Chapter 15

Question 1

what does ‘portfolio management’ focus on?

Answer 1

risk
return

Question 2

What do ‘financial decisions’ revolve around?

Answer 2

risk-return tradeoff

Question 3

There are two types of investors what are they

Answer 3

1. Those who prefer investments that generate a return for a given level of risk
2. Some investors who are more risk averse and choose to own safe assets

Question 4

What are examples of ‘safe’ assets

Answer 4

GICs,
Canada’s Savings Bonds
(both low risk, low return assets)

Question 5

What are some ‘riskier assets’

Answer 5

Google
Amazon
Tesla

Question 6

List assets from ‘less risk/less return’ to ‘greater risk/greater return’

Answer 6

Treasury bills

Bonds

Debentures

Preferred shares

Common shares

Derivatives

Question 7

What is ‘total return’?

Answer 7

Its the sum of
1. Intrest & dividends paid (cash flow) you receive when you own the security

2. Capital gain (price change)

Question 8

How would you calculate % return?

Answer 8

Cash flow + (Ending value – beginning value)/ Beginning value

“Cash flow” = interest / dividends received

“(Ending value – beginning value)” = capital gain

Question 9

What is the real rate of return?

Answer 9

+ is how much an investment has increased due to adjustments made after inflation

Question 10

How do you calculate real rate of return?

Answer 10

Real rate of return (approximate) = Nominal rate – inflation rate

Question 11

What is nominal rate

Answer 11

Its your actual rate of return

Question 12

What are the four types of risk?

Answer 12

Inflation risk
Political risk
Business risk
Liquidity risk

Question 13

What is ‘inflation risk”?

Answer 13

It reduces the future value of a securities csh flow and with this increase in inflation prices of securities tend to fall

Question 14

What is business risk?

Answer 14

Its risk associated with a specific business or industry

Question 15

What is a political risk?

Answer 15

Risk associated doing business in a country due to government policies and political instability

Question 16

What is liquidity risk?

Answer 16

Its the risk associated with how quickly and easily an investment can be converted to cash without significant loss

Question 17

What is intrest risk?

Answer 17

This is basically how a secuties return tend to change based on interest rates

Question 18

If intrest rate rises, what happens?

Answer 18

Securities value tends to fall and vise versa

Question 19

What is foreign exchange risk?

Answer 19

The risk of the fluctuations in the Canadian dollar can affect investment returns

Question 20

What is defualt risk

Answer 20

Its risk associated ith a company going bankrupt or failing to meet debt obligatios

Question 21

What is systemtaic risk?

Answer 21

risk associated with an overall market or economy and cannot be diversified or eliminated

Question 22

What is non-systematic risk?

Answer 22

Its risk is associated with a specific firm or instruct and can be diversified away by spreading our investments

Question 23

How do we diversify our baskets.

Answer 23

Buy different stocks in different industries in different countries

Question 24

What is beta

Answer 24

Measures a securities return relative to the overall market

Question 25

Higher beta == …?

Answer 25

Greater risk is relative to the overall market

Question 26

What is asset allocation?

Answer 26

Where to put your money!!!

Question 27

What are examples of asset allocation?

Answer 27

Cash
Fixed income
Equities

Question 28

How does a person decide what they want to invest in?

Answer 28

A person’s risk tolerance and investment objectives

Question 29

How does the expected return of a portfolio vary? (based on what factors)

Answer 29

It varies based on the expected return of each asset and their weighting in the portfolio.

Do this for each company and add it all up

Question 30

Why should we diversify our portfolio?

Answer 30

To eliminate the risk specific to one firm

Question 31

The best form of diversity

Answer 31

Is when securites move in opposite directions

Question 32

What does correlation measure?

Answer 32

How returns of 2 securities are related

Question 33

What shows a positive, negative or no correlation?

Answer 33

+1.0 indicates perfect positive correlation
-1.0 indicates perfect negative correlation
0.0 indicates no correlation

Question 34

What is beta?

Answer 34

Measures the volatility of a security return relative to the overall market

Question 35

Example of beta: If Company A’s beta = 2.0; if the market goes up 10%,

Answer 35

Company A’s shares will increase 20% - and vice versa

Question 36

How are portfolio returns weighted

Answer 36

It’s the weighted average of returns for all securities.

Question 37

What’s a rule of thumb to know about portfolio returns?

Answer 37

The overall portfolio risk will be lower than the weighted average of risks for all securities

Question 38

What are some primary investment objectives?

Answer 38

1. Security
2. Income
3. Capital growth
4. Return

Question 39

What are some Secondary investment objectives?

Answer 39

1. marketability/ liquidity
2. Tax minimization

Question 40

What are the safety, income, and growth of ‘short-term, and long-term bonds?

Answer 40

Short term

Safety; Best
Income: very steady
Growth: Very limited

Long-term:

Safety: Next best
income: very Steady
Growth: Varies

Question 41

What are the safety, income, and growth of ‘preferred shares + Common Shares’?

Answer 41

Perfered Shares:

Safety: Good
Income: Stead
Growth: varies

Common shares
Safety: Least
Income: varies
Growth: BEST