Chapter 15 FINAL

Question 1

When an invetsor creates their portfolio what do they look at?

Answer 1

Risk + Return

Question 2

What are the two types of investors

Answer 2

1. an investor who prefers an investment with greater return with a greater level of risk
2. Theres investors who are more risk averse and want safe assets

Question 3

What are safer investments

Answer 3

GICs, Canada savings bond

Question 4

What are riskier investments

Answer 4

TESLA
GOOGLE

Question 5

Rank 6 investments from less risk/return to greater risk/return

Answer 5

Treasury bills
bonds
debentures
preferred shares
common shares
derivatives

Question 6

What is return from a security?

Answer 6

1. Either intrest or dvidends recieved
2. Capiral gain (price change)

Question 7

How do we calculate the % change?

Answer 7

Cash flow + (end - bed) / beg

Question 8

What is cash flow?

Answer 8

intrest/dividends

Question 9

What is the end-beg

Answer 9

Price change of security

Question 10

What is the real rate of return?

Answer 10

Its how much an investment increase by due to inflation

Question 11

How to find real rate of return

Answer 11

Nominat - infaltion rate

Question 12

What is nominal rate?

Answer 12

Actual rate of return

Question 13

There are four types of risk what is it?

Answer 13

Inflation
Business
Political
Liquidity

Question 14

What is liquidity risk?

Answer 14

Due to inflation it decreases the cash flows amount making the price of securities fall.

Question 15

What is a business risk

Answer 15

The risk associated with a specific industry or business

Question 16

What is political risk

Answer 16

Risk associated in a particular country

Question 17

What is a liquidy risk

Answer 17

its if the investment can be monetized quickly and easily

Question 18

What is interest rate risk?

Answer 18

How a securities return is effected to do rise in interest rates

Question 19

What is foreign exchange risk

Answer 19

How the streng/weakness of the canadian dollar will affect investment returns if investing in foreign securities

Question 20

What is default risk

Answer 20

The risk associated with a company going bankrupt or defaults on debt obligations

Question 21

What is systematic risk

Answer 21

Its risk associated with the overall market or economy

Question 22

What is a non systematic risk

Answer 22

its risk associated with a specific firm

Question 23

How do we measure the risk?

Answer 23

Beta

Question 24

What is beta?

Answer 24

bta measures a securities return relative to the overall market

Question 25

Higher beta =

Answer 25

more riskier

Question 26

What is asset allocation

Answer 26

where we decide to put our money

Question 27

what are the different assets a person can get risk and return

Answer 27

cash fixed income equtities

Question 28

How do we determine asset allocation for an investor?

Answer 28

its dependant on what the investors objectives and risk tolerance is

Question 29

How is the expected return of each asset in a portfolio based?

Answer 29

Their weighing and expected return

Question 30

Ex: Exp. Return Weighting Company A 8% 25% Company B 10% 40% Company C 12% 35%

Answer 30

The overall return would be: .08 X .25 + .1 X .4 + .12 X .35 = .102 or 10.2%

Question 31

Why do we need to diversify a portfolio

Answer 31

To eliminate risk to one specific firm

Question 32

How should we invest?

Answer 32

In securities that move in opposite directions

Question 33

What is correlation

Answer 33

measures how two securites are related

Question 34

+1 correlation inficates

Answer 34

two securities are moving in perfect positive direction

Question 35

-1 correlation inficates

Answer 35

two securities are moving in perfect negative direction

Question 36

0 correlation indicates

Answer 36

No correlation

Question 37

How do we want our securities to be correalted?

Answer 37

negative

Question 38

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

Answer 38

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

Question 39

What are primary investment objectives

Answer 39

safety, income, return, capital growth

Question 40

What are secondary investment objectives

Answer 40

marketability/liquidy tax minimization