Ch 12 Portfolio Management and Investment Risk Part II Flashcards
If an adviser attempts to exceed the performance of the market, it is using ______ portfolio management.
active
True or False: With a buy and hold strategy, investors are consistently rebalancing their portfolios.
False. Buy and hold involves no rebalancing.
True or False: Systematic risk may be avoided through diversification.
False. Systematic (non-diversifiable) risk may not be avoided through diversification.
List some formulas used to measure liquidity.
Working capital, current ratio, and quick asset ratio (acid test)
Name four asset classes.
Stocks, Bonds, Real Estate, Cash
Describe positive financial leveraging.
Paying less interest than earnings received (e.g., client pays 4% on a margin loan, but earns 10% on stock gains)
What is the risk that Congress may enact tax law changes that negatively impact the value of an investment?
Legislative risk
If a security’s beta is more than 1, is it considered more or less volatile than the market as a whole?
The higher the beta, the greater the volatility.
Identify the risk: Investors miss out on receiving a better return by placing their funds elsewhere.
Opportunity risk
A __________ is a stream of cash flows that continues forever.
perpetuity
If an investor is attempting to maximize her portfolio growth over a long period, what is her strategy called?
Capital appreciation
What form of asset allocation attempts to keep the asset percentages balanced over a long period?
Strategic asset allocation
If a client eliminates unsystematic or diversifiable risk in his portfolio, he is willing to accept ______ risk.
market risk.
What is the formula for the P/E ratio?
Price ÷ EPS (Earnings Per Share)
True or False: A bottom up approach to investing uses the economy as a main factor in determining which stocks to buy.
False. Bottom up investing uses company specific items (e.g., earnings and dividend payments) to pick stocks.
Which would have the most risk—large-, mid-, or small-cap companies?
Small cap stocks would have the most risk.
True or False: The S&P 400 is a large-cap index.
False, the S&P 400 is a mid-cap index.
If an asset outperforms the market when prices are up, but underperforms when prices are down, what is its beta?
Its beta must be greater than 1.00.
An investment earns 10%, 50%, and 30% in three years. How would the annualized average rate of return be calculated?
When calculating an annualized rate of return over time, the geometric mean is used.
In the secondary market, a customer _____ at the bid and ____ at the ask (offer).
sells at the bid and buys at the ask (offer).
An investor buys stock that returns 2% for the year rather than a T-Bond yielding 6%. The ____________ cost is 4%.
opportunity cost is 4%.
What are some of the characteristics of a value stock?
Low P/E ratios, history of profitability, high dividend payout, and low market-to-book ratio
What type of risk is avoided through indexing?
Business risk, since indexing involves purchasing stocks of many companies
The S&P 400 Index is a ___-cap index.
mid-cap index.
What are two assumptions of MPT?
Investors want to minimize risk and maximize returns
True or False: The longer a bond’s duration, the less sensitive the bond’s price is to changes in interest rates.
False. The longer the duration, the greater a bond’s price sensitivity to changes in interest rates.
A capital needs analysis is done to determine a client’s _________ needs in order to fund future financial goals.
insurance needs
Assuming a 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 (72 ÷ 12 = 6 years).
What are TIPS?
Treasury Inflation-Protected Securities
True or False: Systematic rebalancing assumes markets are inefficient.
False
The greater the dispersion of historical returns of a security, the _________ its standard deviation.
higher
_______ investors are concerned with a company’s future earnings potential.
Growth
True or False: The S&P 500 is an asset class.
False. Stocks, bonds, real estate, and cash are asset classes.
What is considered an optimal portfolio?
One that has the highest expected return given the client’s tolerance for risk
The quick asset ratio is calculated by excluding _________ from a company’s current assets.
inventory
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 bond trading at a premium to its DCF value will earn less than comparably priced bonds.
If there is no relationship between the movement of two investments, they are considered to be _______________.
uncorrelated.
True or False: Tactical asset allocation is considered a passive asset allocation approach.
False. Tactical asset allocation is considered an active approach.
True or False: Stop-limit orders are guaranteed execution if the trigger is touched.
False. Stop-limit orders may not be executed if the limit price cannot be met.
Buy limit orders are placed ________ the market.
below
An investor who follows the __________ style of investing bets against market trends.
contrarian style
To determine a bond’s real interest rate, the bond’s yield is subtracted by the rate of ___________.
inflation.
What type of trading strategy would be used if you believe markets are efficient?
Passive strategies, such as indexing or systematic rebalancing
True or False: Alpha represents an investment’s actual return in excess of its expected return.
True
What types of securities tend to have a low beta?
Defensive stocks
What is a common method used to calculate the returns on an equity indexed annuity?
Point-to-point indexing
What is the formula for determining holding period return?
(Ending Value - Beginning Value + Dividends/Interest) ÷ Beginning Value
Working Capital, Current Ratio, and the Quick Asset Ratio (Acid Test) are examples of ____________ ratios.
liquidity ratios
Define range.
Range is the difference between the largest value and smallest value of a given set of numbers.
What is the Capital Asset Pricing Model (CAPM)?
A model of the relationship between expected risk and expected return
What risk is based on the possibility that new regulations may have a negative impact on an investment’s value?
Regulatory risk
_____________ return allows an investor to compare the performance of two investment advisers.
Time-weighted
What type of trading strategy would be used if you believe markets are inefficient?
Active strategies, such as tactical asset allocation or sector rotation
What is the name for the graph of optimal portfolios?
The efficient frontier
How is market capitalization (cap) determined?
A company’s current share price multiplied by the number of shares outstanding
Stop and stop-limit orders are triggered when a round lot trades at, or through, the _____ ______.
stop price.
In a rising market, is a low beta security expected to outperform or underperform the market as a whole?
Underperform
What are two measures of liquidity?
Current ratio and the quick asset ratio (acid test) both measure a company’s liquidity.
