Investments

Question 1

Margin Position Formula

Answer 1

Margin Position = Equity/FMV

Question 2

Price to Receive Margin Call (Formula)

Answer 2

Price to Receive Margin Call = Loan/(1-Maintenance Margin)

Question 3

Standard Deviation

Answer 3

• A measure of total risk
• Appropriate measure of risk for an un-diversified portfolio
• Larger standard deviation = more risky

Question 4

Standard Deviations (#|%)

Answer 4

• 1 Standard Deviation (68%)
• 2 Standard Deviations (95%)
• 3 Standard Deviations (99%)

Question 5

Coefficient of Variation

Answer 5

• Compare 2 assets with different averages
• Higher CV = more risky

(x= mean expected return)

Question 6

Correlation Coefficient

Answer 6

• Ranges from -1 to 1

Question 7

Covariance

Answer 7

• Measures interactive risk of two securities combined
• Measure of relative risk

Question 8

Beta

Answer 8

• A measure of systematic (market) risk
• Appropriate risk measure for a well-diversified portfolio
• Beta Coefficient is a measure of an individual security’s volatility relative to the market (beta of market = 1)

Question 9

Coefficient of Determination

Answer 9

• R^2
• Measures how much of return is due to the market
• If R^2 is below 0.7 then beta is not a good measure of risk of fund/security

Question 10

Efficient Frontier

Answer 10

Compares portfolios on their risk/return relationships. Impossible to achieve returns above the efficient frontier.

Question 11

Capital Asset Pricing Model (CAPM)

Answer 11

Calculates the relationship of risk and return of an individual asset or investment

Question 12

Treynor Index

Answer 12

• relative risk measure
• Uses beta
• higher = better

Question 13

Sharpe Index

Answer 13

• Relative risk measure
• Uses standard deviation
• higher = better

Question 14

Jensen’s Alpha

Answer 14

• Absolute risk measure
• Uses beta
• higher = better

Question 15

Holding Period Return

Answer 15

• No consideration of time investment was held
• Not a compounded rate of return

Question 16

Dividend Payout Ratio

Answer 16

Relationship between the amount of earnings paid to shareholders in the form of dividend, relative to earnings per share

Question 17

Return on Equity (ROE)

Answer 17

Measures overall profitability of a company
There is a direct relationship between ROE, earnings, and dividend growth

Question 18

Dividend Yield

Answer 18

States the annual dividend as a % of stock price

Question 19

Random Walk Theory

Answer 19

• States that prices of stocks are “unpredictable” but not arbitrary
• states forecasters cannot predict with consistency or accuracy response of stocks prices to stimulus
• states that at any given moment prices of securities are best incorporation if all available information and are a true reflection of value

Question 20

Weak Form (Efficient Market Hypothesis)

Answer 20

Historical information will not help investors achieve above average market returns; rejects technical analysis

Question 21

Semi-Strong Form (Efficient Market Hypothesis)

Answer 21

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

Question 22

Strong Form (Efficient Market Hypothesis)

Answer 22

Historical, public, and private information will not help investors achieve above average market returns; rejects technical and fundamental analysis and inside information
(Diversify randomly or invest in index)

Question 23

GNMA - Ginnie Mae

Answer 23

ONLY federal agency backed by the full faith and credit of the US government

Question 24

Tax Equivalent Yield (TEY)

Answer 24

r= tax exempt yield
t= marginal tax rate

Question 25

Coupon Rate

Answer 25

The annual payment amount in dollars, divided by the par value

Question 26

Current Yield

Answer 26

The annual payment amount in dollars divided by the current price of the bond

Question 27

Yield to Maturity

Answer 27

Discounting a stream of cash flows over the life of the investment and adding the discounted value of the future park value repayment

Question 28

Duration

Answer 28

Indicates a bond’s sensitivity to changes in interest rates

Higher duration = more price sensitive