Chapter 9 Homework and Review

Question 1

Revenue Bonds

Answer 1

Bonds issued to raise capital to fund a particular revenue generating project. the revenue generated by the project will be used to repay the bond issuance.

Question 2

Risk

Answer 2

The uncertainty associated with investment returns. it is the possibility that actual returns will be different from what is expected.

Question 3

Risk Adjusted Performance Measures

Answer 3

Sharpe, Treynor and Jensen’s Alpha, which can be used to measure the performance of any type of investment including stocks, bonds, and mutual funds.

Question 4

Risk Tolerance Questionaire

Answer 4

Evaluates a client’s willingness to take risk by addressing risk issues.

Question 5

Sector Fund

Answer 5

Restricts investments to a particular segment of the market. For example, there are technology, healthcare, telecommunications, financial, and pharmaceutical.

Question 6

Sector Market Line

Answer 6

The relationship between risk and return as defined by the CAPM

Question 7

Sharpe Ratio

Answer 7

A relative risk adjusted performance indicator, meaning the ration by itself does not provide any insight. A Sharpe ratio for one fund needs to be compared to that Sharpe ratio for another fund to take on meaning.

Question 8

Small, Mid, and Large Cap Funds

Answer 8

May have an objective regarding the size of the firm’s market capitalization.

Question 9

Specialty Funds

Answer 9

Restrict their investments to firms that are good corporate citizens and do not operate in industries such as alcohol, gambling, or tobacco and are considered socially responsible funds.

Question 10

Standard Deviation

Answer 10

Measures the total risk of an investment.

Question 11

Systematic Risk

Answer 11

Represents the risk that is inherent in the “system” and cannot be eliminated through diversification. The system represents U.S. market risk.

Question 12

Treynor Ration

Answer 12

A relative risk adjusted performance indicator. A Treynor ratio for one fun requires a comparison to the Treynor ratio for another fund.

Question 13

Unit Investment Trust

Answer 13

An investment company that passively manages a portfolio of either stocks or bonds, known as a bond or equity UIF.

Question 14

Unsystematic Risk

Answer 14

Represents the risk that can be diversified away, by combining multiple stocks, from multiple industries, into one portfolio.

Question 15

U.S. Government Bonds

Answer 15

Bonds issued by the U.S. government to finance the national debt and to fund deficit spending. The three primary types of bonds issued by the U.S. government are Treasury Bills, Treasury Notes, and Treasury Bonds.

Question 16

Value Funds

Answer 16

Typically invest in securities that are deemed to be out of favor or extremely under-valued.

Question 17

Warrant

Answer 17

A long-term option that gives the holder the right to buy a certain number of shares of stock in a particular company by a certain date.

Question 18

Weighted Average Return

Answer 18

Based on the dollar amount or percentage of a portfolio invested in each asset. Investments with a larger allocation or weighting will contribute more to the overall return of the portfolio.

Question 19

Zero Coupon Bonds

Answer 19

Bonds sold at a deep discount to par value and do not pay periodic interest payments. Instead, the hbonds increase in value each year, so that at maturity the bonds are worth their par value.

Question 20

Zero Growth Dividend Model

Answer 20

Values a security based on the stock’s capitalized amount of the actual dividends.