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Series 66 > Ch 12 Portfolio Management and Investment Risk > Flashcards

Ch 12 Portfolio Management and Investment Risk Flashcards

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Series 66 flashcards
1
Q

Identify the range from the following set of numbers: 7, 3, 5, 4, 4, 6

A
  1. Range is calcuated by starting with the largest value (7) and then subtracting the smallest value (3).
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2
Q

A 20-year U.S. Treasury zero-coupon bond is most susceptible to _________ risk.

A

inflation risk.

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3
Q

What is the risk that certain circumstances or factors may have a negative impact on the profitability of a company?

A

Business risk

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4
Q

Sue bought a 6% bond at par. One year later, her bond’s value has fallen to $970. What is her annual return?

A

Sue received the 6% rate of interest, but her bond lost 3% of its value. (-$30 + 60) ÷ $1,000 = 3%.

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5
Q

True or False: Systematic rebalancing involves buying and selling on a periodic basis.

A

True

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6
Q

What is the formula for determining a stock’s current yield?

A

Annual dividend ÷ current market value of the stock

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7
Q

What is the difference between the current ratio and the quick asset ratio?

A

The quick asset ratio is more stringent since it excludes inventory from the current assets.

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8
Q

If a bond is trading at a discount to its value based on DCF, will an investor earn more or less than a comparable bond?

A

A bond trading at a discount to its DCF value will earn more than comparably priced bonds.

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9
Q

A stock with a positive alpha is generally considered a _______ opportunity by an analyst.

A

buying

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10
Q

What types of securities tend to have a high beta?

A

Growth stocks

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11
Q

What is an efficient market?

A

A market in which prices reflect all known information; therefore, nothing will be overvalued or undervalued.

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12
Q

What return will an investment have if its net present value is greater than zero?

A

The investment will generate a positive return.

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13
Q

Which type of risk is non-diversifiable?

A

Market risk

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14
Q

“A dollar received today is worth more than a dollar received tomorrow” describes what concept?

A

The time value of money

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15
Q

Standard deviation is a measure of the dispersion of ____________ returns.

A

expected returns.

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16
Q

True or False: A country with high interest rates will generally have a stronger currency.

A

True

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17
Q

True or False: When the market suffers a large, general decline, most stocks are affected.

A

True. Stocks are subject to the risks of the market as a whole.

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18
Q

True or False: A low beta security would be expected to rise more than a high beta security in a bull market.

A

False. An asset with a low beta would be less volatile and would, therefore, be expected rise less in a rising market.

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19
Q

Is market risk considered a form of diversifiable or non-diversifiable risk?

A

Non-diversifiable risk

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20
Q

An investor needs an IRR of 5%. His investment has a negative NPV. Is its IRR greater than, less than, or equal to 5%?

A

A negative NPV would indicate that an investment has an IRR that is less than the required rate.

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21
Q

Define sector rotation.

A

A strategy that anticipates the next turn in the business cycle and shifts assets into the sectors that will benefit.

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22
Q

What rule can be used to determine how long it takes for an amount of money to double at a given rate of return?

A

The Rule of 72

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23
Q

Are inflationary periods characterized by rising or falling interest rates?

A

Rising

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24
Q

__________ value determines how much a dollar amount invested today will be worth at a set point in the future.

A

Future

25
Q

Define capital risk.

A

The risk that an investor may lose a part or her entire investment (principal). Capital risk is a form of diversifiable risk.

26
Q

True or False: Investors who are planning to hold bonds until maturity have no risk.

A

False. Opportunity risk (the risk of missing out on a superior investment) is a risk these types of investors face.

27
Q

True or False: Dollar weighted return (DWR) takes into account the deposits into or withdrawals out of the portfolio.

A

True. DWR includes the weighted value of cash flows into and out of the portfolio when calculating return.

28
Q

True or False: Strong-form market efficiency advocates believe they can beat the market.

A

False. Strong-form market efficiency states that no person can beat the market.

29
Q

MPT has found that having asset classes with a slight ___________ correlation provides the best long-term performance.

A

MPT has found that having asset classes with a slight negative correlation provides the best long-term performance.

30
Q

What happens to the U.S. trade deficit if the dollar is weakening?

A

The trade deficit will shrink as U.S. goods become cheaper for foreign consumers.

31
Q

What are small-cap stocks?

A

Typically stocks of new companies with more volatility, but also with more growth potential

32
Q

True or False: Inflation is a persistent rise in the general level of prices.

A

True

33
Q

______________ measures the degree to which the movements of two variables are related.

A

Correlation

34
Q

What is a time-weighted return?

A

A time-weighted return is a geometric mean (average) that eliminates the effect of varying cash inflows (dividends).

35
Q

What is the present value of a perpetual monthly payment of $1,000 earning 5% per year?

A

$240,000 = ($1,000 x 12 mo)/.05

36
Q

What is a major disadvantage when using an arithmetic mean to measure investment performance?

A

Arithmetic means (averages) can misrepresent compounding effects on an investment’s return.

37
Q

What are large-cap stocks?

A

Stocks of mature companies with a long history of dividend payments

38
Q

_________ value projects what an investment will be worth at some point in the future.

A

Future

39
Q

If a stop order is activated, at what price will the trade be executed?

A

The next trade after activation.

40
Q

How are secured creditors treated in a liquidation?

A

They are given priority up to the value of their collateral and are unsecured for any remaining claim.

41
Q

Define positive financial leverage.

A

It is when the return achieved is greater than the cost of borrowing.

42
Q

Which market is considered negotiated?

A

The over-the-counter (OTC) market in which market makers negotiate prices (e.g., the OTCBB)

43
Q

An investor needs an IRR of 5%. His investment has a NPV of $0. Is its IRR greater than, less than, or equal to 5%?

A

A NPV of $0 would indicate that an investment has an IRR that is equal to the required rate.

44
Q

What is a dollar-weighted return?

A

A dollar-weighted return is a geometric mean (average) used to measure how a portfolio performed over time.

45
Q

True or False: Perfect negative correlation is -1.00, while a perfect positive correlation is 1.00.

A

True

46
Q

A security has appreciated from $10 to $15 over three months and has paid no dividend. What is the annualized return?

A

200%, which is calculated by multiplying the holding period return (50%) by four quarters

47
Q

What type of risk does beta measure?

A

Non-diversifiable

48
Q

The _______________________ is often considered the most important measure of inflation.

A

Consumer Price Index (CPI)

49
Q

Modern Portfolio Theory (MPT) focuses on differing __________ of assets rather than on _____________ securities.

A

classes of assets rather than on individual securities.

50
Q

Do those who favor market timing (active strategies) believe markets are efficient or inefficient?

A

Inefficient. They may alter their portfolio to take advantage of anticipated economic events.

51
Q

What are micro-cap stocks?

A

Stocks of emerging companies that would generally be suitable only for speculative investors

52
Q

True or False: The S&P 500 is a large-cap index.

A

True

53
Q

List the risks associated with investing in 30-year U.S. Treasury bonds.

A

Inflation risk and interest-rate risk

54
Q

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?

A

Investment A is better. NPV measures net cash flows above a discount rate. A greater NPV indicates more value.

55
Q

Define currency risk.

A

The risk that foreign investments will be worth less in the future due to changes in exchange rates.

56
Q

Market, interest rate, and inflation risk are all types of ___________ risk.

A

systematic risk.

57
Q

Another name for a security’s risk-adjusted return is its ________.

A

alpha.

58
Q

What type of risk is liquidity risk?

A

It is non-systematic risk, since liquidity risk may be diversified against by buying actively traded assets.

Series 66 (21 decks)

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