Investment Planning Review Flashcards

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1
Q

true or false?

futures contracts require a margin account

A

true

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2
Q

purchasing a contract for future delivery is termed a ___- position

A

long

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3
Q

a long position will ___ in value if the underlying commodity/asset increases in value

A

increase

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4
Q

selling a contract for future delivery is called a ___ position

A

short

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5
Q

a short position will ____ in value if the underlying commodity/asset decreases in value

A

increase

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6
Q

what type of hedge , long or short, should a farmer use if he grows and sells wheat?

A

short hedge

use a short hedge when you would already benefit from a price appreciation in the asset/commodity

use a short hedge to protect a price decrease in your commodity/asset

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7
Q

how would a farmer take a short position in wheat?

A

by selling a futures contract

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8
Q

true or false?

future contracts are taxed annually regardless of when sell or purchase occurs

A

true

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9
Q

if a producer needs wood to sell tree houses to people, is he long or short in wood? how would he hedge against wood price fluctuation?

A

short ; buy futures contracts

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10
Q

net gains or losses from future contracts are taxed as if ___% are long term and ___% are short term regardless of the actual breakdown

A

60% ; 40%

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11
Q

one option contract gives the holder the right to buy or sell ___ shares

A

100

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12
Q

how to calculate the intrinsic value of an option?

A

market price - exercise price

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13
Q

writing a ___ option is very risky

A

naked

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14
Q

a ___ option is when you are writing an option on a security you already own

A

covered

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15
Q

a ___ option is when you are writing an option on a security that you don’t already own

A

naked

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16
Q

____ is the number of outstanding contracts for a specific option

A

open interest

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17
Q

what is the main difference between American options and European options?

A

American options can be exercised at any time before expiration, but European options can only be exercised at expiration

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18
Q

what is your max gain when you buy a call option?

A

unlimited

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19
Q

what is your max loss when you buy a call option?

A

premium paid

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20
Q

what is your max gain when you buy a put option?

A

exercise price less the premium you paid

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21
Q

what is you max loss when you buy a put option?

A

premium paid

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22
Q

what is your max loss when you sell a call option?

A

unlimited if naked call

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23
Q

what is your max loss when you sell a put option?

A

exercise price less premium received

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24
Q

what is your max gain when you sell a call option?

A

premium received

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25
Q

what is your max gain when you sell a put option?

A

premium received

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26
Q

under the black-scholes valuation method, the option premium ____ as the time to expiration increases

A

increases

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27
Q

under the black-scholes valuation method, the more volatile the stock, the ____ the option premium will be

A

greater

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28
Q

under the black-scholes valuation method, the call premium will ___ as the risk free rate of return increases

A

increase

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29
Q

under the black-scholes valuation method, the call premium will be ___ for a lower exercise price

A

greater

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30
Q

under the black-scholes valuation method, the call premium will be ___ for a higher market price

A

greater

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31
Q

___ are puts and calls with lengthy expiration dates

A

LEAPS (long term equity anticipation securities)

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32
Q

Most LEAPS expire within ____ or ___ years of initial listing dates

A

2 or 3

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33
Q

true or false?

LEAPS are available on stocks, ADRs, but not indexes

A

false, they are available for all of those

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34
Q

___ is used to protect a gain in a long position of stock

A

zero cost collar

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35
Q

what does a zero cost collar consist of?

A

long position in stock, long put option, and a short call option

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36
Q

which have longer lives, warrants or options?

A

warrants (usually)

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37
Q

___ are issued by companies where as ____ are issued by individuals

A

warrants ; options

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38
Q

under a warrant the exercise price is usually set ___ the current market price

A

above (well above)

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39
Q

____ give the holder the right to purchase a certain number of shares of a specified common stock at a predetermined price for a specified time period

A

warrants

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40
Q

___ allows the holder to buy new issues before the company offers them to the general public

A

preemptive rights

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41
Q

___ allows stockholders to purchase common stock below the current market price

A

preemptive rights

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42
Q

___ is the right to maintain proportionate ownership in company

A

preemptive rights

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43
Q

the closer the intrinsic value of an option gets to the premium, the ____ the option is to expiration

A

closer

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44
Q

___ measures the extent to which the returns on any two securities are related

A

correlation

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45
Q

true or false?

correlation denotes association and causation

A

false, on association

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46
Q

___ is a relative measure of systematic risk

A

beta

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47
Q

a security portfolio with a beta of 1.25 would be considered ____% more risky than the market

A

25%

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48
Q

studies show that betas for individual securities are or are not stable over time?

A

are not

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49
Q

studies show that betas for portfolios are or are not stable over time?

A

are

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50
Q

what does a coefficient of determination equal to 70% tell us about the relationship between XYZ stock and the market?

A

it tells us that 70% of XYZ price movement can be explained by the market (systematic risk) and the other 30% can be explained from non market factors (unsystematic risk)

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51
Q

true or false?

beta captures both the systematic and unsystematic risk within a portfolio

A

false

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52
Q

what does it mean if the coefficient of determination equals 1 or 100%?

A

it means that the total risk is equal to the market risk only (systematic risk only)

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53
Q

how do you calculate the coefficient of determination?

A

square the correlation coefficient

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54
Q

___ describes the percentage of variability of the dependent variable that is explained by changes in the independent variable

A

coefficient of determination

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55
Q

R squared = ___

A

coefficient of determination

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56
Q

___ is a relative measure of total risk per unit of expected return

A

coefficient of variation

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57
Q

what is the main use of the coefficient of variation?

A

used to compare investments with varying rate of returns and standard deviations

58
Q

how to calculate the coefficient of variation

A

standard deviation of asset / expected return of asset

59
Q

_____ is an absolute measure of the variability of returns around the mean or expected mean

A

standard deviation

60
Q

standard deviation measures ____ risk and beta measures ___ risk

A

total ; systematic

61
Q

the ___ measures the number of standard deviations a data value is from the mean

A

z score

62
Q

z score formula

A

(data value - mean) / standard deviation

63
Q

___ measures whether a distribution is is more or less peaked than a normal distribution

A

kurtosis

64
Q

____ is when a distribution is more peaked than a normal distribution

A

leptokurtic

65
Q

___ is a distribution where more observations are cluttered around the mean

A

leptokurtic distribution

66
Q

an investor who wants to minimize volatility in their portfolio would prefer a ____ distribution

A

leptokurtic

67
Q

____ is a distribution that is less peaked than a normal distribution

A

platykurtic

68
Q

____is a distribution where more observations are further away from a mean

A

platykurtic

69
Q

____ only measures the downside volatility of an investment

A

semivariance

70
Q

when used in analysis, the ___ the semivariance of a security, the less likely the security will incur a substantial loss in value

A

lower

71
Q

___ measures the consistency in which a manager beats a benchmark

A

information ratio

72
Q

what is the efficient frontier’s risk measure?

A

standard deviation

73
Q

the portfolio that lies at the ___ of the indifference curve and the efficient frontier is the optimum portfolio for the investor

A

tangent

74
Q

who developed the efficient frontier?

A

harry markowitz

75
Q

the ___ consists of portfolios with the highest expected return for a given level of risk

A

efficient frontier

76
Q

how many indifference curves can an investor have?

A

an unlimited amount

77
Q

true or false?

an assumption of CAPM is that transaction costs are equal to zero

A

true

78
Q

true or false?

an assumption of CAPM is that taxes are equal to zero

A

true

79
Q

true or false?

an assumption of CAPM is that markets are always in equilibrium

A

true

80
Q

the capital market line uses ___ on the y axis

A

risk free rate

81
Q

the capital market line uses ___ on the x axis

A

standard deviation of portfolio

82
Q

___ states that investors are unable to consistently outperform the market on a risk adjusted basis

A

efficient market hypothesis

83
Q

___ form of EMH states that the current stock price already includes historical info such as trading volume, public info, and prices

A

weak

84
Q

___ form of EMH includes only information that can be found by technical analysis

A

weak

85
Q

____form of EMH includes historical data and data from analyzing financial statements, industry info, and economic outlook

A

semi strong

86
Q

___ form of EMH includes info that can be found from technical and fundamental analysis

A

semi strong

87
Q

____ form of EMH includes all public info including historical data, financial statements, and insider info

A

strong

88
Q

___ analysis is the process of determining the FMV or intrinsic value of a security

A

fundamental

89
Q

what is the order of top down analyzing?

A

economy, industry, company

90
Q

what is the order of bottom up analyzing?

A

company, industry, economy

91
Q

___ is the present value of expected future cash flows discounted at an appropriate discount rate while taking the risk of the investment into consideration

A

intrinsic value

92
Q

___ analysis is an attempt to determine the demand side of the supply/demand equation for a particular stock or set of stocks

A

technical

93
Q

as a bond’s price increases the current yield will ___

A

decrease

94
Q

as a bond’s price decreases the current yield will ___

A

increase

95
Q

if a bond is trading at a discount, the current yield will be ___ than the coupon rate

A

higher

96
Q

if a bond is trading at a premium, the current yield will be ____ than the coupon rate

A

less

97
Q

the coupon rate of a bond and the duration of a bond have a(n) ___ relationship

A

inverse

98
Q

the duration of a zero coupon bond will equal the bond’s ____

A

maturity

99
Q

a bond with coupon payments will always have a duration that is ___ than its time to maturity

A

less

100
Q

the duration and YTM of a bond have a(n) ___ relationship

A

inverse

101
Q

as the YTM of a bond increases, the duration will ___

A

decrease

102
Q

higher quality bonds will have a ___ duration than lower quality bonds

A

higher

103
Q

when is convexity the greatest?

A

low coupon bonds
long maturity bonds
low YTM bonds

104
Q

what is convexity?

A

the degree to which duration changes as a result of changes in the YTM

105
Q

Large convexity implies a ___ change in duration

A

large

106
Q

coupon rates and convexity have a(n) ___ relationship

A

inverse

107
Q

maturity and convexity have a(n) ___ relationship

A

direct

108
Q

yield to maturity and convexity have a(n) ___ relationship

A

inverse

109
Q

yield to maturity and duration have a(n) ____ relationship

A

inverse

110
Q

if the conversion value of a security is less than the market price of a stock, should the conversion happen?

A

no

111
Q

if the market lowers the required rate of return, the value of the common stock will ____

A

increase

112
Q

if the market raises the required rate of return, the value of the common stock will _______

A

decrease

113
Q

if investors decide the dividend growth will be higher, the value of the common stock will ____

A

increase

114
Q

if investors decide the dividend growth will be lower, the value of the common stock will _____

A

decrease

115
Q

the constant dividend growth model is best to use with ____ companies

A

mature

116
Q

____ refers to the amount of equity within a company and is determined by subtracting liabilities from assets

A

book value

117
Q

____ is the cash received if the company discontinues business, sells all assets, and distributes the funds to shareholders

A

liquidation value

118
Q

____ usually represents the minimum value of a company

A

liquidation value

119
Q

____ is the amount of the issuing company’s stockholder equity divided by the total number of common shares outstanding

A

price to book value

120
Q

____ is the most appropriate approach when there are several properties in a market that have recently been sold having similar characteristics to the property that is being valued

A

sales comparison approach

121
Q

____ approach is designed to estimate the value of a property by determining how much it would cost to replace the property and then making any adjustments for depreciation or deterioration of the property

A

cost approach

122
Q

___ approach takes the position that the value of the property is based on the income that can be generated from the property

A

income capitliation

123
Q

______ is defined as net income (income less fixed and variable operating expenses) before depreciation and debt service

A

net operating income

124
Q

___ form of return provides an assessment of an investor’s actual performance rather than a portfolio managers

A

dollar weighted return

125
Q

____ for of return is the preferred method for analyzing the performance of a portfolio

A

time weighted return

126
Q

the purpose of ___ asset allocation is to choose an appropriate asset allocation based on forecasts of the economy, expectations of selected asset classes, and risk tolerance of the client

A

strategic

127
Q

___ asset allocation refers to changing the mix of investment classes based on changing market conditions

A

tactical

128
Q

___ is an investment strategy investing in both broad market indexes and higher risk alternatives

A

core and satellite

129
Q

what is the main benefit from a buy and hold strategy?

A

minimal transaction costs and taxes

130
Q

true or false?

an index fund is an example of a buy and hold strategy

A

true

131
Q

the S&P 500 is a good bench mark for ____

A

large cap companies (US)

132
Q

the Russell 2000 is a good bench mark for ___

A

small cap companies

133
Q

the MSCI EAFE is a good bench mark for ___

A

international markets

134
Q

the Wilshire 500 is a good bench mark for ___

A

overall US market

135
Q

if you are building a benchmark for a specific portfolio then the correlation between your portfolio in the benchmark should be ___

A

high

136
Q

the goal of ___ is to protect a bond portfolio from interest rate risk and reinvestment rate risk

A

immunization

137
Q

____ is an approach where investors purchase a series of bonds with similar maturities that are focused around one point in time

A

bullet strategy

138
Q

___ is an approach where funds are invested in both short term and long term bonds

A

barbell (dumbbell) strategy

139
Q

___ is an approach where funds are invested in bonds with staggered maturities

A

laddered strategy

140
Q

___ involves exchanging bonds with identical characteristics selling for different prices

A

substitution swap

141
Q

___ involves the exchange of one type of bond with another type of bond

A

intermarket swap

142
Q

___ involves exchanging a lower YTM bond with a higher YTM bond

A

pure yield pickup swap