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

Ch 12 Portfolio Management and Investment Risk Part II Flashcards

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Series 66 flashcards
1
Q

If an adviser attempts to exceed the performance of the market, it is using ______ portfolio management.

A

active

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2
Q

True or False: With a buy and hold strategy, investors are consistently rebalancing their portfolios.

A

False. Buy and hold involves no rebalancing.

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3
Q

True or False: Systematic risk may be avoided through diversification.

A

False. Systematic (non-diversifiable) risk may not be avoided through diversification.

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4
Q

List some formulas used to measure liquidity.

A

Working capital, current ratio, and quick asset ratio (acid test)

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5
Q

Name four asset classes.

A

Stocks, Bonds, Real Estate, Cash

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6
Q

Describe positive financial leveraging.

A

Paying less interest than earnings received (e.g., client pays 4% on a margin loan, but earns 10% on stock gains)

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7
Q

What is the risk that Congress may enact tax law changes that negatively impact the value of an investment?

A

Legislative risk

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8
Q

If a security’s beta is more than 1, is it considered more or less volatile than the market as a whole?

A

The higher the beta, the greater the volatility.

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9
Q

Identify the risk: Investors miss out on receiving a better return by placing their funds elsewhere.

A

Opportunity risk

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10
Q

A __________ is a stream of cash flows that continues forever.

A

perpetuity

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11
Q

If an investor is attempting to maximize her portfolio growth over a long period, what is her strategy called?

A

Capital appreciation

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12
Q

What form of asset allocation attempts to keep the asset percentages balanced over a long period?

A

Strategic asset allocation

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13
Q

If a client eliminates unsystematic or diversifiable risk in his portfolio, he is willing to accept ______ risk.

A

market risk.

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14
Q

What is the formula for the P/E ratio?

A

Price ÷ EPS (Earnings Per Share)

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15
Q

True or False: A bottom up approach to investing uses the economy as a main factor in determining which stocks to buy.

A

False. Bottom up investing uses company specific items (e.g., earnings and dividend payments) to pick stocks.

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16
Q

Which would have the most risk—large-, mid-, or small-cap companies?

A

Small cap stocks would have the most risk.

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17
Q

True or False: The S&P 400 is a large-cap index.

A

False, the S&P 400 is a mid-cap index.

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18
Q

If an asset outperforms the market when prices are up, but underperforms when prices are down, what is its beta?

A

Its beta must be greater than 1.00.

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19
Q

An investment earns 10%, 50%, and 30% in three years. How would the annualized average rate of return be calculated?

A

When calculating an annualized rate of return over time, the geometric mean is used.

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20
Q

In the secondary market, a customer _____ at the bid and ____ at the ask (offer).

A

sells at the bid and buys at the ask (offer).

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21
Q

An investor buys stock that returns 2% for the year rather than a T-Bond yielding 6%. The ____________ cost is 4%.

A

opportunity cost is 4%.

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22
Q

What are some of the characteristics of a value stock?

A

Low P/E ratios, history of profitability, high dividend payout, and low market-to-book ratio

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23
Q

What type of risk is avoided through indexing?

A

Business risk, since indexing involves purchasing stocks of many companies

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24
Q

The S&P 400 Index is a ___-cap index.

A

mid-cap index.

25
Q

What are two assumptions of MPT?

A

Investors want to minimize risk and maximize returns

26
Q

True or False: The longer a bond’s duration, the less sensitive the bond’s price is to changes in interest rates.

A

False. The longer the duration, the greater a bond’s price sensitivity to changes in interest rates.

27
Q

A capital needs analysis is done to determine a client’s _________ needs in order to fund future financial goals.

A

insurance needs

28
Q

Assuming a 12% rate of return, how long will it take $50,000 to double?`

A

Six years. Using the Rule of 72, 72 divided by the rate of return determines the number of years (72 ÷ 12 = 6 years).

29
Q

What are TIPS?

A

Treasury Inflation-Protected Securities

30
Q

True or False: Systematic rebalancing assumes markets are inefficient.

A

False

31
Q

The greater the dispersion of historical returns of a security, the _________ its standard deviation.

A

higher

32
Q

_______ investors are concerned with a company’s future earnings potential.

A

Growth

33
Q

True or False: The S&P 500 is an asset class.

A

False. Stocks, bonds, real estate, and cash are asset classes.

34
Q

What is considered an optimal portfolio?

A

One that has the highest expected return given the client’s tolerance for risk

35
Q

The quick asset ratio is calculated by excluding _________ from a company’s current assets.

A

inventory

36
Q

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

A

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

37
Q

If there is no relationship between the movement of two investments, they are considered to be _______________.

A

uncorrelated.

38
Q

True or False: Tactical asset allocation is considered a passive asset allocation approach.

A

False. Tactical asset allocation is considered an active approach.

39
Q

True or False: Stop-limit orders are guaranteed execution if the trigger is touched.

A

False. Stop-limit orders may not be executed if the limit price cannot be met.

40
Q

Buy limit orders are placed ________ the market.

A

below

41
Q

An investor who follows the __________ style of investing bets against market trends.

A

contrarian style

42
Q

To determine a bond’s real interest rate, the bond’s yield is subtracted by the rate of ___________.

A

inflation.

43
Q

What type of trading strategy would be used if you believe markets are efficient?

A

Passive strategies, such as indexing or systematic rebalancing

44
Q

True or False: Alpha represents an investment’s actual return in excess of its expected return.

A

True

45
Q

What types of securities tend to have a low beta?

A

Defensive stocks

46
Q

What is a common method used to calculate the returns on an equity indexed annuity?

A

Point-to-point indexing

47
Q

What is the formula for determining holding period return?

A

(Ending Value - Beginning Value + Dividends/Interest) ÷ Beginning Value

48
Q

Working Capital, Current Ratio, and the Quick Asset Ratio (Acid Test) are examples of ____________ ratios.

A

liquidity ratios

49
Q

Define range.

A

Range is the difference between the largest value and smallest value of a given set of numbers.

50
Q

What is the Capital Asset Pricing Model (CAPM)?

A

A model of the relationship between expected risk and expected return

51
Q

What risk is based on the possibility that new regulations may have a negative impact on an investment’s value?

A

Regulatory risk

52
Q

_____________ return allows an investor to compare the performance of two investment advisers.

A

Time-weighted

53
Q

What type of trading strategy would be used if you believe markets are inefficient?

A

Active strategies, such as tactical asset allocation or sector rotation

54
Q

What is the name for the graph of optimal portfolios?

A

The efficient frontier

55
Q

How is market capitalization (cap) determined?

A

A company’s current share price multiplied by the number of shares outstanding

56
Q

Stop and stop-limit orders are triggered when a round lot trades at, or through, the _____ ______.

A

stop price.

57
Q

In a rising market, is a low beta security expected to outperform or underperform the market as a whole?

A

Underperform

58
Q

What are two measures of liquidity?

A

Current ratio and the quick asset ratio (acid test) both measure a company’s liquidity.

Series 66 (21 decks)

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