital allocation line, CAL, is the combination of the risk-free asset and a portfolio of all:
A.risky assets.
B.equity securities.
C.feasible investments.
•A is correct. The CAL is the combination of the risk-free asset with zero risk and the portfolio of all risky assets that provides for the set of feasible investments. Allowing for borrowing at the risk-free rate and investing in the portfolio of all risky assets provides for attainable portfolios that dominate risky assets below the CAL.
112
25 Two individual investors with different levels of risk aversion will have optimal portfolios that are:
A.below the capital allocation line.
B.on the capital allocation line.
C.above the capital allocation line.
•B is correct. The CAL represents the set of all feasible investments. Each investor’s indifference curve determines the optimal combination of the risk-free asset and the portfolio of all risky assets, which must lie on the CAL.
113
31 The correlation between assets in a two-asset portfolio increases during a market decline. If there is no change in the proportion of each asset held in the portfolio or the expected standard deviation of the individual assets, the volatility of the portfolio is most likely to:
A.increase.
B.decrease.
C.remain the same.
A is correct. Higher correlations will produce less diversification benefits provided that the other components of the portfolio standard deviation do not change (i.e., the weights and standard deviations of the individual assets).
114
•The portfolio on the minimum-variance frontier with the lowest standard deviation is:
A.unattainable.
B.the optimal risky portfolio.
C.the global minimum-variance portfolio.
•C is correct. The global minimum-variance portfolio is the portfolio on the minimum-variance frontier with the lowest standard deviation. Although the portfolio is attainable, when the risk-free asset is considered, the global minimum-variance portfolio is not the optimal risky portfolio.
115
•The set of portfolios on the minimum-variance frontier that dominates all sets of portfolios below the global minimum-variance portfolio is the:
A.capital allocation line.
B.Markowitz efficient frontier.
C.set of optimal risky portfolios.
•B is correct. The Markowitz efficient frontier has higher rates of return for a given level of risk. With respect to the minimum-variance portfolio, the Markowitz efficient frontier is the set of portfolios above the global minimum-variance portfolio that dominates the portfolios below the global minimum-variance portfolio.
116
Compared to the efficient frontier of risky assets, the dominant capital allocation line has higher rates of return for levels of risk greater than the optimal risky portfolio because of the investor’s ability to:
A.lend at the risk-free rate.
B.borrow at the risk-free rate.
C.purchase the risk-free asset.
B is correct. The CAL dominates the efficient frontier at all points except for the optimal risky portfolio. The ability of the investor to purchase additional amounts of the optimal risky portfolio by borrowing (i.e., buying on margin) at the risk-free rate makes higher rates of return for levels of risk greater than the optimal risky asset possible.
117
Which of the following statements is least accurate? The efficient frontier is the set of all attainable risky assets with the:
A.highest expected return for a given level of risk.
B.lowest amount of risk for a given level of return.
C.highest expected return relative to the risk-free rate.
C is correct. The minimum-variance frontier does not account for the risk-free rate. The minimum-variance frontier is the set of all attainable risky assets with the highest expected return for a given level of risk or the lowest amount of risk for a given level of return
118
Mr. Miles decides to set aside a small part of his wealth for investment in a portfolio that has greater risk than his previous investments because he anticipates that the overall market will generate attractive returns in the future. He assumes that he can borrow money at 5 percent and achieve the same return on the S&P 500 as before: an expected return of 15 percent with a standard deviation of 20 percent.
Calculate his expected risk and return if he borrows 25 percent, 50 percent, and 100 percent of his initial investment amount.
The leveraged portfolio’s standard deviation and return can be calculated in the same manner as before with the following equations:
E(Rp) = w1Rf + (1 – w1)E(Rm)
and
σp = (1 – w1)σm
The proportion invested in T-bills becomes negative instead of positive because Mr. Miles is borrowing money. If 25 percent of the initial investment is borrowed, w1 = –0.25, and (1 – w1) = 1.25, etc.
Return with –25 percent invested in T-bills = (–0.25 × 5%) + (1.25 × 15%) = 17.5%.
Standard deviation with –25 percent invested in T-bills = 1.25 × 20% = 25%.
Return with –50 percent invested in T-bills = (–0.50 × 5%) + (1.50 × 15%) = 20.0%.
Standard deviation with –50 percent invested in T-bills = 1.50 × 20% = 30%.
Return with –100 percent invested in T-bills = (–1.00 × 5%) + (2.00 × 15%) = 25.0%.
Standard deviation with –100 percent invested in T-bills = 2.00 × 20% = 40%.
Note that negative investment (borrowing) in the risk-free asset provides a higher expected return for the portfolio but that higher return is also associated with higher risk.
119
Assuming that the risk (standard deviation) of the market is 25 percent, calculate the beta for the following assets:
1.A short-term US Treasury bill.
2.Gold, which has a standard deviation equal to the standard deviation of the market but a zero correlation with the market.
3.A new emerging market that is not currently included in the definition of “market”—the emerging market’s standard deviation is 60 percent, and the correlation with the market is –0.1.
4.An initial public offering or new issue of stock with a standard deviation of 40 percent and a correlation with the market of 0.7 (IPOs are usually very risky but have a relatively low correlation with the market).
We use the formula for beta in answering the above questions: βi= ρi,m*σi/σm
Solution to 1:
By definition, a short-term US Treasury bill has zero risk. Therefore, its beta is zero.
Solution to 2:
Because the correlation of gold with the market is zero, its beta is zero.
Solution to 3:
Beta of the emerging market is –0.1 × 0.60 ÷ 0.25 = –0.24.
Solution to 4:
Beta of the initial public offering is 0.7 × 0.40 ÷ 0.25 = 1.12.
120
1 Sharpe ratio
2 Treynor ratio
3 M^2
4 Jensen's alpha
1
rp-rf/DesvpPortf
é baseado em total risk
2
rp-rf/BetaP
é baseado apenas no risco de mercado
3
M^2= (rp-rf) *StdM/StdP -(Rm-rf)
Baseado em risco total
4
Alpha=Rp-(rf+BetaP*(Rm-rf)) representa o valor máximo que devemos querer dar por uma gestão ativa.
Nonsystematic variance=Stdi^2-Bi^2*StdM^2
121
The line depicting the risk and return of portfolio combinations of a risk-free asset and any risky asset is the:
A.security market line.
B.capital allocation line.
C.security characteristic line.
B is correct. The capital allocation line, CAL, is a combination of the risk-free asset and a risky asset (or a portfolio of risky assets). The combination of the risk-free asset and the market portfolio is a special case of the CAL, which is the capital market line, CML.
122
With respect to capital market theory, an investor’s optimal portfolio is the combination of a risk-free asset and a risky asset with the highest:
A.expected return.
B.indifference curve.
C.capital allocation line slope.
B is correct. Investors will have different optimal portfolios depending on their indifference curves. The optimal portfolio for each investor is the one with highest utility; that is, where the CAL is tangent to the individual investor’s highest possible indifference curve.
123
Which of the following statements most accurately defines the market portfolio in capital market theory? The market portfolio consists of all:
A.risky assets.
B.tradable assets.
C.investable assets.
A is correct. The market includes all risky assets, or anything that has value; however, not all assets are tradable, and not all tradable assets are investable.
124
Relative to portfolios on the CML, any portfolio that plots above the CML is considered:
A.inferior.
B.inefficient.
C.unachievable.
C is correct. Theoretically, any point above the CML is not achievable and any point below the CML is dominated by and inferior to any point on the CML.
125
•With respect to return-generating models, the intercept term of the market model is the asset’s estimated:
A.beta.
B.alpha.
C.variance.
•B is correct. In the market model, Ri=αi+βiRm+ei
, the intercept, αi, and slope coefficient, βi, are estimated using historical security and market returns.
126
•With respect to return-generating models, the slope term of the market model is an estimate of the asset’s:
A.total risk.
B.systematic risk.
C.nonsystematic risk.
•B is correct. In the market model, Ri=αi+βiRm+ei
, the slope coefficient, βi, is an estimate of the asset’s systematic or market risk.
127
E(r) E(std) Correl
1 11 25 0,6
2 11 20 0,7
3 14 20 0,8
Mercado 10 15 1
Which security has the highest beta measure?
A.Security 1.
B.Security 2.
C.Security 3.
Importante lembrar fórmula de tirar Beta com correlação
C is correct. Security 3 has the highest beta value; 1.07=ρ3,m*σ3/σm=(0.80)*(20%)/15%
compared to Security 1 and Security 2 with beta values of 1.00 and 0.93, respectively.
128
The slope of the security characteristic line is an asset’s:
A.beta.
B.excess return.
C.risk premium.
A is correct. The security characteristic line is a plot of the excess return of the security on the excess return of the market. In such a graph, Jensen’s alpha is the intercept and the beta is the slope.
129
•With respect to capital market theory, correctly priced individual assets can be plotted on the:
A.capital market line.
B.security market line.
C.capital allocation line.
•B is correct. The security market line applies to any security, efficient or not. The CAL and the CML use the total risk of the asset (or portfolio of assets) rather than its systematic risk, which is the only risk that is priced.
130
•With respect to the capital asset pricing model, the primary determinant of expected return of an individual asset is the:
A.asset’s beta.
B.market risk premium.
C.asset’s standard deviation.
•A is correct. The CAPM shows that the primary determinant of expected return for an individual asset is its beta, or how well the asset correlates with the market.
131
With respect to the capital asset pricing model, which of the following values of beta for an asset is most likely to have an expected return for the asset that is less than the risk-free rate?
A.−0.5
B.0.0
C.0.5
•A is correct. If an asset’s beta is negative, the required return will be less than the risk-free rate in the CAPM. When combined with a positive market return, the asset reduces the risk of the overall portfolio, which makes the asset very valuable. Insurance is an example of a negative beta asset.
132
With respect to capital market theory, which of the following assumptions allows for the existence of the market portfolio? All investors:
A.are price takers.
B.have homogeneous expectations.
C.plan for the same, single holding period.
B is correct. The homogeneous expectations assumption means that all investors analyze securities in the same way and are rational. That is, they use the same probability distributions, use the same inputs for future cash flows, and arrive at the same valuations. Because their valuation of all assets is identical, they will generate the same optimal risky portfolio, which is the market portfolio.
133
Portfolio managers, who are maximizing risk-adjusted returns, will seek to invest less in securities with:
A.lower values for nonsystematic variance.
B.values of nonsystematic variance equal to 0.
C.higher values for nonsystematic variance.
C is correct. Since managers are concerned with maximizing risk-adjusted returns, securities with greater nonsystematic risk should be given less weight in the portfolio.
134
Which of the following is least important as a reason for a written investment policy statement (IPS)?
A.The IPS may be required by regulation.
B.Having a written IPS is part of best practice for a portfolio manager.
C.Having a written IPS ensures the client’s risk and return objectives can be achieved.
C is correct. Depending on circumstances, a written IPS or its equivalent may be required by law or regulation and a written IPS is certainly consistent with best practices. The mere fact that a written IPS is prepared for a client, however, does not ensure that risk and return objectives will in fact be achieved.
135
•The section of the investment policy statement (IPS) that provides information about how policy may be executed, including investment constraints, is best described as the:
A.Investment Objectives.
B.Investment Guidelines.
C.Statement of Duties and Responsibilities.
•B is correct. The major components of an IPS are listed in Section 2.2 of the reading. Investment Guidelines are described as the section that provides information about how policy may be executed, including investment constraints. Statement of Duties and Responsibilities “detail[s] the duties and responsibilities of the client, the custodian of the client’s assets, the investment managers, and so forth.” Investment Objectives is “a section explaining the client’s objectives in investing.”
136
•Which of the following is least likely to be placed in the appendices to an investment policy statement (IPS)?
A.Rebalancing Policy.
B.Strategic Asset Allocation.
C.Statement of Duties and Responsibilities
•C is correct. The major components of an IPS are listed in Section 2.2 of the reading. Strategic Asset Allocation (also known as the policy portfolio) and Rebalancing Policy are often included as appendices to the IPS. The Statement of Duties and Responsibilities, however, is an integral part of the IPS and is unlikely to be placed in an appendix.
137
•An investment policy statement that includes a return objective of outperforming the FTSE 100 by 120 basis points is best characterized as having a(n):
A.relative return objective.
B.absolute return objective.
C.arbitrage-based return objective.
•A is correct. Because the return objective specifies a target return relative to the FTSE 100 Index, the objective is best described as a relative return objective.
138
•Risk assessment questionnaires for investment management clients are most useful in measuring:
A.value at risk.
B.ability to take risk.
C.willingness to take risk.
•C is correct. Risk attitude is a subjective factor and measuring risk attitude is difficult. Oftentimes, investment managers use psychometric questionnaires, such as those developed by Grable and Joo (2004), to assess a client’s willingness to take risk.
139
After interviewing a client in order to prepare a written investment policy statement (IPS), you have established the following:
◾The client has earnings that vary dramatically between £30,000 and £70,000 (pre-tax) depending on weather patterns in Britain.
◾In three of the previous five years, the after-tax income of the client has been less than £20,000.
◾The client’s mother is dependent on her son (the client) for approximately £9,000 per year support.
◾The client’s own subsistence needs are approximately £12,000 per year.
◾The client has more than 10 years’ experience trading investments including commodity futures, stock options, and selling stock short.
◾The client’s responses to a standard risk assessment questionnaire suggest he has above average risk tolerance.
A is correct. The volatility of the client’s income and the significant support needs for his mother and himself suggest that the client has a low ability to take risk. The client’s trading experience and his responses to the risk assessment questionnaire indicate that the client has an above average willingness to take risk.
140
•Tactical asset allocation is best described as:
A.attempts to exploit arbitrage possibilities among asset classes.
B.the decision to deliberately deviate from the policy portfolio.
C.selecting asset classes with the desired exposures to sources of systematic risk in an investment portfolio.
•B is correct. Tactical asset allocation allows actual asset allocation to deviate from that of the strategic asset allocation (policy portfolio) of the IPS. Tactical asset allocation attempts to take advantage of temporary dislocations from the market conditions and assumptions that drove the policy portfolio decision.
141
•Investing the majority of the portfolio on a passive or low active risk basis while a minority of the assets is managed aggressively in smaller portfolios is best described as:
A.the core–satellite approach.
B.a top-down investment policy.
C.a delta-neutral hedge approach.
•A is correct. The core–satellite approach to constructing portfolios is defined as “investing the majority of the portfolio on a passive or low active risk basis while a minority of the assets is managed aggressively in smaller portfolios.”
