Chapter 8

Question 1

Risk Profile

Answer 1

A description of the type of risk associated with a particular investment

Question 2

Real Rate of Return and it’s calculation

Answer 2

The return adjusted for the effects of inflation. Determines purchasing power

Real Return = Nominal Rate - Annual Inflation Rate

Question 3

Norminal Return

Answer 3

The return that has not been adjusted for the impact of inflation

Question 4

Arithmetic Mean Calculation

Answer 4

Sum of individual holding period returns / the number of holding period returns

Eg. year 1($45-$50) / $50 = -10%
Year 2($55-$45) / $45 = 22.22%

 (-10% + 22.22%) / 2 aka 0.02 = 6.11%

Question 5

Geometric Mean Calculation

Answer 5

Calculates the average compound return over several periods. Used to determine the periodic increase or decrease in wealth

Question 6

Return on a Security and Calculation

Answer 6

Can be measured in Absolute Dollars but it is more common to express return as a percentage.

Return % =
cash flow + (ending value - beginning value)
/
Beginning value
X 100

Question 7

Common Measures of Risk : Variance

Answer 7

Measures the extent to which the possible realized returns differ from the expected return or mean

Question 8

Common Measures of Risk : Standard Deviation

Answer 8

The measure of risk commonly applied to portfolios and to individual securities within the portfolio. The square root of variance.

Question 9

Probable Range of Returns Calculations

Answer 9

Average return + standard return = positive outcome

Average return - standard deviation = negative outcome

Question 10

Portfolio Beta

Answer 10

Statistical measure that links the risk for individual equity securities or a portfolio or equities to the market as a whole.

Higher beta means that the portfolio is exposed to more risk

Measures that part of the fluctuation in returns driven by changes in the stock market

Question 11

Risk and Return Relationship (low to high)

Answer 11

Low to High Risk:

Treasury Bills
Bonds
Debentures
Preferred shares
Common shares
Derivatives

Question 12

Index Fund

Answer 12

Investor believes that the markets are completely efficient, there is no justification for active portfolio management

Question 13

The value of a share is primarily influenced by…

Answer 13

The company’s future earnings

Question 14

Liquidity Ratios

Answer 14

Are used to judge a company’s ability to meet short-term commitments.

Question 15

Fixed Asset

Answer 15

Assets that are expected to last longer than one year (not intended to be sold and are used for day to day operations to produce goods and services

Question 16

Current Asset

Answer 16

Assets that are expected to be converted to cash within 1 year (deposit accounts, inventories, trade receivables)

Question 17

Current Liabilities

Answer 17

1: Trade Payables (goods that have not received payment for)
2: Accured Liabilities (wages or taxes not yet paid)
3: Notes Payable (loans)

Question 18

Total shareholder’s Equity

Answer 18

The amount contributed to the financing of the company by shareholders over time by 2 means:
1: buying shares when they were in the peimary market
2: all of the company’s annual profits that have not been distributed to shareholders but reinvested into the company
Common shares + retained earnings

Question 19

Gross Profit

Answer 19

Revenue less cost of sales

The revenue, net cost of sales (the cost of producing those goods), cost of inventories used to produce the goods and labor in production

Question 20

Closing Retained Earnings for a Fiscal Year Calculation

Answer 20

Retained Earnings at beginning of period - dividends + profit for the period = closing retained earnings

Question 21

4 Common Types of Ratios used in Financial Analysis: Liquidity Ratios

Answer 21

Used to judge the company’s ability to meet it’s short-term commitments

Question 22

4Common Types of Ratios used in Financial Analysis: Risk Analysis Ratio

Answer 22

Shows how well the company can deal with it’s debt obligations

Question 23

4 Common Types of Ratios used in Financial Analysis: Operating Performance Ratio

Answer 23

How well management is making use of the company’s resources

Question 24

4 Common Types of Ratios used in Financial Analysis: Value Ratio

Answer 24

Show the investor what the company’s shares are worth or the return on owning them

Question 25

Meaningful External Comparisons

Answer 25

Not only should the companies be similar in operation but also in basis used to calculate each ratio compared should be the same

Question 26

Mutual Fun Performance Calculation

Answer 26

Investment x Year 1 % return / 100 = A
A + Investment = Mutual fund Year 1 Return

Year 1 return x Year 2 % return / 100 = Year 2 mutual fund return

Question 27

Geometric Return Calculation

Answer 27

[(1 +or- r1)(1 +or- r2)] ^0.5 - 1 x100

Question 28

Fundamental Analysis

Answer 28

The use of analytical tools to determine the intrinsic value of securities

Question 29

Technical Analysis

Answer 29

The study of historic prices and stock market behaviour to identify recurring patterns in the data

Question 30

Fundamental Analysis

Answer 30

Involved assessing the short, medium and long range prospects of different industries and companies

Question 31

Tax Rates on Types of Investments

Answer 31

Interest Income: Highest - Treasury Bills, bonds, money market mutual funds

Dividend Income: Middle - common and preferred shares

Capital Gains: Lowest - selling an investment for more that the price paid

Question 32

Duration

Answer 32

A measure of the security of a bond’s price to changes in interest rates (approx % change in price/value of a bond for 1% change in interest rates)

Question 33

Portfolio Alpha

Answer 33

The excess return earned on the portfolio

Question 34

Asset Allocation

Answer 34

The selection of the classes of securities to be held and in what portion to hold them

Question 35

Security Analysis

Answer 35

Evaluation of risk and return characteristics of securities.

Question 36

Fundamental Analysis

Answer 36

Assessing the short, medium and long range prospects of different industries and companies.

This means studying everything