Investments

Question 1

Total risk is measured by what?

Answer 1

standard deviation

Question 2

What are the 5 non-diversifiable risks?

Answer 2

-Purchasing power risk
-Reinvestent risk
-Interest rate risk
Market risk
-Exchange rate risk

Question 3

Systematic risk is measured by what?

Answer 3

beta

Question 4

Name 5 unsystematic risks

Answer 4

-Business risk
-Financial risk
-Default or credit risk
-Regulation risk
-Sovereignty risk

Question 5

What 3 factors influence an investor’s capacity for risk?

Answer 5

1) Time horizon
2) Liquidity needs
3) Total investable assets

Question 6

What are 2 assumptions when using Holding period Return?

Answer 6

-Not indexed for Time Value of Money
-Assumes dividends are not reinvested

Question 7

Risk-averse investors have _ indifference curves

Answer 7

steep

Question 8

Risk-tolerant investors have _ indifference curves

Answer 8

flat

Question 9

what measure of risk is used in an efficient frontier?

Answer 9

standard deviation

Question 10

what is the definition of “random walk”?

Answer 10

the movements of stocks being utterly unpredictable , lacking any pattern that can be exploited as an investor

Question 11

name 3 facts about S-corps

Answer 11

1) max 100 shareholders
2) 1 share class of stock (voting and non-voting)
3) offers opportunity to avoid payroll taxes when setup property
4) not designed for huge growth since shareholders are limited

Question 12

name 3 facts about c-corps

Answer 12

1) rare double taxation
2) corporate tax level is 21%
3) shareholder dividends are taxed at shareholder rates
4) multiple shareclasses

Question 13

name 3 facts about partnerships

Answer 13

1) general partners have full control/management and unlimited liability
2) limited partners have minimal control/management and limited liability
3) partners share gains and losses

Question 14

name 3 facts about LLCs

Answer 14

1) liability protection
2) multiple shareclasses
3) no shareholder cap

Question 15

When is expected return is greater than required rate of return a stock is _

Answer 15

undervalued

Question 16

What does r represent in the TEY formula?

Answer 16

tax-free yield

Question 17

What is the Margin Call Price formula?

Answer 17

1 minus initial margin over 1 minus maintenance margin times initial purchase price

Question 18

What are the 2 basic variables that determine an option’s price?

Answer 18

Intrinsic value and time premium

Question 19

Everything else equal, the _ the maturity of a bond and the _ the coupon, the greater the sensitivity of the bond’s price to interest rate changes.

Answer 19

longer, lower

Question 20

A _ coupon will result in a lower duration.

Answer 20

higher

Question 21

What is considered a junk grade bond?

Answer 21

Anything under BBB- or Baa3 for Moody’s

Question 22

What are 2 other names for an options buyer?

Answer 22

holder and long

Question 23

What are 2 other names for an options seller?

Answer 23

writer and short

Question 24

What is the intrinsic value formula for call options?

Answer 24

Market price-exercise price

Question 25

What is the intrinsic value formula for put options?

Answer 25

Exercise price - market price

Question 26

Time premium is made up of 3 variables. The greater any of the 3 variables, the greater the time premium. What are the 3 variables?

Answer 26

1) Risk-free rate of return 2) Time to expiration 3) Variability of the underlying stock (as measured by standard deviation)

Question 27

What does the efficient frontier represent

Answer 27

It represents the optimal amount of return given a level of risk.

Question 28

Does HPR assume reinvestment of dividends?

Answer 28

NO

Question 29

If the NPV and IRR suggest 2 different investment projects, select the project with the _

Answer 29

higher positive NPV

Question 30

What is the main weakness of IRR?

Answer 30

Any cashflows are reinvested back at the IRR, so it underestimates when rates are higher and overestimates when rates go lower.

Question 31

What model exemplifies that expected returns are a function of market risk?

Answer 31

The Capital asset pricing model

Question 32

What does the behavioral asset pricing model assume?

Answer 32

That expected returns are a function of factors other than systematic risk such as market cap, P/E ratios, and momentum.

Question 33

How do you implement a collar? How does it work?

Answer 33

Long the stock, long the put, short the call. The put is used to protect against a stock price decrease and the call premium is used to offset the cost of the put.

Question 34

How do you implement a straddle?

Answer 34

Long a put and a call on the same underlying stock with the same expiration date and strike price.

Question 35

Does the SML use standard deviation or beta?

Answer 35

The SML uses systematic risk or beta while the CML uses standard deviation or total risk.

Question 36

What is the current yield formula?

Answer 36

Coupon payment divided by current price ex: 70/922 = 7.59%

Question 37

Regarding future contracts, owners/sellers are _ and buyers are _.

Answer 37

long, short