Module 11 Investments

Question 1

8 Basic characteristics of investments

Answer 1

1) Return
2) Risk
3) Liquidity
4) Marketability
5) Term
6) Managment
7) Tax conditions
8) Diversity

Question 2

Risk of an investment

Answer 2

the higher the probability of a negative return, the higher the risk. Risk is measured by looking at the variability of the rate of return

Question 3

Variance

Answer 3

Measures how much the outcome variates from the expected value. It is the weighted average of the squared deviations

Question 4

Beta

Answer 4

Measures the risk of an investment relative to the risk of the market. The higher the beta, the more sensitive the stock is to market fluctuation

Question 5

What are the 2 ways to formulate a proba distribution on investment

Answer 5

• Objective proba distribution

- Subjective proba distribution

Question 6

Risk free asset

Answer 6

Investment whose rate of return are guarenteed

Question 7

5 Risk factors (investment)

Answer 7

• Inflation risk
• Reinvestment risk
• Default risk
• Interest rate Risk
  Liquidity risk

Question 8

Interest rate risk

Answer 8

Caused by change in the level of market interest rate which affect the values of all assets

Question 9

What are the 3 fundamental principals of investment

Answer 9

1) Return is an increasing function of risk
2) Diversification
3) Efficient market hypothesis

Question 10

Portfolio

Answer 10

Collection of securities so it is diversified in more than one asset

Question 11

Correlaton coefficient

Answer 11

Measures the extent to which 2 sequences of numbers move together

Question 12

Systematic Risk

Answer 12

Risk that can not be divercified away

Question 13

3 Dimentions of diversifications

Answer 13

• Within each type of investment
• Between types of investment
• Accross different countries

Question 14

Efficient market hypothesis

Answer 14

Occures when prices of securities traded in the market fully reflect all available information related to their value

Question 15

Market price

Answer 15

Amount of money at which the security can be bought or sold in the market

Question 16

Intrinsic value

Answer 16

Determined by the PV of all expected future cash flow of the security

Question 17

3 levels of market efficiency

Answer 17

1- Weak form
2- Semi strong
3- Strong

Question 18

Weak form of market efficiency

Answer 18

Market prices reflect all past informations

Question 19

Semi-strong market efficiency

Answer 19

Market prices reflect all publicaly available informations

Question 20

Strong form market efficiency

Answer 20

Market prices reflect all available info including insider info

Question 21

5 Major types of investments

Answer 21

1) Cash and cash equivalent
2) Bonds
3) Stock
4) Option
5) Futures

Question 22

3 types of cash and cash equivalent investments

Answer 22

1) T-Bills
2) Canada Saving Bond
3) Deposits with financial institutions

Question 23

Characteristics of a T-bill

Answer 23

short term, liquide, sell at a discount, no income

Question 24

2 Types of Canada Saving Bond

Answer 24

1) Regular interst bond

2) Coumpound interest bond

Question 25

3 Types of deposit with financial institutions

Answer 25

1) Chequing, saving, chequable saving… account
2) Term Deposit
3) Guaranteed investment certificate

Question 26

2 types of stockbrocker

Answer 26

• Full service brocker

- Discount brocker

Question 27

Guaranteed Investment Certificate (GIC)

Answer 27

Realy long term deposit with term ranging from 1 to 5 years