Investment Planning

Question 1

repurchase agreement.

Answer 1

A long-term corporate debt obligation with a claim against securities rather than against physical assets.

Question 2

A yield curve can be described as a curve that

Answer 2

Shows the term structure of interest rates on government debt.
The yield curve demonstrates graphically the relationship between long-term and short-term government debt

Question 3

greatest relative amount of price volatility if interest rates were to change quickly?

Answer 3

The smaller the coupon, the greater the volatility. Because the zero-coupon bond pays no payments, it is the smallest, thus the most volatile.

Question 4

The form of technical analysis that utilizes Advances and Declines (also known as Breadth of the Market) as an indicator is known as:

Answer 4

Price Indicator.

Advances and declines deal with price.

Question 5

number of shares traded.

Answer 5

Volume Indicator.

Question 6

deal with directions of the market and related averages

Answer 6

Market indicators

Question 7

do not use price but rather movements.

Answer 7

Charts are used as indicators and in some instances, do not use price but rather movements.

Question 8

Eddie Bauer bought a tax-exempt Original Issue Discount (OID) bond in November of 1998. Which of the following statements is/are true?

Answer 8

The bond basis increases at a set rate each year.
The difference between maturity value and the original issue discount price is known as the OID.
The bond’s earnings are treated as exempt interest income.
The bond was issued at a discount to its par value.

Question 9

Bottom-up equity managers include:

Answer 9

Value managers.

Technicians.

Question 10

top down” style managers.

Answer 10

Group rotation managers.

Market timers

Question 11

The entity that establishes the initial margin requirement is the:

Answer 11

The Federal Reserve sets margin requirements for all security transactions.

Question 12

An investor who searches for stocks selling at a low price to earnings (P/E) ratio believes that

Answer 12

Anomalies to the Efficient Market Hypothesis exist.

Question 13

The strong form of the Efficient Market Hypothesis is

Answer 13

often thought to be invalid because it presumes markets are completely efficient and historical, public and private information will not help you achieve above average market returns.

strong form states that stock prices reflect all information including insider information.

Question 14

The semi-strong form of the Efficient Market Hypothesis is

Answer 14

the semi-strong theory rejects fundamental analysis (and technical analysis).
“Stock prices adjust rapidly to the release of all new public information.

Question 15

All of the following are calculated as a weighted average except?

A portfolio standard deviation
B portfolio beta
C portfolio expected return
D portfolio duration

Answer 15

The correct answer is A.

Portfolio Standard Deviation cannot accurately be reflected in a weighted average. Standard Deviation takes into account all risk, which includes asset movement (COV) within the portfolio. A weighted average would not take into account the assets movement in relation to each other.

Question 16

time value of money concepts

Answer 16

An increase in interest rates increases the present value, but not the future value.

An increase in compounding rates will increase the future value, which is the same result as if the interest rate was increased.

The effective annual rate will be higher than the nominal rate whenever the frequency is less than one year (quarterly, monthly, etc.).

The best way to compare investment loan options with different frequencies is to convert all nominal rates to effective annual rates.

Question 17

Laura has been thinking about her need for life insurance. If she were to die today, she would want to leave her husband Scott with enough to pay off their $440,527 mortgage. Additionally, she would like to establish a scholarship that provides $8,000 annually in today’s dollars to her current University. Assume the scholarship would grow at 6% annually and education costs inflation is 5% on an annual basis. Under the capital needs analysis approach, approximately how much life insurance does Laura need to purchase?

Answer 17

$1,281,000.
Under the capital needs analysis approach, the earnings from the capital balance should be sufficient to provide cash needed, without liquidating the capital. The annual cash need is $8,000 in today’s dollars.

The amount of capital needed under the capital needs analysis approach can be determined using the following formula:

Capital needed = Annual Income Need / Interest Rate

However, the interest rate must be adjusted for inflation, using the following formula:

Inflation Adjusted interest rate = [(1 + 6%) / (1 + 5%)] - 1

Inflation Adjusted interest rate = .009523

Capital needed = $8,000 / .009523 Capital needed = $840,071

Laura also wants Scott to be able to pay off the mortgage, which has a current balance of $440,527.

Therefore, the total life insurance need is $1,280,598 ($440,527 + $840,071), or approximately $1,281,000.

Question 18

guaranteed investment contract (GIC)

Answer 18

Guaranteed investment contracts are similar in nature to money market accounts or CDs. The major risk is purchasing power (inflation) risk.

Question 19

internal rate of return (IRR)

Answer 19

If NPV is negative, the IRR of the investment is less than the required rate of return. If NPV is zero, the IRR of the investment exactly equals the required rate of return. If NPV is positive, the IRR of the investment is greater than the required rate of return.

Question 20

U.S. Series EE Savings Bonds
Templeman Intermediate Tax Exempt Fund
Treasury Bills

Answer 20

Interest income from the municipal bond fund is federally tax-exempt.

When the Series EE bond is redeemed, it will not be subject to state income tax.

The Treasury Bills are federally taxed only upon maturity, unless sold prior to maturity

Capital appreciation will be taxable at capital gain when shares of the fund are sold.

Question 21

The yield to maturity for a bond represents:

A. The coupon payments of the bond divided by the bond’s face value.

B. An index for a bond’s price volatility and a measure that can be used for an immunization strategy.

C. The probability that the bond issue will be called by the issuer.

D. The interest rate that equates a bond’s coupon payments and face value to the current price of the bond.

Answer 21

The correct answer is D.

A is incorrect. The current yield of a bond represents the coupon payments of the bond divided by the bond’s face value.

B is incorrect. The duration of a bond represents an index for a bond’s price volatility and a measure that can be used for an immunization strategy.

C is incorrect. There is no measure that determines the probability of a bond being called by the issuer.

Question 22

weak form of the efficient market hypothesis.

Answer 22

The weak form of the EMH states that “the current price of a security reflects all historical information available on that security and does not reject fundamental analysis.”
Efficient Market Hypothesis weak form states that prices reflect historical information

Kimberly Thurman is a private investor who researches individual stock purchases thoroughly. She studies company annual reports and 10k reports, computes comparative financial ratios from the reports, and compares company financial information to industry statistics to find undervalued stocks. Kim believes in:

The weak form of the efficient market hypothesis.

Question 23

Efficient Market Hypothesis EMH

Answer 23

Consistently superior performance is rare.
One cannot consistently earn abnormal returns. Over time, these superior returns will be reversed and overall gain is consistent with the general market.

Question 24

Sharpe ratio

Answer 24

measures the reward to overall risk (systematic and unsystematic) because it uses standard deviation in the formula.
Richard’s portfolio will include the “doctors only” investment as well as the stock in his personal assets, so there is more than stock market risk. The measure of performance should take into consideration overall risk as does the Sharpe ratio

Question 25

Treynor ratio and Jensen’s alpha

Answer 25

make use of beta which measures return only in relation to systematic risk

Question 26

information ratio

Answer 26

used for evaluating a fund manager against a benchmark.

Question 27

A $1,000 bond originally issued at par maturing in exactly 10 years bears a coupon rate of 8% compounded semi-annually and a market price of $1,147.20. The indenture agreement provides the bond may be called after five years at $1,050. Which of the following statements is/are true?

The yield to maturity is 6%.
The yield to call is 5.5%.
The bond is currently selling at a premium, indicating that market interest rates have fallen since the issue date.
The yield to maturity is less than the yield to call.

Answer 27

YTM N=10 × 2=20 I=? PV=<1,147.20> PMT=.08 × 1000 × .50=40 FV=1,000 I=3.0097 × 2=6.01%

YTC N=5 × 2=10 I=? PV=<1147.20> PMT=.08 × 1000 × .50=40 FV=1,050 I=2.7387 × 2=5.5%

Question 28

margin
Your client has purchased stock with a margin position that required 50% initial margin and a 35% maintenance margin. The stock was originally valued at $23 per share when the transaction was undertaken and your client bought 1,000 shares. What stock price will trigger a margin call?

$13.04
$17.69
$26.45
$32.86

Answer 28

Price = Loan ÷ (1 - MM) = (23 × . 50) ÷ (1 - .35) = 17.69

Question 29

My margin requirements are 50% initial margin and 25% maintenance margin. I purchase a total of 200 shares at $100 per share using full margin amount for the 200 share purchase. Shortly thereafter, share prices fall to $50 per share. What will my margin call be?

$1,000
$1,500
$2,500
$5,000

Answer 29

The correct answer is C.

Required equity: $50 × .25 = 12.50 per share

Actual equity: $50 - $50 = 0 (current price- loan amount)

To meet required equity: $12.50 per share × 200 shares = $2,500

Question 30

Intrinsic Value of Put

Intrinsic Value of Call

Answer 30

Intrinsic Value of Put= Strike Price - Stock Price

Intrinsic Value of Call = Stock Price - Strike Price

intrinsic value cannot be negative.

Question 31

option

Answer 31

Buying a put option is like insurance against a drop in price. Remember, from the buyer’s perspective, “Call up” . . . “Put down”!! (This may be a helpful mnemonic device.) The opposite is true for option sellers.

Question 32

A spread.
A strap.
A strip.
A straddle.

Answer 32

In a “spread”, the prices are different.

In a “strip”, the price and time are the same, but two puts and one call are purchased.

In a “strap”, two calls and one put are purchased with price and time the same.

In a “straddle”investor’s position in purchasing a put and a call on the same security, at the same exercise price, for the same period of time. Hedge if investors believe a company have equal probability of dramatically rise or fail due to a future event. Buy $40 Put and Buy $40 Call

Question 33

change in bond price

Answer 33

Change in bond price = -[Duration / (1 + YTM)] x Change in yield/rate

Walt purchased a $1,000 par value bond that matures in 7 years. The bond has a current yield to maturity of 8%, and has a duration of 5.85 years. Walt believes that market interest rates will decrease by 1% in the future. If Walt’s forecast is accurate, his bond investment will increase by:
Duration can be used to solve for a change in bond price when interest rates change. The formula to determine the change in bond price is:

Change in bond price = -[Duration / (1 + y)] x Change in y

Change in bond price = -[5.85 / (1.08)] x -.01

Change in bond price = -5.42 x -.01

Change in bond price = 5.42%

Question 34

Tactical asset allocation

Answer 34

Tactical asset allocation is an active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors.
Tactical asset allocation is concerned with shifting wealth between asset classes to take advantage of expected price level changes (timing) arising from broad movements in the business cycle.

Question 35

Strategic asset allocation.

Answer 35

Strategic asset allocation is more of a “buy and hold” strategy.
Strategic asset allocation is concerned with allocating the wealth of a client among various asset classes, consistent with the clients’ investment objectives, time horizons and risk preferences.

Question 36

Value investing.

Answer 36

Value investing represents the purchasing of stock with low Price/Equity ratios to hold over a long time horizon.

Question 37

Dollar cost averaging

Answer 37

Dollar cost averaging is a strategy for accumulating wealth. It involves purchasing during market highs and lows.

Question 38

Milton has researched four capital investment projects. The following are the internal rate of return (IRR) and net present value (NPV) of each project:

Project IRR NPV

Project 1 12.0% $9,861

Project 2 13.7% $9,690

Project 3 11.6% $7,500

Project 4 12.9% $8,379

Assuming he only has the capital to choose one of the projects, which project should Milton select?

Answer 38

The correct answer is Project 1

NPV is a better method for evaluating projects than the IRR method. The NPV method:

Employs more realistic reinvestment rate assumptions.
Is a better indicator of profitability and shareholder wealth.
Mathematically will return the correct accept-or-reject decision regardless of whether the project experiences non-normal cash flows or if differences in project size or timing of cash flows exist.

Look to the highest NPV and ensure the level of risk is acceptable. NPV of zero is a break even, meaning you are earning the IRR.

Question 39

Jamal purchased stock today for $100 per share. Last year, the stock paid a dividend of $2 per share. What would be Jamal’s holding period return if he sold the stock for $108 one year from today, and the company increased its dividend by 5% during the year?

A. 5.9%.

B. 10%.

C. 10.1%.

D. 11.3%.

Answer 39

The correct answer is C.

Since the dividend grew by 5% during the current year, the dividend would be $2.10 ($2 x 1.05).

The holding period return is calculated using the following formula:

HPR = [Selling Price - Purchase Price +/- Cash Flows]
Purchase Price

Jamal’s holding period return = ($108 - $100 + $2.10) / $100

Jamal’s holding period return = ($10.10) / $100

Jamal’s holding period return = 10.1%

Question 40

security market line (SML) and the capital market line (CML)?

Answer 40

The SML shows the relationship between risk and return for a particular asset, whereas the CML shows that relationship for efficient portfolios of assets.

In the SML, risk is measured by the beta coefficient; whereas in the CML, risk is measured by the standard deviation.

The CML (Capital Market Line) uses standard deviation, while the SML (Security Market Line) uses the beta as its “risk” measurement.

Portfolios above the CML are undervalued and have outperformed the market. Portfolios below the line are overvalued and have underperformed the market. Portfolios on the line are in equilibrium.

Securities above the CML refers to alphas, not measures of risk

Question 41

Roland Chaffey has been investing in a fund by making annual contributions over the past five years. The purchases and annual results have been as follows:
Purchases $1,000 $2,000 $1,500 $2,500 $2,500
End of year values 1,100 2,900 4,750 7,100 12,150

What can the CFP® professional tell Roland are his dollar-weighted return (DWR) and his time-weighted return (TWR)?

DWR 6.33%, TWR 7.26%
DWR 7.14%, TWR 6.09%
DWR 8.26%, TWR 6.22 %
DWR 9.49%, TWR 6.55%

Answer 41

The dollar-weighted return is the easier of the two calculations so we perform that calculation first. We use the purchases as the cash flows and the last end of year value for the final cash flow.

The keystrokes on the HP 10BII are as follows:

1,000, +/-, CFj

2,000, +/-, CFj

1,500, +/-, CFj

2,500, +/-, CFj

2,500, +/-, CFj

12,150, CFj

Shift, IRR, and the result displayed is 9.487

Question 42

A $1,000 par value bond with four years remaining to maturity has a 7% annual coupon rate. If bonds of comparable riskiness are now yielding 8%, what is this bond’s duration? (Note: Assume that the bond’s interest is paid annually, rather than semiannually.)

2. 11 years
2. 83 years
3. 49 years
3. 62 years

Answer 42

Duration is found by dividing the aggregate present value of the bond’s cash inflows, weighted by the year in which each cash flow occurs, by the price (intrinsic value) of the bond. In the present case, the bond’s price, or intrinsic value, is $966.88 (that is, FV = $1,000, N = 4, PMT = $70, and I/YR = 8). The weighted value of the cash flows, discounted at 8%, is:

Cash Weighted Present

Flow Weight Cash Flow Value

$ 70 1 $ 70 $ 64.81

 70             2                    140            120.03

 70             3                    210            166.70

1,070 4 4,280 3,145.93

     Total                                        $3,497.47

The duration is $3,497.47 ÷ $966.88 = 3.62 years.

A shortcut to calculate the present value of the weighted cash flows is to use the cash flow keys on a financial calculator. You just need to input the following cash flows: 0, 70, 140, 210, and 4,280; input 8% as the interest rate; and solve for NPV, which is $3,497.47. Topic 38; Domain 2 and 3

Question 43

Duration

Answer 43

With the term being equal, the bond with the lowest coupon will have the biggest duration. The bigger the duration, the more price sensitive the bond is to interest rate changes

The smaller the coupon, the greater the volatility. Because the zero-coupon bond pays no payments, it is the smallest, thus the most volatile.

A zero-coupon bond’s duration is always its maturity. Thus, coupon bonds with the same time to maturity as a zero will always have a shorter duration.

Duration, not maturity is used to immunize a portfolio. The average weighted duration rather than the duration of each specific bond is used for successful portfolio immunization.

The process of portfolio immunization entails not maturity of a security, but its duration. Duration is based on coupon rate. The larger the coupon payment, the shorter the duration. This being the case, a bond generally pays higher interest than a note, and a note pays higher than short-term Treasury bills. Given this information, one could reasonably expect a shorter duration (than time to maturity), while receiving better immunization from the bond.
Immunization attempts to balance price risk and reinvestment risk. Offers protections against changes in interest rate risks

Question 44

Beta.
Correlation coefficient.
Covariance.
Standard deviation.

Answer 44

Beta reveals the level of over or underperformance of the security relative to market expectations.
In a well diversified portfolio, beta can be used to measure risk
If correlation is .85, then r-squared is .72. When r-squared is greater than or equal to .70, then the portfolio is well diversified and Beta is an appropriate measure of total risk.

Correlation coefficient and covariance measure two stocks movements relative to one another.
In the process of adding new investments to a portfolio, the lowest correlation coefficient makes the best addition. Closest to negative one (-1) is always best.

Correlation of securities is always the strongest determinant as to what should be added to a portfolio.

Correlation is .80, therefore r-squared is .64 (R-squared = correlation coefficient squared). Therefore 64% of mutual fund’s return is due to the S&P 500. Remember, r-squared measures the percentage of return due to the market.

Standard deviation measures a security’s performance relative to expectations of performance.
best describes an investment where standard deviation serves as the best measure of a portfolio’s risk level? : When a portfolio is not well diversified

Question 45

Markowitz Model,

Answer 45

the point of tangency, we have attained: The optimal portfolio.

The efficient frontier measures what portfolios are attainable and which are unattainable

The indifference curve measures what level of risk an investor will accept for given levels of return.

The Indifference Curve is the risk return trade-off which investors are willing to make, while the Efficient Frontier is the best possible returns that could be expected from all possible portfolios. At the point of tangency, one has attained the optimal portfolio.

Question 46

What is the geometric rate of return for a stock that has experienced the following prices over a four-year period? Year 1 = $20 Year 2 = $32 Year 3 = $24 Year 4 = $28

Answer 46

Answer : 11.88%
There are many ways to solve this, but here is the quickest: N=3 i=? PV=<20> PMT=0 FV=28 Assume you paid $20 for the stock today and three years later, it is trading at $28.

Question 47

The Chesapeake Bay apartment complex contains 60 one-bedroom apartments renting for $650 per month. In addition, the complex generates $625 per month from laundry, parking, and vending machines. Vacancy and collection losses have averaged 8% of Potential Gross Income (PGI) and are expected to continue at about the same rate in the future.

Annual expenses totaling $117,000

There is a monthly mortgage payment of $10,000 per month. Out of the $10,000 mortgage, $6,000 is interest expense and $4,000 is repayment of principal. Assuming a capitalization rate of 9%, what is the market value of the Chesapeake Bay complex?

Answer 47

Gross rental receipts ($650 × 60 × 12) = $468,000 plus non-rental income ($625 × 12) = $7,500 equals potential gross income (PGI) ($468,000 + $7,500) = $475,500. PGI minus vacancy and collection losses [$475,500 - (.08 × $475,500)] = $437,460 equals Effective Gross Income (EGI). EGI minus expenses equals net income $437,460 - $117,000 = $320,460. Next, determine net operating income by adding interest and depreciation expense back to net income.

NOI = $320,460 + $72,000 interest + $0 depreciation = $392,460.

Market value = $392,460 ÷ .09 = $4,360,667

Question 48

anchoring.

Answer 48

Anchoring results in buying securities that have fallen in value because it “must” get back up to that recent high.
Anchoring represents the investor’s inability to objectively review and analyze new information.

Question 49

hindsight bias.

Answer 49

Hindsight bias is a form of overconfidence related to an investor’s belief that they had predicted an event that, in fact, they did not predict.

Question 50

Regret avoidance

Answer 50

Regret avoidance, also known as the disposition effect, causes investors to take action (or inaction) in hopes of minimizing any regret.

Leads investors to take action or to refuse to act in hopes of minimizing any regret over their actions or inactions. In investments, it leads people to sell winners too soon and to hold on to losers too long.

Question 51

Representativeness

Answer 51

Representativeness is thinking that a good company is a good investment without regard to an analysis of the investment
thinking a good company is a good investment

Question 52

Overconfidence

Answer 52

The client has been successful with one stock selection that was the recommendation of a friend. The client then thinks that he can select other stocks based on that one success. This overestimation of one’s ability to perform a specific task is a bias that can lead to irrational risk taking. One could argue that other biases are also present but overconfidence seems to be the bigger concern.

Overconfidence leads to overtrading

Overconfidence suggests that investors overestimate their ability to successfully predict future market events.

Question 53

loss aversion

Answer 53

Many individuals, indeed most individuals, exhibit loss aversion. Loss aversion notes that people more strongly prefer to avoid losses than to seek gains. Loss aversion was identified by Amos Tversky and Daniel Kahneman. Kahneman received the Nobel Prize in Economics in 2002 for his work on prospect theory and loss aversion.

Mark Wallens, CFP®, is reviewing a client’s choices relating to refinancing the mortgage on the client’s primary residence. Recent turmoil in the residential mortgage market has introduced significant uncertainty into the market. Rates over the past few weeks have varied significantly, even from one hour to the next. Mark’s client was a subprime borrower when she took out an option adjustable rate mortgage (option ARM) and would have to pay a prepayment penalty of $6,000 to refinance. Mark’s analysis suggests that there is a 40% chance the client could save $20,000 (in present value terms) with a new mortgage from First State Bank but there is a 60% chance she would be no better off with the new mortgage ($0 in present value terms). Mark also contacts the client’s current lender and that bank is willing to renegotiate the current loan waiving the prepayment penalty. The new mortgage from the existing lender would save the client $1,000 (in present value terms)

The client is having difficulty choosing which option to pursue. She tells Mr. Wallens that while she recognizes that the new mortgage from First State Bank has a higher expected value, the possibility of spending $6,000 and receiving no benefit is very unattractive.

Question 54

cognitive dissonance.

Answer 54

Cognitive dissonance is a form of overconfidence because an investor’s memory of past performance is better than the actual results.

Question 55

Risk aversion

Answer 55

Risk aversion is not considered to be a behavioral bias. Rather, risk aversion is an assumption of traditional financial analysis based on the precepts of rational, utility-maximizing economic theory.

Question 56

Belief perseverance.

Answer 56

Belief perseverance is evident when people are unlikely to change their views given new information.

Belief perseverance is similar to anchoring in that people are unlikely to change their views given new information.

giving the most weight to the first information she encountered during her analysis

Question 57

Herd mentality

Answer 57

Herd mentality is the process of buying what and when others are buying and selling.

Question 58

Familiarity Bias

Answer 58

Familiarity leads to overinvestment in companies that are familiar, such as employers
investing only in companies she is familiar with

Question 59

Naïve diversification

Answer 59

Naïve diversification is the process of investing in every option available.
investments equally amongst all her available options. This is known as naïve diversification or 1/n diversification

Question 60

Bottom-up equity managers

Answer 60

Value managers.
Technicians.
Bottom up analysts are looking for the next big, but as yet, undiscovered stock that will break onto the scene. Bottom up analysts start with the company, then the industry and finally the economic climate.

Question 61

top down” style managers.

Answer 61

Group rotation managers.
Market timers.
Top-down starts with the economic climate, moves to the industry and then the company.

Question 62

Sample of stock during economic cycle
Energy Stock
Gold
Pharmaceutical Stock
Automobile Stock

Answer 62

Energy Stock - excel toward economy peak

Gold - Excel toward economy peak and high inflation environment

Pharmaceutical Stock - Excel toward economy recession as a defensive industry

Automobile Stock - Excel toward economy exits through and begins recovery - increasing consumer confidence and personal incomes will drive increased discretionary spending as economy exits through

Question 63

American Opportunity Credit (AOC)

Answer 63

Firs expenses 100% = $2000, the next Expenses 25% = $2,500
Max $2,500
You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.

What are the income limits for AOTC?
To claim the full credit, your MAGI,♦ modified adjusted gross income must be $80,000 or less ($160,000 or less for married filing jointly).
You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).

Question 64

Options

Futures

Answer 64

The payoff on options are Asymmetrical while Futures are Symmetrical

Futures contracts are more expensive than options due to the initial margin requirements

When Options are bot the loss is limited to the premium paid

Options normally have shorter lives than futures

Question 65

Options

Answer 65

Sell Short - Will lose upside appreciation. thinks price will go down
Write a put - does not think the stock is going down
Buy Put - thinks price goes down and protect downside. putting it to you.
Buy Call - expects price to increase

Question 66

Capitalization rate

Answer 66

Net income / Capitalization rate for similar prop

Offer - $650K

Gross rent = $118,000
Operating expenses = $38,000
Net income = $80,000
Capitalization rate = $80,000/ 0.09 (9%) = $888,889
Thus offer is to low

Question 67

Capital Asset Pricing Model (CAPM)

Arbitrage Pricing Theory (APT)

Answer 67

CAPM
Single factor model
Less Complex since its single index model

APT - Perfect substitute must sell at the same time
Multi Factor model
More complex - because it has factor analytics, Factor interpretation