Investing

Question 1

Margin call formula

Answer 1

Loan / 1 - maintenance margin

Question 2

Type of average for Dow Jones Industrial Average

Answer 2

• price-weighted average

- doesn’t incorporate market capitalization

Question 3

Type of average for S&P 500

Answer 3

• Value-weighted index

- Incorporates market capitalization of individual stocks into the average

Question 4

Coefficient of variation formula

Answer 4

CV = standard deviation / mean (average) return

• compare two assets
• higher CV = riskier investment

Question 5

What is arbitrage pricing theory?

Answer 5

• multi-factor model
• takes advantage of price imbalances
• inputs are factors (f) such as inflation and expected returns and their sensitivity (b) to those factors
• standard deviation and beta are NOT inputs

Question 6

Dollar-weighted return

Answer 6

• measures a result from a client

- IRR using investor’s cash flows

Question 7

Time-weighted return

Answer 7

• IRR using the security’s cash flow
• ignores investor’s cash flow (focuses on decisions made by manager)
• mutual funds report on time-weighted basis

Question 8

Price-earnings (P/E) ratio

Answer 8

Earnings per share x P/E multiplier = expected price per share

• # of $ an investor will pay for each $ of company earnings
• good for stocks with no dividend

Question 9

Dividend payout ratio

Answer 9

Common stock dividend / earnings per share

• measure manager’s decision to payout earnings as dividend

Question 10

Return on equity (ROE)

Answer 10

Earnings per share / stockholders equity per share

• how much profit the company provides against every dollar of investment equity

Question 11

Dividend yield

Answer 11

Dividend per share / stock price

• measures cash flows

Question 12

Efficient market hypothesis: weak form

Answer 12

• historical information will not investors achieve above average market returns
• rejects technical analysis

Question 13

Efficient market hypothesis: semi-strong form

Answer 13

• historical and public information will not help investors achieve above average market returns
• rejects technical and fundamental analysis

Question 14

Efficient market hypothesis: strong form

Answer 14

Historical, public and private information will not help investors achieve above market returns

• rejects technical, fundamental and insider information
• index investing

Question 15

Series E and EE bonds

Answer 15

• Sold at face value
• Non-marketable
• Non-transferable
• Do not pay interest periodically

Question 16

Series H bonds

Answer 16

• no longer available

- pay interest semi-annually

Question 17

Series I bonds

Answer 17

• inflation protected with fixed rate + variable rate

- do not pay interest periodically

Question 18

Treasury bills

Answer 18

< 1 year maturity

• marketable
• denominations of $100
• tax-free at state and local level

Question 19

Treasury notes

Answer 19

2-10 year maturity

• marketable
• tax-free at state and local level

Question 20

Treasury bonds

Answer 20

> 10 year maturity

• marketable
• tax-free at state and local level

Question 21

Treasury inflation protected securities (TIPS)

Answer 21

• principal adjusts for inflation

- coupon rate doesn’t change (unlike I bonds)

Question 22

Coupon rate

Answer 22

Annual $ payment / par value

Question 23

Current yield

Answer 23

Annual $ payment / current price of bond

Question 24

Original issue discount

Answer 24

Discount value a bond for which a bond is sold

• bond holder pays phantom income

Question 25

Conversion value formula

Answer 25

(Par / conversion price) x price per share

Question 26

Closed investment company

Answer 26

- fixed initial market capitalization - shares trade on organized exchange - trade at premium or discount to NAV

Question 27

Open investment company

Answer 27

- unlimited initial market capitalization - shares bought and redeemed directly from fund family - shares trade at NAV Ex. mutual fund

Question 28

Unit investment trust

Answer 28

- equity or fixed income (usually fixed income) - self-liquidating - passive management, no trading assets in trust - units, not shares

Question 29

Long straddle

Answer 29

- buy a put and call | - expects volatility, not sure what direction

Question 30

Short straddle

Answer 30

- sells put and call option | - investor doesn’t expect volatility, wants to keep the premiums

Question 31

Black / Scholes model

Answer 31

- determines value of a call option - variables (IVEST) - direct relationship on price of option - price of underlying asset - time upon expiration - risk-free rate of return - volatility of underlying asset - inverse relationship for strike (exercise) price

Question 32

Regulation T for initial margin from Federal Reserve

Answer 32

50%

Question 33

Value line reports

Answer 33

Ranks stocks 1-5 (one is highest)

Question 34

Morningstar reports

Answer 34

Ranks mutual funds, stocks, bonds, ETFs 1-5 ranking (five is highest)

Question 35

What is last day to receive dividend?

Answer 35

Two days before date of record

Question 36

Commercial paper

Answer 36

Short-term loan between corporations - Maturities of 270 days or less - denominations of $100,000

Question 37

Bankers acceptance

Answer 37

Facilitates imports and exports

Question 38

Ginnie Mae

Answer 38

Government National Mortgage Association (GNMA) - backed by U.S. government - no default risk / as safe as treasuries

Question 39

Municipal bonds

Answer 39

Tax-free at federal, state, local level if you live in issuing state

Question 40

Relationship between bond duration and volatility

Answer 40

Higher duration = more volatile price

Question 41

Relationship between bond maturity and bond duration

Answer 41

Longer maturity = higher duration

Question 42

Relationship between bond coupon and bond duration

Answer 42

Higher coupon = shorter duration

Question 43

Relationship between yield to maturity (YTM) and duration

Answer 43

Higher YTM = shorter duration

Question 44

Preferred stock

Answer 44

Debt / equity features Debt - par value - dividend rate as % or par Equity - bond price moves with price of common stock - Dividend doesn’t fluctuate (like stock) - No maturity date (like bond)

Question 45

Growth fund

Answer 45

Low dividend payout ratio - invests in stocks with high P/E - goal is capital appreciation

Question 46

Balanced fund

Answer 46

- more bonds than typical stock fund | - moderate volatility

Question 47

Global fund

Answer 47

International and U.S. stocks

Question 48

International fund

Answer 48

International stocks only (no U.S.)

Question 49

A shares

Answer 49

- front end load - small 12b-1 fee - no redemption fee

Question 50

B shares

Answer 50

- no longer available - redemption fee - max 12b-1 fee of 1% - no front end load - convert to A shares

Question 51

C shares

Answer 51

- level expense charges - no front end load - small back end load - max 12b-1 fee of 1% - companies convert C to A after expense

Question 52

American depository receipts (ADRs)

Answer 52

- foreign stock in domestic bank’s foreign branch - trade / dividends in USD - does not eliminate exchange rate risk

Question 53

Warrants

Answer 53

Call options issued by corporations - 5-10 year expiration period (vs 9 months or less for options) - not standardized (options are standardized) - always out of the money