Ch 12 Portfolio Management and Investment Risk Part III

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

Describe a growth investor.

Answer 3

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

Question 4

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

Answer 4

Annual Interest ÷ Current Market Price

Question 5

___________ stock fluctuates with the business cycle.

Answer 5

Cyclical stock

Question 6

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

Answer 6

The weighted arithmetic mean

Question 7

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

Answer 7

Regulatory risk

Question 8

What are mid-cap stocks?

Answer 8

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

Question 9

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

Answer 9

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

Question 10

Strategic asset allocation assumes that the markets are ____________.

Answer 10

efficient.

Question 11

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

Answer 11

taxes paid.

Question 12

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

Answer 12

Liquidity risk

Question 13

Tactical asset allocation assumes that markets are ______________.

Answer 13

inefficient.

Question 14

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

Answer 14

Dollar-weighted

Question 15

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

Answer 15

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

Question 16

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

Answer 16

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

Question 17

Define capital structure.

Answer 17

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

Question 18

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

Answer 18

Debt (i.e., bonds)

Question 19

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

Answer 19

Present

Question 20

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

Answer 20

risk-free

Question 21

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

Answer 21

The internal rate of return (IRR)

Question 22

Identify the acronym: CPI

Answer 22

Consumer Price Index

Question 23

What measures risk-adjusted return?

Answer 23

Alpha and the Sharpe Ratio

Question 24

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

Answer 24

True

Question 25

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

Answer 25

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

Question 26

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

Answer 26

Legislative risk

Question 27

What is another name for diversifiable risk?

Answer 27

Non-systematic risk

Question 28

____________ stock is resistant to recession.

Answer 28

Defensive stock is resistant to recession (utility companies).

Question 29

Is indexing considered an active or passive portfolio management strategy?

Answer 29

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

Question 30

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

Answer 30

real interest rate.

Question 31

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

Answer 31

inflation risk.

Question 32

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

Answer 32

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

Question 33

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

Answer 33

Legislative risk

Question 34

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

Answer 34

Compounding

Question 35

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

Answer 35

Inflation risk

Question 36

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

Answer 36

The investment will generate a negative return.

Question 37

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

Answer 37

Inventory

Question 38

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

Answer 38

True

Question 39

Define net present value (NPV).

Answer 39

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

Question 40

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

Answer 40

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

Question 41

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

Answer 41

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

Question 42

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

Answer 42

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).

Question 43

What is the fair value of a bond?

Answer 43

The discounted present value of the sum of the future payments

Question 44

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

Answer 44

Political risk

Question 45

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

Answer 45

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

Question 46

Sell limit orders are placed ________ the market.

Answer 46

above the market.

Question 47

What is an advantage to buy and hold portfolio management?

Answer 47

Transaction costs and tax consequences are minimized.

Question 48

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

Answer 48

1

Question 49

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

Answer 49

The Rule of 72

Question 50

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

Answer 50

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%.

Question 51

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

Answer 51

Annual Dividend ÷ Current Market Price

Question 52

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

Answer 52

Annual interest ÷ current market value of the bond

Question 53

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

Answer 53

5%

Question 54

What is another name for non-diversifiable risk?

Answer 54

Systematic risk

Question 55

Define holding period return.

Answer 55

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

Question 56

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

Answer 56

limit orders

Question 57

What is the Sharpe Ratio used to determine?

Answer 57

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

Question 58

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

Answer 58

Business risk