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

Ch 12 Portfolio Management and Investment Risk Part III Flashcards

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Series 66 flashcards
1
Q

True or False: Tactical asset allocation is changing a portfolio’s asset mix due to impending market and economic factors.

A

True

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2
Q

True or False: Diversification is one method by which an investor may avoid non-systematic risk.

A

True

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3
Q

Describe a growth investor.

A

One seeking stocks of companies with an above-average growth rate, high P/E ratios, and low dividend payout ratios

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4
Q

What is the formula for calculating a bond’s current yield?

A

Annual Interest ÷ Current Market Price

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5
Q

___________ stock fluctuates with the business cycle.

A

Cyclical stock

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6
Q

What type of mean is used to calculate the expected return?

A

The weighted arithmetic mean

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7
Q

What is the risk that environmental regulations could impact the prices of securities?

A

Regulatory risk

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8
Q

What are mid-cap stocks?

A

Stocks of companies that are more volatile and growth-oriented than the large-cap stocks

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9
Q

If an investment has increased in value, when would its annualized return be greater than its holding period return?

A

An investment’s annualized return would be greater than its holding period return if it was held for less than one year.

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10
Q

Strategic asset allocation assumes that the markets are ____________.

A

efficient.

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11
Q

An investor’s net return is the gross return minus ________ paid.

A

taxes paid.

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12
Q

What is the risk that investors may be unable to dispose of a securities position quickly and at a fair price?

A

Liquidity risk

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13
Q

Tactical asset allocation assumes that markets are ______________.

A

inefficient.

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14
Q

_______________ return allows an investor to measure the amount of money she has earned on her investments.

A

Dollar-weighted

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15
Q

Which is a better hedge against inflation, investing in stocks or bonds?

A

Historically, stocks have outperformed inflation. Since bonds are fixed income instruments, they are hurt by inflation.

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16
Q

True or False: The longer an investor’s time horizon, the more concerned he is with market fluctuations.

A

False. The longer the time horizon, the less concerned he is with market fluctuations.

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17
Q

Define capital structure.

A

A company’s issuance of debt and equity securities (both common and preferred stocks) to finance operations

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18
Q

Which asset class is most susceptible to interest-rate risk?

A

Debt (i.e., bonds)

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19
Q

__________ value is the amount of money that must be invested today to result in a certain sum at a future time.

A

Present

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20
Q

The interest rate on a U.S. T-bill is commonly used to measure an asset’s _________ rate of return.

A

risk-free

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21
Q

What is used to determine how a given present value will become a needed future value.

A

The internal rate of return (IRR)

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22
Q

Identify the acronym: CPI

A

Consumer Price Index

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23
Q

What measures risk-adjusted return?

A

Alpha and the Sharpe Ratio

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24
Q

True or False: According to CAPM, a security’s return equals a risk-free return (T-Bill return) plus a risk premium.

A

True

25
Q

Do investors who favor passive strategies believe markets are efficient or inefficient?

A

Efficient. Rather than trying to time the market, they may rebalance their portfolios periodically (e.g., quarterly).

26
Q

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

A

Legislative risk

27
Q

What is another name for diversifiable risk?

A

Non-systematic risk

28
Q

____________ stock is resistant to recession.

A

Defensive stock is resistant to recession (utility companies).

29
Q

Is indexing considered an active or passive portfolio management strategy?

A

Passive, since the composition of the benchmark index generally remains the same.

30
Q

A bond’s inflation-adjusted rate of return may also be referred to as the _______ interest rate.

A

real interest rate.

31
Q

Buying gold or gold futures may protect an investor against _________ risk.

A

inflation risk.

32
Q

How much principal, compounding at 3% annually, is needed to make annual payments of $3,000 in perpetuity?

A

$100,000 principal = $3,000 annual payment /.03 rate of return

33
Q

What is the risk that changes in tax law could impact securities prices?

A

Legislative risk

34
Q

___________ is the term that BEST describes the process used to calculate an investment’s future value.

A

Compounding

35
Q

Gold coins, gold certificates, or gold futures may be purchased in an effort to avoid what type of risk?

A

Inflation risk

36
Q

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

A

The investment will generate a negative return.

37
Q

(Current Assets - ____________) ÷ Current Liabilities = Quick Asset Ratio (or Acid Test)

A

Inventory

38
Q

True or False: Securities with a correlation coefficient of zero are considered uncorrelated.

A

True

39
Q

Define net present value (NPV).

A

The difference between the value of an investment’s cash inflows and outflows above a discount rate

40
Q

What is the proper order of liquidation for a corporation at bankruptcy?

A

Secured creditors, unpaid workers, IRS, unsecured creditors, preferred, and then common.

41
Q

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

A

A positive NPV would indicate than an investment has an IRR that is greater than the required rate.

42
Q

True or False: In the secondary market, a client buys at the bid and sells at the ask (offer).

A

False. Clients buy at the ask/offer (price at which a BD will sell) and sell at the bid (price at which a BD will buy).

43
Q

What is the fair value of a bond?

A

The discounted present value of the sum of the future payments

44
Q

What is the risk of foreign investors losing money due to changes with a country’s government or regulatory environment?

A

Political risk

45
Q

Jim invested $25,000 in an annuity with a 6% return. How long will it take for the money to double?

A

Using the Rule of 72, divide 72 by the rate of return (72 ÷ 6 = 12 years).

46
Q

Sell limit orders are placed ________ the market.

A

above the market.

47
Q

What is an advantage to buy and hold portfolio management?

A

Transaction costs and tax consequences are minimized.

48
Q

What is the beta of the market (S&P 500)?

A

1

49
Q

What rule can be used to determine the annual rate of return needed for funds to double if given a number of years?

A

The Rule of 72

50
Q

$10,000 has become $80,000 in 36 years. What is the internal rate of return?

A

The money doubled every 12 years. The 10 grew to 20, the 20 to 40, and the 40 to 80. Using the Rule of 72, 72 ÷ 12 = 6%.

51
Q

To find a stock’s current yield, the formula is: ____________ ÷ ____________

A

Annual Dividend ÷ Current Market Price

52
Q

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

A

Annual interest ÷ current market value of the bond

53
Q

A bond is yielding 8% and the rate of inflation is 3%. What is the bond’s real interest rate?

A

5%

54
Q

What is another name for non-diversifiable risk?

A

Systematic risk

55
Q

Define holding period return.

A

The total return received from holding an asset or portfolio of assets

56
Q

Stop-limit orders become ________ orders once they are triggered/activated.

A

limit orders

57
Q

What is the Sharpe Ratio used to determine?

A

The Sharpe Ratio is used to determine if returns are from wise investments or the result of excess risk.

58
Q

Identify the risk: A particular enterprise may not perform well due to poor management or increased competition.

A

Business risk

Series 66 (21 decks)

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