Ch. 12 Flashcards
T/F: stop limit orders are guaranteed execution of the trigger is touched.
False. Stop limit orders may not be executed at the limit price cannot be met.
T/F: strategic asset allocation is considered an active asset allocation approach.
False. Strategic asset allocation is considered a passive approach.
_________ risk is the inability to sell an investment easily.
Liquidity
What types of securities tend to have low beta?
Defensive stocks
What return will an investment have If it’s net present value is greater than zero?
The investment will generate a positive return
What is the fair value of a bond?
The discounted present value of the sum of the future payments
T/F: perfect negative correlation is -1.00, while a perfect positive correlation is 1.00.
True
How are secured creditor treated in a liquidation?
They are given priority up to the value of their collateral, and our unsecured for any remaining claim
What risk is based on the possibility of that new regulations may have a negative impact on an investment value?
Regulatory risk
What type of risk is avoided through indexing?
Business risk, since indexing involves purchasing stocks of many companies
Define capital structure.
Accompanies, issuance of debt and equity securities, both common and preferred, to finance operations
Which would have the most risk large mid or small cab companies?
Small cap stocks would have the most risk
List the risks associated with investing in 30 year US treasury bonds.
Inflation risk, and interest-rate risk
T/off: in the secondary market, a client buys at the bed and sells at the ask.
False. Clients buy at the ask or offer price and sell at the bid price.
The difference between an investments, total return, and the risk-free rate is the risk ________.
Premium
“ a dollar received today is worth more than a dollar receive tomorrow” describes what concept?
The time value of money
Which asset class is most susceptible to interest-rate risk?
Debt
Strategic asset allocation assumes that the markets are __________.
Efficient
If two investments go in opposite directions from one another, this is referred to as ___________ correlation.
Negative
What is commonly used to measure and assess risk free rate of return?
The interest rate on a US T-bill
A capital needs analysis is done to determine a clients __________
Needs in order to find future financial goals.
Insurance
What is the efficient frontier?
The line representing portfolios, excluding risk-free alternatives, showing the lower risk for a given level of return
Name for asset classes.
Stocks, bonds, real estate, and cash
What is another name for diversifiable risk?
Nonsystematic risk
Do those who favor market timing, active strategies, believe markets are efficient or inefficient?
Inefficient. They may alter their portfolio to take advantage of anticipated, economic events.
Two investments have the same price, but the net present value (NPV) of choice A is $50 while B’s is $40. Which is best?
Investment A is better. NPV measures net cash flows above a discount rate. A greater NPV indicates more value.
T/F: securities with a correlation coefficient of zero or considered uncorrelated
True
What type of risk is liquidity risk?
It’s a non-systematic risk, security risk may be diversified against by buying actively traded assets.
T/F: in a weak form, efficient market, technical analysis will be useful.
False. In a weak form, efficient market, only fundamental analysis will be useful.
What is the formula for determining a Stocks current yield?
annual dividend ➗ by current market value of the stock
T/F: when the market suffers a large, general decline, most stocks are affected.
True. Stocks are subject to the risks of the market as a whole.
12 years ago, Tina ❤️ invested $25,000 which is now ground to $100,000. What is the annual growth rate of her investment?
In 12 years, the money double twice so every six years. Using the rule of 72, 72÷6 years equals 12%
What are large cap stocks?
Stocks of mature companies, with a long history of dividend payments
A bonds inflation adjusted rate of return, may also be referred to as the ________ interest rate.
Real
Define net present value or NPV
The difference between the value of an investment, cash inflow, and outflow’s above the discount rate
What is the name for a graph of optimal portfolios?
The efficient frontier
Which is a better hedge against inflation, investing in stocks or bonds?
Historically, stocks of outperformed inflation. Since sponsor fixed income instruments They are hurt by inflation.
What type of meat is used to calculate the expected return?
The weighted arithmetic mean
Tactical asset allocation assumes that markets are ___________.
Inefficient
In the secondary market, a customer _________ at the bid, and _____ at the ask (offer).
Sells; buys
What measures risk adjusted return?
Alpha and the sharpe ratio
Business, regulatory, political, and liquinity risk are all types of _______ risk.
Unsystematic
If an asset outperforms the market, when prices are up, but under performs, when prices are down, what is its beta?
It’s been a must be greater than one
What are mid-cap stocks?
Stocks of companies that are more volatile and growth oriented than large caps stocks
Modern portfolio theory focuses on differing _________ of assets rather than on _________ securities.
Classes; individual
T/F: systematic rebalancing assumes markets are inefficient.
False
Stop limit orders become ________ orders once they are triggered/activated.
Limit
T/F: a country with high interest rates will generally have a stronger currency.
True
T/F: tactical asset allocation is changing a portfolios asset mix due to impending market in economic factors.
True
T/F: The S&P 400 is a large cap index.
F; the S&P 400 is a mid cap index
It’s 20 year US treasury zero coupon bond is most acceptable to ________ risk.
Inflation
The _________ rate of return is used to calculate the anticipated return for portfolio of securities.
Expected
What does uses the basic measure of risk for an investment?
Standard deviation
Identify the risk: in particular enterprise may not perform well due to poor management, or increased competition.
Business risk
And investment earns 10%, 50%, and 30% in three years. How would the annualized average rate of return be calculated?
When calculating and annualized rate of return overtime, the geometric mean as used.
Which return measures investment performance by including all cash, inflows and outflows?
Dollar weighted returns
T/F: alpha, represents an investment actual return, an excess of it’s expected return.
True
If an advisor attempts to exceed the performance of the market, it is using _______ portfolio management.
Active
How much principal, compounding at 3% annually, is needed to make an annual payments of $3000 in perpetuity?
$100,000 principal = $3000 annual payment ➗ by .03 rate of return.
Are inflationary periods characterized by rising or falling interest rates?
Rising
Sue bought a 6% bond at par. One year later, her bonds value as fallen to $970. What is her annual return?
Sue receives 6% rate of interest, but her bond lost 3% of its value. (-$30 + $60)➗$1,000 = 3%
What is the risk that certain circumstances are factors may have a negative impact on the profitability of a company?
Business risk
And investor needs an IRR, a 5%. His investment has a negative NPV. Is it’s IRR greater than, less than, or equal to 5%?
A negative NPV would indicate that an investment has an IRR that is less than required rate.
And investor needs an IRR of 5%. His investment has an NPV of zero dollars. Is it IRR greater than, less than, or equal to 5%?
A NPV of zero dollars would indicate that an investment has an IRR that is equal to the required rate
If an investor is short stock, a buy stop order can be used to limit ________ risk.
Upside
The Russell 2000 Index is a _______-cap index.
Small
Define negative financial leverage
It is when they return achieved is less than the cost of borrowing
What type of trading would be used if you believe markets are in efficient?
Active strategies, such as tactical asset, allocation, or sector rotation
Is an investor is attempting to maximize her portfolio growth over a long period, what is her strategy called?
Capital appreciation
The _____________ is often considered the most important measure of inflation
CPI
Another name for security’s risk adjusted return is its ________________
Alpha
A client notices that a thinly traded stock has a few daily trades affected. To what risk is it most susceptible?
Liquidity risk
Assuming at 12% rate of return, how long will it take $50,000 to double?
Six years. Using the rule of 72, 72 divided by the rate of return determines the number of years
__________ value projects what an investment will be worth at some point in the future.
Future
_____________ measures the degree to which the movement of two variables are related.
Correlation
Identify the range from the following set of numbers: 10, 12, 5, 1, 7, 7, 8, 4
- Range is calculated by starting with the largest value, and then subtracting the smallest value.
(Current Assets - ___________ ) ➗ Current Liabilities = Quick Asset Ratio (or Acid Test)
Inventory
What form of asset allocation of times to keep the asset percentage is balance over a long period?
Strategic asset allocation
T/s: dollar weighted returns, takes into account the deposits into or withdraws out of the portfolio.
True. Dollar weighted return includes the weighted value of cash flows into and out of the portfolio when calculating return.
What are TIPS?
Treasury inflation protected securities
__________ is the balancing of investment classes according to an investors investment objectives.
Asset allocation
Which form of market efficiency declares that only insiders can regularly beat the market?
Semi strong
_________ investors look for stocks of companies that are intrinsically undervalued.
Value
Identify the range from the following set of numbers: 7, 3, 5, 4, 4, 6
4
To find a stocks current yield, the formula is: _________➗__________
Annual Dividend ➗ Current Market Price
What is the formula for the sharpe ratio?
(ROI - Risk free return) ➗ standard deviation
What is the sharpe ratio used to determine?
The sharpe ratio is used to determine if returns are from wise investment or the result of excess risk
What are two assumptions of MPT
Investors want to minimize risk and maximize returns
What are micro cap socks?
Stocks of emergent companies that would generally be suitable only for speculative investors
If a securities beta is more than one, is it considered more or less volatile in the market as a whole?
The higher, the better, the greater volatility
What is the time weighted return?
A time we did return is a geometric mean or average that eliminates the effective varying cash inflows or dividends
A bond is yielding 8% and the rate of inflation is 3%. What is the bonds real interest rate?
5%. Real interest rate measures the true yield once inflation is factored out.
Define holding period return.
The total return receipt from holding an asset or portfolio of assets
What is considered an optimal portfolio?
One that has the highest expected return given the clients tolerance for risk
What is an advantage to buy and hold portfolio management?
Transaction cost in tax consequences are minimized
Sell limit orders are placed _______ the market.
Above
T/F: with a buy and hold strategy, investors are consistently rebalancing their portfolios.
False. Buy and hold it involves no rebalancing.
What is the better of the market S&P 500?
One
Define sector rotation.
A strategy that anticipates the next turn in the business cycle and shifts assets into the sectors that will benefit.
What is another name for non-diversifiable risk?
Systematic risk
An investor needs an IRL 5%. Her investment has a positive NPV. Is it I are are greater than, less than, or equal to 5%?
A positive NPV would indicate that an investment has an IRR that is greater than the required rate
The principal value of TIPS may be adjusted based on the changes to the ___________.
CPI
If there is no relationship between the movement of two investments, they are considered to be ____________.
Uncorrelated
Is market risk considered a form of diversifiable or non-diversifiable risk?
Non-diversifiable risk
List some formula is used to measure liquidity.
Working capital, current ratio, an quick asset ratio (acid test)
___________ stock fluctuates with the business cycle.
Cyclical
__________value is the amount of money that must be invested today to result in a certain sum at a future time
Present value
Identify the acronym: CPI
Consumer price index
_________ investors are concerned with a company’s future earnings potential.
Growth
In a rising market, is a low beta security, expected to outperform or under perform the market as a whole?
Underperform
Working capital, current ratio, and the quick asset ratio are examples of ___________ ratios.
Liquidity ratios
What is a major disadvantage when using an arithmetic mean to measure investment performance?
Arithmetic means or averages can misrepresent compounding effects on an investment return
Which market is considered negotiated?
The over-the-counter market in which market makers negotiate prices
To determine a bonds, real interest rate, the bonds yield is subtracted by the rate of __________.
Inflation
For a person with a diversified portfolio of large cap stocks, what type of risk may be reduced by using index options?
Systematic risk
T/F: a buy hold strategy is considered an active/tactical investment strategy.
False. By hold strategy is a passive strategy.
What is the formula for determining a bonds current yield?
Annual interest ➗ current market value of the bond
Define positive financial leverage.
It is when the return achieved is greater than the cost of borrowing
What are some of the characteristics of value stock?
Low PE ratios, history of profitability, high dividend payout, and low market to book ratio.
MPT has found that having asset classes with slight __________ correlation provides the best long-term performance.
Negative
A company with more debt than equity outstanding is considered __________.
Leveraged
What rule can be used to determine the annual rate of return needed for funds to double if given a number of years?
The rule of 72
___________ return allows an investor to compare the performance of two investment advisors.
Time weighted
What uses computer simulations to present random outcomes of an investment strategy
Monte Carlo simulation
Jim invested $25,000 in an annuity with a 6% return. How long will it take for the money to double?
Using the rule of 72, divide 72 by the rate of return. 12 years
The greater the dispersion of historical returns of a security, the __________ is standard deviation.
Higher
What risk is based on the possibility that new laws may have a negative impact on an investment value?
Legislative risk
What is the dollar weighted returns?
A dollar weighted returns a geometric mean or average used to measure how a portfolio performed overtime
Is indexing considered an active or passive portfolio management strategy?
Passive, since the composition of the benchmark index generally remains the same.
What ratio Tessa companies ability to pay its current liabilities with its current assets, but excludes inventory?
The quick asset ratio (the acid test)
Which type of risk is non-diversifiable?
Market risk
Over the last three months, a sock rose from $50-$51 and paid a $.25 dividend. What is its annualized return?
The three month return is 2.5% ($1.25➗$50). Accordingly return is annualized by multiplying by 4. (2.5 x 4= 10%)
A __________ is an annuity that never stops paying money
Perpetuity
What is the risk that changes in tax law could impact security prices?
Legislative risk
If an investor is long stock, a cell stop order can be used to limit what risk?
Downside
__________ value determines how much a dollar amount invested today will be worth at a set point in the future.
Future
T/F: inflation is a persistent rise in the general level of prices.
True
Define capital risk.
The risk that an investor may lose a part or entire investment or principal. Capital risk as a form of diversifiable risk.
Describe positive financial leveraging.
Paying less interest then earnings received. Example: client pays 4% on a margin loan, but earns 10% on stock gains.
What type of trading strategy would be used if you believe markets are efficient?
Passive strategies, such as indexing are somatic rebalancing
What is required to make the dollar weighted returns and the time we did return equal?
Remove or subtract any deposits into and or withdraws out of the portfolio
____________ return allows an investor to measure the amount of money she has earned on her investments.
Dollar weighted
Security is appreciated from $10-$15 over three months and his paid know Devin. What is the annualized return?
200%, which is calculated by multiplying the holding period returns (50%) by four quarters.
The quick asset ratio is calculated by excluding _____________ from a company’s current assets.
Inventory
What is the present value of a perpetual monthly payment of $1000 are in 5% a year?
$240,000 = ($1,000 x 12 mo.)/.05
What return will an investment have if it’s net present value is less than zero?
The investment will generate a negative return
Define currency risk.
The risk that for an investment will be worth less in the future due to changes in exchange rates
T/off: systematic, rebalancing, involves buying and selling on a periodic basis
True
What is the proper order of liquidation for a corporation of bankruptcy?
Secured, creditors, unpaid workers, IRS, unsecured, creditors, preferred, and then common
T/F: strong for market, efficiency, advocates, believe they can beat the market.
False. Strong for market efficiency states that no person can beat the market.
In a declining market, is a high better security expected outperform are under perform the market as a whole?
Underperform
Which would have the least risk large mid or small cap companies?
Large cap stocks, have a least risk
$10,000 has become $80,000 and 36 years. What is the internal rate of return?
The money doubled every 12 years. The 10 groups of 2020 grew to 40 and 40 go to 80 using the rule of 72, 72÷12 = 6%
Define expected return.
The possible return of an asset, multiplied by the likelihood of occurrence
What is the risk that environmental regulations could impact the prices of securities?
Regulatory risk
Describe a value investor.
One second stocks that are undervalued in relation to their earnings, and have a low PE ratio
What is the formula for determining hold period Return?
(Ending value -Beginning value + dividends/interest) ➗ beginning value
Center deviation is a measure of the dispersion of ___________ returns.
Expected
Identify the acronym: CAPM
Capital asset pricing model
What type of risk does beta measure?
Non-diversifiable
What type of security send to have a high beta?
Growth stocks
A stock with a positive alpha is generally considered a ________________ opportunity by an analyst.
Buying
T/off: an interest rate on TIPS is fixed, but the principal may be adjusted.
True
Bond a yield is 7.5% when inflation is 3%. Bond b yields 8% when inflation is 4%. Which has a higher real interest rate?
Bond a. The real interest rate is 4.5%.
What is an efficient market?
A market, in which process reflect all known information; therefore, nothing will be overvalued or undervalued.
What are small cap stocks?
Typically stocks of new companies with more volatility, but also with more growth potential
T/F: diversification, is one method by which an investor may avoid nonsystematic risk
True
T/F: a low beta security would be expected to rise more than a high, beta security in a Bull market.
False. An asset with a low beta would be less volatile and wood, therefore, be expected to rise in a rising market.
T/F: systematic risk may be avoided through diversification
False. Systematic risk may not be avoided through diversification.
What method of investing is characterized by regularly investing a set amount of money, regardless of share prices?
Dollar cost averaging
An investor buys stock that returns 2% for the year rather than a T-bond yielding 6%. The ________ cost is 4%.
Opportunity
The S&P 500 index is a _____-cap index.
Mid
Identify the acronym: MPT
Modern portfolio theory
The interest rate on the UST bill is completely used to measure an assets ________ rate of return.
Risk-free
Find gold or gold futures, may protect an investor against __________ risk.
Inflation
My limit orders are placed ________ the market.
Below
T/F: according to CAPM, a securities return equals a risk free return or T-bill return plus a risk premium.
True
If an investment has increased in value, when would its annualize return, be greater than it’s holding period return?
An investment annualized return would be greater than it’s holding period Return if it was held for less than one year.
What is the risk that congressman act a law change that negatively impacts the value of an investment?
Legislative risk
T/S: the S&P 500 is a large cap index
True
How is the market capitalization determined?
Accompanies current share price multiplied by the number of shares, outstanding
What are two measures of liquidity?
Current ratio in the quick asset ratio Both measure companies liquidity
____________ is the term that best describes the process used to calculate and investments future value.
Compounding
Identify the risk: investors miss out on receiving a better return by placing their funds elsewhere.
Opportunity risk
What is the formula for calculating the risk premium?
Risk premium = total return - risk free rate
A _________ is a stream of cash flows that continues forever
Perpetuity
Do investors who favor, passive strategies, believe marketer, efficient, or inefficient?
Efficient. Rather than trying to time the market, they rebalance to portfolios periodically.
T/F: the longer bonds duration, the less sensitive the bonds prices is to changes in interest rates.
False. The longer the duration, the greater the bonds price sensitivity to changes in interest rates.
What is the risk of having an excessive portion of a portfolio invested in one particular security or asset class?
Concentration risk
T/F: the S&P 500 is an asset class.
False. Stocks, bonds real estate and cash are all asset classes.
T/F: bottom of approach to investing uses the economy as a main factor in determining which stocks to buy.
False. Bottom up, investing uses company, specific items, such as earnings and dividend payments to pick stocks.
What are the three main concepts underlying the modern portfolio theory?
Expected, return quote, standard deviation, and correlation
Market, interest rate, and inflation risk are all types of _________ risk.
Systematic
T/S: investors who are planning to hold bonds until maturity, have no risk
False. Opportunity risk, or the risk of missing out on a superior investment is a risk these types of investors face.
If a bond is trading at a discount to its value, based on DCF, will an investor earn more or less than a comparable bond?
About trading at a discount to its DCF value will earn more than a comparably priced bond
If a bond is trading at a premium to its value, based on DCF, will an investor and more or less than a comparable bond?
A bond trading at a premium to his DCF value will earn less than a comparably priced bond
What is the formula for calculating a bonds current yield?
Annual interest divided by current market price
What is used to determine how a given present value will become a needed future value.
The internal rate of return or IRR
T/F: the longer and investors time horizon, the more concerned he is with the market fluctuations.
False. The longer the time horizon, the less concerned, he is with market fluctuations.
What is the present value of an annuity that pays $2000 per year in earns 5% a year?
$40,000= $2,000/.05
Stop orders become __________ order once they are triggered/activated.
Market
What is the difference between the current ratio in the quick asset ratio?
The quick asset ratio is more stringent since it excludes inventory from the current assets
____________ value is the dollar amount to be invested today to meet a specific dollar objective at a set future point.
Present
What is the risk of foreign investors losing money due to changes with a country’s government or regulatory environment?
Political risk
What is the capital asset pricing model?
A model of the relationship between expected risk and expected return
What is a common method used to calculate the returns on an equity indexed annuity?
Point-to-point indexing
Stop and stop limit orders are triggered when a round lot trades at, or through, the ________.
Stop price
If two investments, closely track, one another, this is referred to as ___________ correlation.
Positive
What is the formula for PE ratio?
Price divided by earnings per share
What happens to the US trade deficit if the dollar is weakening?
The trade deficit will shrink as US goods become cheaper for foreign customers
List, some forms of business risk that apply when investing in individual equity securities
Poor management, obsolete products, changing market conditions
________ is the measure of an asset volatility compared to the market as a whole.
Beta
T/F: tactical asset allocation is considered a passive asset allocation approach
False. Tactical asset allocation is considered an active approach.
An investor, who follows the ________ style of investing bets against market trends.
Contrarian
And investors not return is the gross return minus _______ paid.
Taxes
Define range.
Range is the difference between the largest value in the smallest value of a given set of numbers.
If a client, illuminates, unsystematic, or diversifiable risk in his portfolio, he is willing to accept_______ risk.
Market
What is the formula for determining and assets Total return?
(Ending value - beginning value + dividends/interest) ➗ beginning value
Highly regulated companies, such as utilities, Are subject to__________ risk.
Regulatory
Gold coins, gold certificates, or gold futures may be purchased in an effort to avoid what type of risk?
Inflation risk
What is the use of the capital asset pricing model?
To finding investors optimal portfolio by comparing expected risk with expected rate of return
Name the three forms of market efficiency.
Strong, semi strong and weak form
What is a perpetuity?
An annuity that pays out forever
What is the risk our investors may be unable to dispose of securities position quickly and at a fair price?
Liquidity risk
Both the Dow Jones industrial average in the S&P 500 index are______ cap indexes
Large
Describe a growth investor.
One seeking stocks of companies with an above average growth rate, high PE, ratios, and low dividend payout ratio’s.
To stop orders guarantee a specific price when buying or selling?
No, stop orders, execute at the market price, which is uncertain once they are activated
What’s strategy involves moving a clients funds from one industry to another during defined periods?
Sector rotation
___________ stock is resistant to recession.
Defensive
If a stop order is activated, at what price for the trade be executed?
The next trade after activation
_________ stock pays higher than average dividends.
Income
What rule can be used to determine how long it takes for an amount of money to double at a given rate of return?
The rule of 72
