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CFP EXAM - Giauque Flashcards > Investment Planning: Risk and Return > Flashcards

Investment Planning: Risk and Return Flashcards

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1
Q

Measures the total return over the entire period of the investment?

A

Holding Period Return

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2
Q

Calculated by summing the annual holding period returns and dividing the sum by the number of years.

A

Arithemetic Mean (Simple Average Return)

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3
Q

Calculates the average return over time assuming all earnings remain invested. Calculates the compound annual return.

A

Geometric Mean

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4
Q

When does the arithmetic average become less and less accurate?

A

With increased volatility

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5
Q

The earnings rate of a series of cash inflows and outflows over a period of time assuming all earnings are reinvested.

A

Internal Rate of Return

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6
Q

What is NPV (Net Present Value)?

A

NPV is the difference between the

  • initial cash outflow
  • and the discounted future cashflows
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7
Q

Geometric mean is actually another way of calculating the ______ ?

A

IRR (Internal Rate of Return)

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8
Q

What is the geometric mean often used to determine vs the IRR formula?

A

Geometric mean (used to determine):

Annualized compound return from a set of INVESTMENT RETURNS

IRR (used to determine):

Annualized compound return from a set of CASHFLOWS

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9
Q

Measures the effect of all cashflows that an investor controls.

A

Dollar Weighted IRR

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10
Q

Measures the effect of any cashflows associated with the investment security, but ignores the dollar volume and timing of investor driven transactions during the period.

A

Time Weighted IRR

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11
Q

Which geometric mean calculation is more appropriate for assessing the performance of a fund manager?

A

Time Weighted IRR

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12
Q

How does one calculate the effective annual rate or EAR?

A

EAR = (1 + i/n)^n - 1

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13
Q

Method of determining the yield of a bond sold at a discount based on the current price and remaining days to maturity.

A

BEY (Bond Equivalent Yield)

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14
Q

What is the formula to calculate the Bond Equivalent Yield?

A

((Par value - Price )/ (Price)) X (365/Days to Maturity)

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15
Q

How does one calculate the Weighted-Average Return?

A

Total Dollar Return / Total Market Value Invested

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16
Q

How to calculate the tax amount that makes each of the return rates indifferent?

A

Return Option #1 X (1 - Tax Rate) = Return Option #2

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17
Q

What is the formula for calculating the Real Rate of Return?

A

[(1 + Nominal ROR / 1 + Inflation) - 1]

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18
Q

List the 5 biggest systematic risks:

A

1) Purchasing Power Risk
2) Reinvestment Rate Risk
3) Interest Rate Risk
4) Market Risk
5) Exchange Rate Risk

PRIME

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19
Q

List the 7 biggest unsystematic risks:

A 
Accounting Risk
Business Risk 
Country (Political Risk)
Default (Credit Risk)
Executive Risk
Financial Risk
Government Risk

A, B, C, D, E, F

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20
Q

What is the best way to eliminate unsystematic risk?

A

Diversification

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21
Q

How is total risk best measured?

A

Standard deviation

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22
Q

The variability in stock returns due to changes in economic factors and the tendency for changes in the market to influence prices of equities.

A

Market Risk

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23
Q

The variability in asset prices due to changes in interest rates or yields.

A

Interest Rate Risk

24
Q

Why do equity prices typically drop when interest rates rise?

A

1) Increased borrowing costs
2) Attractiveness to Alternative Investments
3) Valuation of Securities

25
Q

A rate of return that is used in a business valuation to convert a series of future anticipated cash flow from a company to present value under the discounted cash flow approach

A

Discount Rate

26
Q

The variability in asset values due to changes in inflation defines _____________ .

A

Purchasing Power Risk (Inflation Risk)

27
Q

The uncertainty of returns in foreign investments due to changes in the value of a foreign currency relative to the valuation of the investors domestic currency.

A

Exchange Rate Risk

28
Q

The risk that the investor is unable to invest cashflows at the IRR?

A

Reinvestment Rate Risk

29
Q

What are also referred to as unique or firm specific risks?

A

Unsystematic Risk

30
Q

Why is Beta not generally recommended as an appropriate measure of investment risk?

A

It measures the variation only related to systematic risk (it does not include company specific risk)

31
Q

The risk that financial statements do not accurately reflect the firms financial results.

A

Accounting Risk

32
Q

Risk in nature of assets and industry in which company operates

A

Business Risk

33
Q

Risk associated with the liability side of a balance sheet and relates to the debt ratio or overall leverage that a company maintains.

A

Financial Risk

34
Q

Risk of companies inability to meet current debt and interest obligations causing creditors to foreclose on any pledged assets.

A

Default (Credit) Risk

35
Q

Describes how much returns vary in relation to average return for a period of time?

A

Standard Deviation

36
Q

How is standard deviation calculated?

A

1) Summing the squared differences between each outcome and the mean
2) Dividing the sum of the squared differences by the number of outcomes (minus 1 for historical returns)
3) Taking the square root of the division

37
Q

How is variance calculated?

A

Standard Deviation Squared

38
Q

Measure of the lack of symmetry for a data set.

A

Skewness

39
Q

Measure of whether data are heavy tailed or light tailed relative to a normal distribution.

A

Kurtosis

40
Q

A distribution that is more peaked with more kurtosis than normal.

A

Leptokurtic

41
Q

A distribution that is less peaked with less kurtosis is _____________ .

A

Platykurtic

42
Q

Statistical method for measuring the relationship between variables

A

Regression Analysis

43
Q

What do positive versus negative beta mean?

A

Positive Beta means - moves with the market

Negative Beta means - Opposite movements in relation to the market

44
Q

What does R (Correlation Coefficient) equal to 1 represent?

A

Perfectly Positive Relationship

45
Q

Occurs on a graph when one variable/axis goes up while the other variable/axis goes down?

A

Negative Correlation

46
Q

Measure of the strength of a relationship between two variables?

A

R squared (Coefficient of Determination)

47
Q

A measure of how much two assets move together?

A

Covariance

48
Q

The more positive the covariance between 2 variables, the more likely they are to _______ ______ .

A

Move together

49
Q

How is covariance calculated?

A

Multiply the standard deviation of each variable X correlation between variables

50
Q

Concept that only takes into consideration volatility below the mean return.

A

Semivariance

51
Q

Measures the amount of risk per unit of return. Standard Deviation divided by average return.

A

CV - Coefficient of Variation

52
Q

Ranges from -1 to +1. Maximum risk reduction occurs at perfect negative (-1). No risk reduction occurs at perfect positive (+1).

A

Correlation Coefficient

53
Q

What percent of outcomes are typically within:
1 standard deviation:
2 standard deviations:
3 standard deviations:

A

1 standard deviation: 68%
2 standard deviations: 95%
3 standard deviations: 99%

54
Q

If comparing multiple bonds with equal terms the bond with the _________ coupon will have the longest duration.

A

Lowest Coupon

55
Q

How do you calculate the geometric mean?

A

Variables times each other, squared root ^ to the amount of variables - 1

Calculator = N1 X N2 X N3 OSy^x 3 OS1/x = (Answer - 1)*100

CFP EXAM - Giauque Flashcards (21 decks)

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