Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFP EXAM - Giauque Flashcards > Chapter 4 - Investment Planning > Flashcards

Chapter 4 - Investment Planning Flashcards

You may prefer our related Brainscape-certified flashcards:
CFP® flashcards
1
Q

Degree by which two assets are RELATED to each other?

A

Correlation Coefficient (R)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

+1 indicates:
0 indicates:
-1 indicates:

A

+1 indicates: Perfect Correlation
0 indicates: No Correlation
-1 indicates: Negative Correlation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Formula for standard deviation:

A

Sq Root of Variance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

How do you calculate variance?

A

(Sum of squared differences between actual and expected return) / (Total # of observations - 1)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

When do the greatest diversification benefits occur?

A

When portfolio is perfect -1 opposite correlation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Represents all possible portfolios that can be constructed?

A

Efficient Frontier

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Indifference curve placement here indicates higher utility

A

Up and to the left

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Modern Portfolio Theory combines the efficient frontier with 2 components?

A

RFR and Beta

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is beta?

A

Measure of a portfolios risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the risk free rate?

A

Current Return on Treasury Bills

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Measures the risk/return relationship for efficient portfolios of securities?

A

Securities Market Line

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the 3 assumptions under CAPM?

A

1) Investors are Rational
2) Investors can borrow and lend at the RFR
3) Assume Taxes & Fees @ 0%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

To the left of Point of Tangency on the efficient frontier of the Capital Market Line?

A

Lending Portfolios

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

All investments into a market portfolio?

A

Point of Tangency

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

To the right of the point of tangency on the capital market line?

A

Borrowing Portfolios

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the CML Capital Money Line Formula?

A

(RFR + Standard Deviation of Portfolio) X (Market Return - RFR) / Standard Deviation of Market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is the Sharpe Ratio formula?

A

(Market Return - RFR) / Standard Deviation of Market

18
Q

Relative measure of portfolio performance in which total risk is measured by standard deviation is used to estimate risk adjusted performance.

A

Sharpe Ratio

19
Q

This ratio is only meaningful when compared to alternative investments.

A

Sharpe Ratio

20
Q

Sharpe Ratio measures what?

A

Risk adjusted performance (based on standard deviation)

21
Q

What is the formula for risk premium?

A

(Market Return - RFR)

22
Q

As risk premium decreases CML slope __________ .

A

Decreases

23
Q

Measure of how much 2 assets MOVE together?

A

Covariance

24
Q

Securities market line OR CAPM Formula:

A

RFR + Beta (Market Return - RFR)

25
Q

How is variance calculated?

A

Standard Deviation Squared

26
Q

What does CAPM calculate?

A

Required Return

27
Q

Asset pricing model describes relationship between risk and return takes into account changes in inflation and GDP

A

APT - Arbitrage Pricing Theory

28
Q

This theory states that perfect substitutes must sell for the same price.

A

Law of One Price

29
Q

Measures the ability of an investor to stay invested when prices rise.

A

Risk Tolerance

30
Q

8 Major Factors to Consider when determining investors risk tolerance.

A
  • Loss Aversion
  • Available Liquidity
  • Savings
  • Psychographics
  • Insurance
  • Time Horizon
  • Goals
  • Phase of Life cycle
31
Q

When an investor has experienced too many losses and “calls it quits.”

A

Loss Aversion

32
Q

Least risk for highest return

A

Efficient Portfolio

33
Q

Another word for “willingness”

A

Propensity

34
Q

What is the ideal allocations for a client age 65-death?

A
  • Relatively liquid investments, enough to fund 5 years of expenditures
  • Rest of portfolio - moderate growth
35
Q

3 common approaches to asset allocation?

A

1) Strategic
2) Tactical
3) Mean Variance Optimization

36
Q

Risk /Return Trade-off considering investor goals

A

Strategic

37
Q

Approach to asset allocation that seeks to outperform market?

A

Tactical

38
Q

Allocation style that seeks to maximize return for selected level of risk?

A

Mean variance

39
Q

Strategy that uses index funds to fulfill the core components of the desired asset allocation?

A

Core Satellite

40
Q

Trying to predict where an economic cycle is heading in the future and timing it.

A

Sector Rotation

41
Q

Occurs when a mutual fund begins to diverge from its stated objective.

A

Style Drift

CFP EXAM - Giauque Flashcards (21 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions