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My Series 65 > Portfolio Management and Investment RIsk > Flashcards

Portfolio Management and Investment RIsk Flashcards

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Series 65 flashcards
1
Q

Involves investing a fixed-dollar amount at regular intervals without regard for the market price of the security

A

Dollar Cost Averaging

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2
Q

This method is most effective when valuing a mature company that pays significant dividends, such as a utility company

A

Dividend Discount Model

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3
Q

Have a high price-to-earnings ratio, but a low dividend payout

A

Growth Stocks

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4
Q

Event risk

A

Systematic (non-diversifiable) risk

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5
Q

The degree to which different investments move in the same direction in the market in which they trade

A

Correlation

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6
Q

Explores the relationship between risk and reward and also focuses on diversifying across asset classes

A

Modern Portfolio Theory

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7
Q

Method of estimating the price of an investment, typically a bond

A

Discounted Cash Flow

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8
Q

If a security’s actual return is higher than its beta than the security has what alpha?

A

A positive alpha

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9
Q

Try to use an active strategy to alter the portfolio’s asset mix in an effort to take advantage of anticipated economic events

A

Tactical asset allocation

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10
Q

Liquidity risk

A

Unsystematic (diversifiable) risk

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11
Q

Provides the greatest return for a given amount of risk

A

Optimal portfolio

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12
Q

Investors can use fundamental analysis (financial metrics) to identify stocks that are undervalued or overvalued in a

A

Weak-form efficiency market

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13
Q

Includes stocks of 30 of the largest publicly traded US corps

A

DJIA

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14
Q

A systematic approach to investing

A

Dollar cost averaging

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15
Q

All past market prices and data are fully reflected in securities prices and that price changes are the result of the random release of new information

A

Weak-form efficiency

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16
Q

The asset is more volatile and expected to outperform the market when the market is up, but underperform when the market is down

A

If an asset’s beta is greater than 1.00

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17
Q

Investors commonly use the rate of return on a three-month Treasury-bill (T-bill) as the

A

Risk-free rate

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18
Q

Taxable interest rate x (100% - Tax Bracket %)

A

After-Tax Yield

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19
Q

Risk-Free Rate + (Beta x Risk Premium)

A

Alpha

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20
Q

The additional return, above the risk-free, that’s necessary to induce investment in riskier asset classes

A

Risk Premium

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21
Q

Involves taking all future cash flows and discounting them to their present value

A

Discounted cash flow

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22
Q

The ratio indicates the amount of return earned per unit of risk

A

Sharpe Ratio

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23
Q

Market risk

A

Systematic (non-diversifiable) risk

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24
Q

Regulatory risk

A

Unsystematic (diversifiable) risk

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25
Q

An identical concept to an internal rate of return. It essentially solves for the rate of return that makes the present value of an investment exactly equal to the present value of the future cash flows

A

Dollar-weighted Return

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26
Q

Measures the performance of all stocks in the US includes small-, mid- and large-cap companies

A

Wilshire 5000

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27
Q

Future value
_____________
(1+ rate of return)^number of compounding periods

A

Present value

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28
Q

The sum of all of the possible returns multiplied by the probability of each possible return

A

Expected return

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29
Q

The rate of return attributed to an investment with zero risk

A

Risk-free return

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30
Q

Attempts to describe the relationship between risk and expected return for securities, while also providing some insight into the nature of risks

A

Capital Asset Pricing Model (CAPM)

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31
Q

Credit risk

A

Unsystematic (diversifiable) risk

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32
Q

What an investor needs to invest today

A

Present Value

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33
Q

Stocks that remain stable and have consistent earnings

A

Defensive stocks

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34
Q

The measure of risk as evidenced by the variability between returns

A

Standard deviation

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35
Q

Sum of the discounted cash flows less the investment

A

Net present value

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36
Q

A strengthening US dollar against foreign currencies will become

A

More expensive for foreigners and result in an increase in foreign goods being imported into the US

37
Q

Portfolio’s return from period I - Risk-free rate of return for period I
__________________________________________________
Standard deviation of the portfolio during period I

A

Sharpe Ratio

38
Q

An investor will be able to buy more shares when the price is low, but fewer shares when the price is high. As a result, the investor’s average cost per share should be lower than the average of the prices at which the investor purchased the shares

A

Dollar cost averaging

39
Q

Modern portfolio theory suggests that an optimal portfolio is one that’s diversified with assets that are

A

Not all correlated with each other

40
Q

The internal rate of return needed for an investment to double over a given number of years

A

Rule of 72

41
Q

Includes 500 stocks of large publicly held companies that trade on either the NYSE or Nasdaq

A

S&P 500

42
Q

A way to value the price of a stock by using an estimate of future dividends and discounting them back to present value

A

Dividend Discount Model

43
Q

Includes 400 stocks of mid-sized companies that are publicly traded and have market capitalizations that range from $2B to $10B

A

S&P 400

44
Q

Currency (Exchange-Rate) Risk

A

Unsystematic (diversifiable) risk

45
Q

Tactical asset allocation is considered an

A

Active investment method

46
Q

Measures the performance of 2,000 small- and mid-cap companies

A

Russell 2000

47
Q

Analysts determine this premium for the market as a whole by subtracting the risk-free rate from the return of the S&P 500

A

Risk premium

48
Q

Expected return, standard deviation, and correlation are the basic components that are important to

A

Modern portfolio theory

49
Q

The price of a stock incorporates all of the current information about that security, including both public and non-public information. Investors may not increase their returns no matter how much research and analysis they conduct.

A

Strong-form efficiency

50
Q

Strategic asset allocation is considered a

A

Passive investment method

51
Q

The basic idea is to determine how much an additional return is being received for the willingness to hold a risky asset over one that’s risk-free

A

Sharpe Ratio

52
Q

Investors who subscribe to the Efficient Market Hypothesis and believe that market timing is ineffective usually favor

A

buy-and-hold strategies and engage in market indexing

53
Q

CAPM considers this risk as one that may be nearly eliminated through diversification and by constructing a portfolio of relatively uncorrelated assets

A

Non-systematic/diversifiable risk

54
Q

Interest rate risk

A

Systematic (non-diversifiable) risk

55
Q

Considered a risk-adjusted return, represents the difference between an asset’s expected return and its actual return

A

Alpha

56
Q

Dividend
_________
Discount Rate

A

Dividend Discount Model

57
Q

Capital risk

A

Unsystematic (diversifiable) risk

58
Q

Call risk

A

Unsystematic (diversifiable) risk

59
Q

Complexity risk

A

Unsystematic (diversifiable) risk

60
Q

Investors who believe that the prices of securities function according to a random process

A

Random walk

61
Q

DCF Value - Market Price of the Bond

A

Net present value

62
Q

Political risk

A

Unsystematic (diversifiable) risk

63
Q

All known information about an investment is reflected in the current price, constantly outperforming the market is impossible and investing passively will outperform active investment strategies

A

Efficient Market Hypothesis

64
Q

Inflation (purchasing-power) risk

A

Systematic (non-diversifiable) risk

65
Q

Original Invesment amount ( 1 + the rate of return ) ^number of compounding periods

A

Future value

66
Q

Tend to sell at a low price-to-earnings ratio

A

Value Stocks

67
Q

When calculating the sharpe ratio, the time frame of the standard deviation must be

A

Identical to the time frame of the rate of return

68
Q

The risk that’s specific to a particular security or sector

A

Non-systematic/diversifiable risk

69
Q

Investment strategy that involves the movement of money from one industry or sector to another in an attempt to beat the market

A

Sector rotation

70
Q

The greater a portfolio’s sharpe ratio, the

A

Better its risk-adjusted performance has been

71
Q

Also known as market risk, is the possibility that changes in the economy and/or the entire market will be reflected in nearly every asset class

A

Systematic/non-diversifiable risk

72
Q

A capital goal that needs to be achieved within a specific period

A

Capital needs

73
Q

The possible return on the investment weighted by the likelihood that the return will occur

A

Expected return

74
Q

Legislative risk

A

Unsystematic (diversifiable) risk

75
Q

Business risk

A

Unsystematic (diversifiable) risk

76
Q

Are a category of mathematical algorithms that are usually run by computers due to the significant volume of calculations involved

A

Monte Carlo Simulations

77
Q

The relatively sensitivity of an investment (or portfolio of investments) to market risk is measured as

A

Beta

78
Q

Estimates what an investment will be worth at a point in the future

A

Future value

79
Q

Security prices reflect all publicly available information and not just past information. Investors can only generate excess returns through the use of non-public information

A

Semistrong-form efficiency

80
Q

Performs risk analysis for a company or industry by first identifying a list of economic factors that may affect the investment and assigns each factor a range of values - a probability distribution

A

Monte Carlo Simulations

81
Q

A negative sharpe ratio indicates that a

A

Riskless asset class will perform better

82
Q

The approximate number of years that it will take for a principal amount to double at a given rate of return

A

Rule of 72

83
Q

Suggests that investors should shift their attention from the hot stock of the day to building a portfolio that consists of various classes of assets

A

Modern Portfolio Theory

84
Q

The asset is more stable and expected to underperform the market when the market is up, but outperform the market when the market is down

A

If an asset’s beta is less than 1.00

85
Q

Reinvestment risk

A

Systematic (non-diversifiable) risk

86
Q

Opportunity (Cost) risk

A

Unsystematic (diversifiable) risk

87
Q

Tax-Free Interest Rate
_______________________
(100% - Tax Bracket %)

A

Taxable Equivalent Yield

88
Q

(Ending Value - Beginning Value + Investment Income)
_______________________________________________
Beginning Value

A

Total Return

My Series 65 (9 decks)

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