Investment

Question 1

Which measure should you use to evaluate a manager’s performance?

Answer 1

If r2 is high, use treynor, jensen’s alpha, Information ratio. If r2 is low, use sharpe.

Question 2

What is the characteristics of convexity?

Answer 2

Convexity described the actual relationship between bond price and changes in interest rates. Convexity is good! The greater a bond’s convexity, the greater the increase in price when interest rates fall, and the less the bond falls in value when interest rates increase.

Question 3

What kind of risk does standard deviation and beta measures?

Answer 3

Standard deviation measures systematic and unsystematic risk, beta measures systematic risk ONLY.

Question 4

What is purchasing power risk and which portion does it focus on?

Answer 4

Purchasing power risk: inflation risk, focus on par.

Question 5

What are the different types of unsystematic risk?

Answer 5

ABCDEFG Accounting risk, business risk, country risk, default risk, executive risk, financial risk, government risk

Question 6

What type of assets to buy to beat inflation?

Answer 6

Equities, TIPs, Precious metals, Real Estate, I-Bonds

Question 7

2 Asset portfolio, how to compare regarding to return and risk?

Answer 7

Same return, choose lower risk, same risk choose higher return, or higher return with lower risk

Question 8

If 2 asset portfolio, A has return 18% and Standard deviation of 20, B has return of 12% and standard deviation of 7. Which one do you recommend?

Answer 8

Calculate coefficient of variation by using standard deviation divided by return. Coefficient of variation calculates risk per unit of return. Coefficient of variation for A is 20/18=1.1, for B is 7/12=0.58, since B has lower risk per unit of return, choose B

Question 9

What is semi-variance?

Answer 9

Semivariance is calculated by measuring the dispersion of all observations that fall below the mean .

Question 10

What are different types of market anomaly?

Answer 10

Jan effect, small firm effect, value line, P/E effect do not support EMH

Question 11

Volatility 4Ls

Answer 11

Lower coupon rate, higher volatility
Lower maturity, higher volatility,
Lower quality, higher volatility
Longer Duration, higher volatility

Question 12

If question provide you different types of bond with maturity time, duration, coupon and price. If investor expects interest rate to increase, which bond would investor prefer?

Answer 12

Interest rate goes up, bond goes down –Lowest duration will the lowest price volatility

Question 13

If question provide you different types of bond with maturity time, duration, coupon and price. If investor expects interest rate to decrease, which bond would investor prefer?

Answer 13

Interest rate goes down, bond price goes up — choose highest volatility

Question 14

Black scholes factors and how correlated

Answer 14

Current price of the underlying asset, time until expiration, the risk-free rate of return, volatility of the underlying asset, strike price
Only strike price is inversely correlated, other factors are all positively related.

Question 15

Future contract charateristics, who to sell and buy, worries about price goes up or down?

Answer 15

Growers(Farmers)= long the commodity(own it)=sell futures, worries about price goes down

Makers=short the commodity (needs the commodity) =buy futures, worries about price goes up

Question 16

Mark’s company makes wood furniture, Sue’s company grows wheat. Who is long, who is short? Who should buy future contract and who should sell?

Answer 16

Mark is short, he needs the wheat for the furniture, worries about price goes up
Sue is long, worries about price goes down
Mark should buy futures contract. Susan should sell the future contract.

Question 17

What is the best way to control volatility?

Answer 17

The best way to control volatility is to find investments that are negatively correlated.

Question 18

Does intrisic value takes into account how much you paid for the premium?

Answer 18

NO!

Question 19

A fund manager in Germany is concerned about a decrease in Euro, what should fund manager do?

Answer 19

Sell a future contract on Euro

Question 20

FFCB

Answer 20

Federal Farm Credit Bank

Question 21

Security Market Line is defined by?

Answer 21

CAPM, correlated to beta, measures systematic risk

Question 22

Liquidity Preference Theory

Answer 22

The yield curve results in lower yields for shorter maturities because investors prefer liquidity and are willing to pay for liquidity in the form of lower yields.

Question 23

Market Segmentation Theory

Answer 23

The yield curve depends on supply and demand at a given maturity.

Question 24

Expectations Theory

Answer 24

The yield curve reflects investors inflation expectations. Typically, since investors are uncertain or believe inflation will be higher in the future, long term yields are higher than short term yields

Question 25

Increasing discount, increasing government purchases of Treasury Security, decreasing budget of the DOT, decreasing corporate federal income tax rate. Which are monetary policies, which are fiscal policies?

Answer 25

Monetary policy: Increasing discount, increasing government purchases of Treasury Security

Fiscal policy: decreasing budget of the DOT, decreasing corporate federal income tax rate

Question 26

Coefficient of Variation

Answer 26

=Standard Deviation/ Average Return

On calculator Standard deviation is Sx!!!