Ch. 20 Flashcards
Strategic asset allocations assume that markets are ________.
Efficient
If the economy is experiencing a deflationary environment, what is the effect on purchasing power?
Purchasing power increases
To what risks would Treasury bond funds be subject?
Interest rate, purchasing power and market risk
True or False: The Efficient Market Theory indicates that, through analysis, undervalued situations can be discovered.
False
If an asset outperforms the market when prices are up, but underperforms when prices are down, what is its beta?
Greater than 1
True or False: Active investment strategies assume that markets are efficient.
False- assume they are inefficient
What theory states that all known relevant information is reflected in a security’s price?
Efficient Market Theory
Describe inflation or purchasing power risk.
The risk that today’s investment will not be worth as much when the money is received in the future.
What is the beta of the market (S&P 500)?
1
What measures a bond’s sensitivity to interest rate changes?
Duration
Based on its Beta, a stock is expected to return 3%. If it actually earned 5%, what is the stock’s Alpha?
2%
An owner of utility stocks, preferred stocks, and bonds would be most concerned about changes in ______________.
Interest rates
Define real interest rate (real rate of return).
Interest rate minus the inflation rate (e.g., Bond yielding 8% when inflation is 3% has a real interest rate of 5%).
Which risk is diversifiable, systematic or non-systematic risk?
Non-systematic
Is sector rotation a passive or active asset allocation strategy?
Active
