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CFP EXAM - Giauque Flashcards > IP - Chapter 13 - Investment Company Analysis* > Flashcards

IP - Chapter 13 - Investment Company Analysis* Flashcards

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1
Q

What are the 6 steps in the investment process?

A

1) Collect relevant information
2) Identify constraints
3) Compute Risk/Return Objectives
4) Identify Funds (to be included in the portfolio)
5) Identify Appropriate Allocation (per fund)
6) Monitor Portfolio

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2
Q

Highest level of return for each level of risk

A

Mean Variance Optimization

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3
Q

What 3 things does mean variance optimization measure?

A

Allocation, Expected Return, and Variability

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4
Q

These help to determine how diversified that the portfolio is?

A

Correlation Coefficients

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5
Q

What does a prospectus typically include?

A
  • Investment Objectives/Goals
  • Strategies for reaching goals
  • Risks
  • Fees/Expenses
  • Past performance
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6
Q

When an investment manager changes to investing outside of the stated fund objective

A

Style Drift

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7
Q

What is geometric return also known as

A

IRR

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8
Q

Mutual funds make the most sense to hold in ____________ accounts.

A

Qualified (tax deferred accounts)

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9
Q

High portfolio turnover and tax is only good for investors if …

A

1) Securities purchased outperform the ones that were sold

2) If the realized gain surpasses the marginal tax rate of the investor

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10
Q

Many mutual funds wave the minimum investment requirement if…

A

Buyer agrees to make regularly scheduled payments

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11
Q

Includes more detailed disclosures about the fund and the investor must request it or search the EDGAR database

A

(SAI) Statement of Additional Information

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12
Q

What is the Coefficient of Correlation?

A
  • R
  • Ranges from -1 to +1
  • Measures correlation between funds
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13
Q

What is the coefficient of determination? What does it measure?

A
  • R2

- Correlation to the index (identifies how much unsystematic risk the holding is subject to)

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14
Q

What does a fund with a lower r2 bring to a portfolio?

A

More diversification

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15
Q

How much systematic/unsystematic risk is a mutual fund with an r2 of .70 subject to?

A

70% systematic risk

30% unsystematic risk

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16
Q

How is beta calculated?

A

Covariance of a fund & index / Variance of the index

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17
Q

A measure of how much two assets move together

A

Co-variance

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18
Q

What does a beta greater that 1 mean?

A

More systematic risk than benchmark

19
Q

What does a beta less than 1 mean?

A

Less systematic risk than benchmark

20
Q

3 measures of risk adjusted return by modern portfolio theory?

A

1) Jensen’s Alpha
2) Sharpe Ratio
3) Treynor Ratio

21
Q

What is the CAPM formula?

A

Rf + Beta(Rm - Rf)

22
Q

Jensens alpha formula?

A

Difference between actual return of the fund and CAPM:

[Rp - (Rf + Beta(Rm - Rf)]

23
Q

This is used to determine the performance of fund managers

A

Jensen’s Alpha

24
Q

What does a + alpha mean?

A

Manager’s fund has better than expected performance

25
Q

What does a - alpha mean?

A

Manager’s fund has worse than expected performance

26
Q

What does a 0 alpha mean?

A

Manager’s fund has on par performance

27
Q

Alpha relies on ________ as a measure of systematic risk.

A

Beta

28
Q

Beta’s that have low _____ may not be very reliable.

A

R2

29
Q

This ratio is used to compare other funds to determine the reward of variability or best performance as measured by standard deviation

A

Sharpe Ratio

30
Q

Sharpe Ratio formula

A

(Rp-Rf)/Standard Deviation

31
Q

What does R2 of 100 indicate?

A

That the fund is an index fund

32
Q

When comparing a fund using Alpha, beta must be ___________ to give an accurate comparison to benchmark.

A

close to 1

33
Q

Rp-Rf/Beta

A

Treynor Ratio

34
Q

Before computing Treynor ratio, one should carefully consider variables ______ & ________ .

A

Beta and R2

35
Q

Ratios that measure relative performance?

A

Treynor Ratio and Sharpe Ratio

36
Q

Ratios that measure absolute performance?

A

Jensen’s Alpha

37
Q

This accounts for the majority of variability in a portfolio?

A

Asset Allocation

38
Q

Correlation ranges from ___________ .

A

-1 to +1

39
Q

R2 ranges from ________ .

A

0 to +1

40
Q

Provides insight into the % change by a mutual fund that can be explained by changes in the market

A

R2

41
Q

This variable provides insight into whether Beta is reliable or not?

A

R2

42
Q

Shows whether a stock can be used as a measure against a benchmark

A

Beta

43
Q

Is a measure of a mutual funds systematic risk relative to the market?

A

Beta

44
Q

Is an absolute measure of performance that equals the difference between the actual return for a mutual fund and the expected return based on CAPM.

A

Alpha

CFP EXAM - Giauque Flashcards (21 decks)

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