Chapter 15 Part 3

Question 1

Growth stocks are those with

Answer 1

high expectation of growth in earnings, though often have a low dividend payout. These types of stocks usually have a high price-to-earnings ratio .

Question 2

Income stocks, such as those issued by

Answer 2

utility companies, often provide high dividend payouts.

Question 3

Value stocks tend to sell at a

Answer 3

low price-to-earnings ratio. These issues are usually undervalued by the market because they are in a sector that is currently out of favor.

Question 4

emerging growth stocks are typically

Answer 4

new companies with little, if any, earnings and an unproven track record.

Question 5

Cyclical stocks tend to

Answer 5

perform in relation to the economic cycle (e.g., manufacturers, materials, etc.).

Question 6

Countercyclical companies perform

Answer 6

inversely to the economic cycle. for example, if the economy is declining, gold stocks tend to rise.

Question 7

Defensiue stocks are stocks that perform

Answer 7

consistently, regardless of the economic cycle (e.g., utility companies or drug manufacturers).

Question 8

Sector stocks are those stocks that represent a

Answer 8

segment of the economy, or industry specific companies (e.g., airline companies, technology stocks, and gold stocks).

Question 9

Speculative stocks are stocks that are considered

Answer 9

high risk. These companies tend to fluctuate a great deal in price or have a positive track record of earnings.

Question 10

Special situation stocks are companies that

Answer 10

may be involved in an event that will affect their earnings, such as a merger, restructuring, or bankruptcy.

Question 11

Corporate bonds are

Answer 11

debt securities that provide investors with a fixed-income stream. The interest paid is taxable at the federal, state, and local levels. Corporate bonds are subject to various risks such as inflation risk, reinvestrnent risk, default risk, and credit risk.

Question 12

Municipal bonds are

Answer 12

a type of bond that is more suitable for investors in a high tax bracket. The interest received from these types of debt instruments is exempt from federal income taxes. However, the interest may be subject to state and local taxes

Question 13

The U.S. government issues various debt instruments. Three of the most popular are

Answer 13

Treasury bills, Treasury notes, and Treasury bonds. Since these securities are issued by the Treasury, they are considered safe and are very liquid. The interest paid on these bonds is exempt from state and local taxes, but is subject to federal taxes. Government debt may be subject to inflation and reinvestment risk, but is not subject to default risk.

Question 14

An optimal portfolio provides the

Answer 14

greatest return for a given amount of risk.

Question 15

efficient frontier

Answer 15

A line created by graphing these optimal portfolios

Question 16

Monte Carlo Simulation

Answer 16

illustrates the hypothetical performance of a portfolio over time by using randomly selected variable rates of return identical to the returns a client would earn in the market. The rates of return are based on the expected rate of return and the corresponding standard deviation.

Question 17

expected return equation

Answer 17

Rz = Rrf + Bz(Rm-Rrf) Rz = the expected return on investment Z, Rrf = the risk free rate (the return on a risk free investment), Rm = the treturn of the market (S&P 500 index), Bz = the beta of investment Z

Question 18

T-bills are usually used to approximate the returns on a

Answer 18

risk-free rate (RRF). As previously mentioned, T-bills are short-term, fixed income securities issued by the U.S. government

Question 19

beta is the measurement of

Answer 19

the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

Question 20

The market as a whole is assigned a beta value of

Answer 20

1. In most cases, the representation of the market will be the S&P 500 Index. Therefore, an asset’s beta will be compared to the market beta of 1. If an asset’s beta is greater than 1 (more volatile), the asset is expected to outperform the market when the market is up, but underperfonn the market when the market is down. If an asset’s beta is less than 1 (more stable), the asset is expected to underperform the market when the market is up, but outperform the market when the market is down.