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

Ch 12 Portfolio Management and Investment Risk Part IV Flashcards

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Series 66 flashcards
1
Q

Define reinvestment risk.

A

The risk that an investor will not be able to reinvest her principal at the same interest rate.

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2
Q

What is the formula for determining an asset’s total return?

A

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

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3
Q

Define negative financial leverage.

A

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

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4
Q

A client notices that a thinly traded stock has had few daily trades effected. To what risk is it most susceptible?

A

Liquidity risk

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5
Q

Business, regulatory, political, and liquidity risk are all types of ____________ risk.

A

unsystematic risk.

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6
Q

Highly regulated companies, such as utilities, are subject to __________ risk.

A

regulatory risk.

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7
Q

12 years ago, Tina invested $25,000 which has now grown to $100,000. What is the annual growth rate of her investment?

A

In 12 years, the money doubled twice (every six years). Using the Rule of 72, 72 divided six years = 12%.

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8
Q

Both the Dow Jones Industrial Average and the S&P 500 Index are _____-cap indexes.

A

large-cap indexes.

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9
Q

__________ value is the dollar amount to be invested today to meet a specific dollar objective at a set future point.

A

Present

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10
Q

True or False: The interest rate on TIPS is fixed, but the principal may be adjusted.

A

True

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11
Q

_________ stock pays higher than average dividends.

A

Income stock

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12
Q

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

A

Underperform

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13
Q

What is the use of the Capital Asset Pricing Model (CAPM)?

A

To find an investor’s optimal portfolio by comparing expected risk with expected rates of return

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14
Q

If an investor is short stock, a buy stop order can be used to limit _________ risk.

A

upside risk.

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15
Q

What is the efficient frontier?

A

The line representing portfolios (excluding risk-free alternatives) showing the lowest risk for a given level of return

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16
Q

What is a Perpetuity?

A

An annuity that pays out forever.

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17
Q

Identify the acronym: MPT

A

Modern Portfolio Theory

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18
Q

A company with more debt than equity outstanding is considered ____________.

A

leveraged.

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19
Q

___________________ is the balancing of investment classes according to an investor’s investment objectives.

A

Asset allocation

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20
Q

The difference between an investment’s total return and the risk-free rate is the risk _______.

A

premium.

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21
Q

What is commonly used to measure an asset’s risk-free rate of return?

A

The interest rate on a U.S. T-bill

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22
Q

What is the risk of having an excessive portion of a portfolio invested in one particular security or asset class?

A

Concentration risk

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23
Q

Do stop orders guarantee a specific price when buying or selling?

A

No, stop orders execute at the market price (which is uncertain) once they are activated.

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24
Q

Stop orders become _________ orders once they are triggered/activated.

A

market orders

25
Q

Define expected return.

A

The possible return of an asset multiplied by the likelihood of occurrence

26
Q

A ____________ is an annuity that never stops paying money.

A

perpetuity

27
Q

The Russell 2000 Index is a _____-cap index.

A

small-cap index.

28
Q

Bond A yields 7.5% when inflation is 3%. Bond B yields 8% when inflation is 4%. Which has a higher real interest rate?

A

Bond A. Bond A’s real interest rate is 4.5% (7.5% - 3%) and Bond B’s real interest rate is 4% (8% - 4%).

29
Q

True or False: Strategic asset allocation is considered an active asset allocation approach.

A

False. Strategic asset allocation is considered a passive approach.

30
Q

Identify the acronym: CAPM

A

Capital Asset Pricing Model

31
Q

Over the last three months, a stock rose from $50 to $51 and paid a $.25 dividend. What is its annualized return?

A

The three-month return is 2.5% ($1.25 ÷ $50). A quarterly return is annualized by multiplying by four (2.5% x 4 = 10%).

32
Q

If an investor is long stock, a sell stop order can be used to limit ___________ risk.

A

downside risk.

33
Q

True or False: A buy-and-hold strategy is considered an active/tactical investment strategy.

A

False. A buy-and-hold strategy is considered a passive/strategic investment strategy.

34
Q

What is required to make the dollar weighted return and the time weighted return equal?

A

Remove or subtract any deposits into and/or withdrawals out of the portfolio

35
Q

Which return measures investment performance by including all cash inflows and outflows?

A

Dollar-weighted return

36
Q

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

A

Large cap stocks have the least risk.

37
Q

What uses computer simulations to present random outcomes of an investment strategy?

A

Monte Carlo Simulation

38
Q

What strategy involves moving a client’s funds from one industry to another during defined periods?

A

Sector rotation

39
Q

Name the three forms of market efficiency.

A

Strong-, Semi-Strong and Weak-Form

40
Q

______ is the measure of an asset’s volatility compared to the market as a whole.

A

Beta

41
Q

What is the present value of an annuity that pays $2,000 per year and earns 5% per year?

A

$40,000 = $2,000/.05

42
Q

List some forms of business risk that apply when investing in individual equity securities.

A

Poor management, obsolete products, changing market conditions

43
Q

What method of investing is characterized by regularly investing a set amount of money, regardless of share prices?

A

Dollar Cost Averaging

44
Q

What is used as the basic measure of risk for an investment?

A

Standard deviation

45
Q

If two investments go in opposite directions from one another, this is referred to as ___________ correlation.

A

negative correlation.

46
Q

What is the formula for the Sharpe Ratio?

A

(Return on Investment - Risk-Free Return) ÷ Standard Deviation

47
Q

True or False: In a weak-form efficient market, technical analysis will be useful.

A

False. In a weak-form efficient market, only fundamental analysis will be useful.

48
Q

_______ investors look for stocks of companies that are intrinsically undervalued.

A

Value

49
Q

What is the formula for calculating the risk premium?

A

Risk premium = total return - risk-free rate

50
Q

Identify the range from the following set of numbers: 10, 12, 5, 1, 7, 7, 8, 4

A
  1. Range is calcuated by starting with the largest value (12) and then subtracting the smallest value (1).
51
Q

For a person with a diversified portfolio of large-cap stocks, what type of risk may be reduced by using index options?

A

Systematic risk

52
Q

What are the three main concepts underlying the Modern Portfolio Theory?

A

Expected return, standard deviation, and correlation

53
Q

____________ risk is the inability to sell an investment easily.

A

Liquidity risk

54
Q

The ________ rate of return is used to calculate the anticipated return for a portfolio of securities.

A

expected

55
Q

Describe a value investor.

A

One seeking stocks that are undervalued in relation to their earnings and have low P/E ratios

56
Q

Which form of market efficiency declares that only insiders can regularly beat the market?

A

Semi-strong

57
Q

The principal value of TIPS may be adjusted based on changes to the __________________________.

A

Consumer Price Index (CPI).

58
Q

If two investments closely track one another, this is referred to as ___________ correlation.

A

positive correlation.

59
Q

What ratio tests a company’s ability to pay its current liabilities with its current assets, but excludes inventory?

A

The Quick Asset Ratio (the Acid Test)

Series 66 (21 decks)

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