Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Series 66 > Portfolio Management and Investment Risk > Flashcards

Portfolio Management and Investment Risk Flashcards

You may prefer our related Brainscape-certified flashcards:
Series 66 flashcards
1
Q

__________ stock fluctuates with the business cycle.

A

Cyclical stock fluctuates with the business cycle (auto companies).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

____________ stock is resistant to recession.

A

Defensive stock is resistant to recession (utility companies).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the proper order of liquidation for a corporation at bankruptcy? 6

A
  1. Unpaid workers, 2. IRS, 3. secured creditors, 4. unsecured creditors, 5. preferred, and then 6. common.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are TIPS?

A

Treasury Inflation-Protected Securities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

The principal value of TIPS may be adjusted based on changes to the __________________________.

A

The principal value of TIPS may be adjusted based on changes to the Consumer Price Index (CPI).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

True or False: The interest rate on TIPS is fixed, but the principal may be adjusted.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

If a stop order is activated, at what price will the trade be executed?

A

The next trade after activation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Do stop orders guarantee a specific price when buying or selling?

A

No, stop orders execute at the market price (which is uncertain) once they are activated.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

True or False: Stop-limit orders are guaranteed execution if the trigger is touched.

A

False. Stop-limit orders may not be executed if the limit price cannot be met.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

___________________ is the balancing of investment classes according to an investor’s investment objectives.

A

Asset allocation is the balancing of investment classes according to an investor’s investment objectives.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

______ is the measure of an asset’s volatility compared to the market as a whole.

A

Beta is the measure of an asset’s volatility compared to the market as a whole.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the beta of the market (S&P 500)?

A

1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

(Current Assets - ____________) ÷ Current Liabilities = Quick Asset Ratio (or Acid Test)

A

(Current Assets - Inventory) ÷ Current Liabilities = Quick Asset Ratio (or Acid Test)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Working Capital, Current Ratio, and the Quick Asset Ratio (Acid Test) are examples of ____________ ratios.

A

Working Capital, Current Ratio, and the Quick Asset Ratio (Acid Test) are examples of liquidity ratios.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

To find a stock’s current yield, the formula is: ____________ ÷ ____________

A

To find a stock’s current yield, the formula is: Annual Dividend ÷ Current Market Price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the Capital Asset Pricing Model (CAPM)?

A

A model of the relationship between expected risk and expected return

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

True or False: According to CAPM, a security’s return equals a risk-free return (T-Bill return) plus a risk premium.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

True or False: Inflation is a persistent rise in the general level of prices.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

The _______________________ is often considered the most important measure of inflation.

A

The Consumer Price Index (CPI) is often considered the most important measure of inflation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

__________ value is the dollar amount to be invested today to meet a specific dollar objective at a set future point.

A

Present value is the dollar amount to be invested today to meet a specific dollar objective at a set future point.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

__________ value determines how much a dollar amount invested today will be worth at a set point in the future.

A

Future value determines how much a dollar amount invested today will be worth at a set point in the future.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is used to determine how a given present value will become a needed future value.

A

The internal rate of return (IRR)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

$10,000 has become $80,000 in 36 years. What is the internal rate of return?

A

The money doubled every 12 years. The 10 grew to 20, the 20 to 40, and the 40 to 80. Using the Rule of 72, 72 ÷ 12 = 6%.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Modern Portfolio Theory (MPT) focuses on differing __________ of assets rather than on _____________ securities.

A

Modern Portfolio Theory (MPT) focuses on differing classes of assets rather than on individual securities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What are the three main concepts underlying the Modern Portfolio Theory?

A
  1. Expected return, 2.standard deviation, and 3. correlation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Define expected return.

A

The possible return of an asset multiplied by the likelihood of occurrence

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Standard deviation is a measure of the dispersion of ____________ returns.

A

Standard deviation is a measure of the dispersion of expected returns.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What is the likelihood of an investment’s return falling within 1, 2, and 3 standard deviation units?

A

67% within 1 standard deviation, 95% within 2 standard deviations, and 99% within 3 standard deviations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What is used as the basic measure of risk for an investment?

A

Standard deviation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

The greater the dispersion of historical returns of a security, the _________ its standard deviation.

A

The greater the dispersion of historical returns of a security, the higher its standard deviation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

______________ measures the degree to which the movements of two variables are related.

A

Correlation measures the degree to which the movements of two variables are related.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

If two investments closely track one another, this is referred to as ___________ correlation.

A

If two investments closely track one another, this is referred to as positive correlation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

If two investments go in opposite directions from one another, this is referred to as ___________ correlation.

A

If two investments go in opposite directions from one another, this is referred to as negative correlation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

If there is no relationship between the movement of two investments, they are considered to be _______________.

A

If there is no relationship between the movement of two investments, they are considered to be uncorrelated.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

True or False: Perfect negative correlation is -1.00, while a perfect positive correlation is 1.00.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

MPT has found that having asset classes with a slight ___________ correlation provides the best long-term performance.

A

MPT has found that having asset classes with a slight negative correlation provides the best long-term performance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

What is the efficient frontier?

A

The line representing portfolios (excluding risk-free alternatives) showing the lowest risk for a given level of return

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

Strategic asset allocation assumes that the markets are ____________.

A

Strategic asset allocation assumes that the markets are efficient.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

True or False: With a buy and hold strategy, investors are consistently rebalancing their portfolios.

A

False. Buy and hold involves no rebalancing.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

Tactical asset allocation assumes that markets are ______________.

A

Tactical asset allocation assumes that markets are inefficient.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

True or False: Diversification is one method by which an investor may avoid non-systematic risk.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

If a security’s beta is more than 1, is it considered more or less volatile than the market as a whole?

A

The higher the beta, the greater the volatility.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

True or False: Alpha represents an investment’s actual return in excess of its expected return.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

Another name for a security’s risk-adjusted return is its ________.

A

Another name for a security’s risk-adjusted return is its alpha.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

What is the risk of having an excessive portion of a portfolio invested in one particular security or asset class?

A

Concentration risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

____________ risk is the inability to sell an investment easily.

A

Liquidity risk is the inability to sell an investment easily.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

What uses computer simulations to present random outcomes of an investment strategy?

A

Monte Carlo Simulation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

What is considered an optimal portfolio?

A

One that has the highest expected return given the client’s tolerance for risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

What measures risk-adjusted return?

A

Alpha and the Sharpe Ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

Is market risk considered a form of diversifiable or non-diversifiable risk?

A

Non-diversifiable risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

To determine a bond’s real interest rate, the bond’s yield is subtracted by the rate of ___________.

A

To determine a bond’s real interest rate, the bond’s yield is subtracted by the rate of inflation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

True or False: A low beta security would be expected to rise more than a high beta security in a bull market.

A

False. An asset with a low beta would be less volatile and would, therefore, be expected rise less in a rising market.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

An investor’s net return is the gross return minus ________ paid.

A

An investor’s net return is the gross return minus taxes paid.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

Define holding period return.

A

The total return received from holding an asset or portfolio of assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

What is the formula for determining a bond’s current yield?

A

Annual interest ÷ current market value of the bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
56
Q

What is the formula for determining a stock’s current yield?

A

Annual dividend ÷ current market value of the stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
57
Q

Identify the acronym: CPI

A

Consumer Price Index

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
58
Q

What type of mean is used to calculate the expected return?

A

The weighted arithmetic mean

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
59
Q

An investment earns 10%, 50%, and 30% in three years. How would the annualized average rate of return be calculated?

A

When calculating an annualized rate of return over time, the geometric mean is used.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
60
Q

Identify the acronym: CAPM

A

Capital Asset Pricing Model

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
61
Q

Identify the acronym: MPT

A

Modern Portfolio Theory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
62
Q

What rule can be used to determine how long it takes for an amount of money to double at a given rate of return?

A

The Rule of 72

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
63
Q

What rule can be used to determine the annual rate of return needed for funds to double if given a number of years?

A

The Rule of 72

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
64
Q

Jim invested $25,000 in an annuity with a 6% return. How long will it take for the money to double?

A

Using the Rule of 72, divide 72 by the rate of return (72 ÷ 6 = 12 years).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
65
Q

_________ value projects what an investment will be worth at some point in the future.

A

Future value projects what an investment will be worth at some point in the future.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
66
Q

__________ value is the amount of money that must be invested today to result in a certain sum at a future time.

A

Present value is the amount of money that must be invested today to result in a certain sum at a future time.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
67
Q

A bond’s inflation-adjusted rate of return may also be referred to as the _______ interest rate.

A

A bond’s inflation-adjusted rate of return may also be referred to as the real interest rate.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
68
Q

True or False: Tactical asset allocation is considered a passive asset allocation approach.

A

False. Tactical asset allocation is considered an active approach.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
69
Q

True or False: Strategic asset allocation is considered an active asset allocation approach.

A

False. Strategic asset allocation is considered a passive approach.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
70
Q

Do those who favor market timing (active strategies) believe markets are efficient or inefficient?

A

Inefficient. They may alter their portfolio to take advantage of anticipated economic events.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
71
Q

What is an advantage to buy and hold portfolio management?

A

Transaction costs and tax consequences are minimized.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
72
Q

Identify the risk: Investors miss out on receiving a better return by placing their funds elsewhere.

A

Opportunity risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
73
Q

Identify the risk: A particular enterprise may not perform well due to poor management or increased competition.

A

Business risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
74
Q

What method of investing is characterized by regularly investing a set amount of money, regardless of share prices?

A

Dollar Cost Averaging

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
75
Q

Describe a growth investor.

A

One seeking stocks of companies with an above-average growth rate, high P/E ratios, and low dividend payout ratios

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
76
Q

Describe a value investor.

A

One seeking stocks that are undervalued in relation to their earnings and have low P/E ratios

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
77
Q

How is market capitalization (cap) determined?

A

A company’s current share price multiplied by the number of shares outstanding

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
78
Q

Sue bought a 6% bond at par. One year later, her bond’s value has fallen to $970. What is her annual return?

A

Sue received the 6% rate of interest, but her bond lost 3% of its value. (-$30 + 60) ÷ $1,000 = 3%.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
79
Q

Bond A yields 7.5% when inflation is 3%. Bond B yields 8% when inflation is 4%. Which has a higher real interest rate?

A

Bond A. Bond A’s real interest rate is 4.5% (7.5% - 3%) and Bond B’s real interest rate is 4% (8% - 4%).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
80
Q

“A dollar received today is worth more than a dollar received tomorrow” describes what concept?

A

The time value of money

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
81
Q

If a bond is trading at a discount to its value based on DCF, will an investor earn more or less than a comparable bond?

A

A bond trading at a discount to its DCF value will earn more than comparably priced bonds.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
82
Q

If a bond is trading at a premium to its value based on DCF, will an investor earn more or less than a comparable bond?

A

A bond trading at a premium to its DCF value will earn less than comparably priced bonds.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
83
Q

What are two assumptions of MPT?

A

Investors want to minimize risk and maximize returns

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
84
Q

What is the name for the graph of optimal portfolios?

A

The efficient frontier

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
85
Q

Which would have the least risk—large-, mid-, or small-cap companies?

A

Large cap stocks have the least risk.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
86
Q

Which would have the most risk—large-, mid-, or small-cap companies?

A

Small cap stocks would have the most risk.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
87
Q

True or False: Systematic rebalancing involves buying and selling on a periodic basis.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
88
Q

True or False: Systematic rebalancing assumes markets are inefficient.

A

False

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
89
Q

What is an efficient market?

A

A market in which prices reflect all known information; therefore, nothing will be overvalued or undervalued.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
90
Q

Name the three forms of market efficiency.

A

Strong-, Semi-Strong and Weak-Form

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
91
Q

What type of trading strategy would be used if you believe markets are efficient?

A

Passive strategies, such as indexing or systematic rebalancing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
92
Q

True or False: The S&P 500 is a large-cap index.

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
93
Q

True or False: The S&P 400 is a large-cap index.

A

False, the S&P 400 is a mid-cap index.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
94
Q

What type of trading strategy would be used if you believe markets are inefficient?

A

Active strategies, such as tactical asset allocation or sector rotation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
95
Q

Define sector rotation.

A

A strategy that anticipates the next turn in the business cycle and shifts assets into the sectors that will benefit.

96
Q

Define capital structure.

A

A company’s issuance of debt and equity securities (both common and preferred stocks) to finance operations

97
Q

What are two measures of liquidity?

A

Current ratio and the quick asset ratio (acid test) both measure a company’s liquidity.

98
Q

What is the difference between the current ratio and the quick asset ratio?

A

The quick asset ratio is more stringent since it excludes inventory from the current assets.

99
Q

A company with more debt than equity outstanding is considered ____________.

A

A company with more debt than equity outstanding is considered leveraged.

100
Q

_______ investors look for stocks of companies that are intrinsically undervalued.

A

Value investors look for stocks of companies that are intrinsically undervalued.

101
Q

What are some of the characteristics of a value stock?

A

Low P/E ratios, history of profitability, high dividend payout, and low market-to-book ratio

102
Q

What is the formula for the P/E ratio?

A

Price ÷ EPS (Earnings Per Share)

103
Q

_______ investors are concerned with a company’s future earnings potential.

A

Growth investors are concerned with a company’s future earnings potential.

104
Q

What is a dollar-weighted return?

A

A dollar-weighted return is a geometric mean (average) used to measure how a portfolio performed over time.

105
Q

What is a time-weighted return?

A

A time-weighted return is a geometric mean (average) that eliminates the effect of varying cash inflows (dividends).

106
Q

What is a major disadvantage when using an arithmetic mean to measure investment performance?

A

Arithmetic means (averages) can misrepresent compounding effects on an investment’s return.

107
Q

True or False: Systematic risk may be avoided through diversification.

A

False. Systematic (non-diversifiable) risk may not be avoided through diversification.

108
Q

Market, interest rate, and inflation risk are all types of ___________ risk.

A

Market, interest rate, and inflation risk are all types of systematic risk.

109
Q

Business, regulatory, political, and liquidity risk are all types of ____________ risk.

A

Business, regulatory, political, and liquidity risk are all types of unsystematic risk.

110
Q

What is the risk that certain circumstances or factors may have a negative impact on the profitability of a company?

A

Business risk

111
Q

What is the risk of foreign investors losing money due to changes with a country’s government or regulatory environment?

A

Political risk

112
Q

What is the risk that investors may be unable to dispose of a securities position quickly and at a fair price?

A

Liquidity risk

113
Q

True or False: A country with high interest rates will generally have a stronger currency.

A

True

114
Q

Define currency risk.

A

The risk that foreign investments will be worth less in the future due to changes in exchange rates.

115
Q

What is the formula for the Sharpe Ratio?

A

(Return on Investment - Risk-Free Return) ÷ Standard Deviation

116
Q

What is the Sharpe Ratio used to determine?

A

The Sharpe Ratio is used to determine if returns are from wise investments or the result of excess risk.

117
Q

Buy limit orders are placed ________ the market.

A

Buy limit orders are placed below the market.

118
Q

Sell limit orders are placed ________ the market.

A

Sell limit orders are placed above the market.

119
Q

Name four asset classes.

A
  1. Stocks, 2. Bonds, 3. Real Estate, 4. Cash
120
Q

True or False: The S&P 500 is an asset class.

A

False. Stocks, bonds, real estate, and cash are asset classes.

121
Q

What return will an investment have if its net present value is greater than zero?

A

The investment will generate a positive return.

122
Q

What return will an investment have if its net present value is less than zero?

A

The investment will generate a negative return.

123
Q

True or False: Dollar weighted return (DWR) takes into account the deposits into or withdrawals out of the portfolio.

A

True. DWR includes the weighted value of cash flows into and out of the portfolio when calculating return.

124
Q

What is the present value of an annuity that pays $2,000 per year and earns 5% per year?

A

$40,000 = $2,000/.05

125
Q

A ____________ is an annuity that never stops paying money.

A

A perpetuity is an annuity that never stops paying money.

126
Q

What is a Perpetuity?

A

An annuity that pays out forever.

127
Q

What is the present value of a perpetual monthly payment of $1,000 earning 5% per year?

A

$240,000 = ($1,000 x 12 mo)/.05

128
Q

A __________ is a stream of cash flows that continues forever.

A

A perpetuity is a stream of cash flows that continues forever.

129
Q

How much principal, compounding at 3% annually, is needed to make annual payments of $3,000 in perpetuity?

A

$100,000 principal = $3,000 annual payment /.03 rate of return

130
Q

How are secured creditors treated in a liquidation?

A

They are given priority up to the value of their collateral and are unsecured for any remaining claim.

131
Q

List some formulas used to measure liquidity.

A

Working capital, current ratio, and quick asset ratio (acid test)

132
Q

_____________ return allows an investor to compare the performance of two investment advisers.

A

Time-weighted return allows an investor to compare the performance of two investment advisers.

133
Q

_______________ return allows an investor to measure the amount of money she has earned on her investments.

A

Dollar-weighted return allows an investor to measure the amount of money she has earned on her investments.

134
Q

The quick asset ratio is calculated by excluding _________ from a company’s current assets.

A

The quick asset ratio is calculated by excluding inventory from a company’s current assets.

135
Q

If an investment has increased in value, when would its annualized return be greater than its holding period return?

A

An investment’s annualized return would be greater than its holding period return if it was held for less than one year.

136
Q

Define capital risk.

A

The risk that an investor may lose a part or her entire investment (principal). Capital risk is a form of diversifiable risk.

137
Q

Which return measures investment performance by including all cash inflows and outflows?

A

Dollar-weighted return

138
Q

In the secondary market, a customer _____ at the bid and ____ at the ask (offer).

A

In the secondary market, a customer sells at the bid and buys at the ask (offer).

139
Q

True or False: In the secondary market, a client buys at the bid and sells at the ask (offer).

A

False. Clients buy at the ask/offer (price at which a BD will sell) and sell at the bid (price at which a BD will buy).

140
Q

What is the use of the Capital Asset Pricing Model (CAPM)?

A

To find an investor’s optimal portfolio by comparing expected risk with expected rates of return

141
Q

What is the formula for calculating the risk premium?

A

Risk premium = total return - risk-free rate

142
Q

The difference between an investment’s total return and the risk-free rate is the risk _______.

A

The difference between an investment’s total return and the risk-free rate is the risk premium.

143
Q

Define net present value (NPV).

A

The difference between the value of an investment’s cash inflows and outflows above a discount rate

144
Q

Two investments have the same price, but the net present value (NPV) of choice A is $50 while B’s is $40. Which is best?

A

Investment A is better. NPV measures net cash flows above a discount rate. A greater NPV indicates more value.

145
Q

An investor needs an IRR of 5%. Her investment has a positive NPV. Is its IRR greater than, less than, or equal to 5%?

A

A positive NPV would indicate than an investment has an IRR that is greater than the required rate.

146
Q

An investor needs an IRR of 5%. His investment has a negative NPV. Is its IRR greater than, less than, or equal to 5%?

A

A negative NPV would indicate that an investment has an IRR that is less than the required rate.

147
Q

An investor needs an IRR of 5%. His investment has a NPV of $0. Is its IRR greater than, less than, or equal to 5%?

A

A NPV of $0 would indicate that an investment has an IRR that is equal to the required rate.

148
Q

Buying gold or gold futures may protect an investor against _________ risk.

A

Buying gold or gold futures may protect an investor against inflation risk.

149
Q

Which asset class is most susceptible to interest-rate risk?

A

Debt (i.e., bonds)

150
Q

A client notices that a thinly traded stock has had few daily trades effected. To what risk is it most susceptible?

A

Liquidity risk

151
Q

What type of risk is liquidity risk?

A

It is non-systematic risk, since liquidity risk may be diversified against by buying actively traded assets.

152
Q

What type of risk is avoided through indexing?

A

Business risk, since indexing involves purchasing stocks of many companies

153
Q

The ________ rate of return is used to calculate the anticipated return for a portfolio of securities.

A

The expected rate of return is used to calculate the anticipated return for a portfolio of securities.

154
Q

What strategy involves moving a client’s funds from one industry to another during defined periods?

A

Sector rotation

155
Q

If an investor is attempting to maximize her portfolio growth over a long period, what is her strategy called?

A

Capital appreciation

156
Q

Gold coins, gold certificates, or gold futures may be purchased in an effort to avoid what type of risk?

A

Inflation risk

157
Q

If a client eliminates unsystematic or diversifiable risk in his portfolio, he is willing to accept ______ risk.

A

If a client eliminates unsystematic or diversifiable risk in his portfolio, he is willing to accept market risk.

158
Q

What form of asset allocation attempts to keep the asset percentages balanced over a long period?

A

Strategic asset allocation

159
Q

___________ is the term that BEST describes the process used to calculate an investment’s future value.

A

Compounding is the term that BEST describes the process used to calculate an investment’s future value.

160
Q

For a person with a diversified portfolio of large-cap stocks, what type of risk may be reduced by using index options?

A

Systematic risk

161
Q

If an adviser attempts to exceed the performance of the market, it is using ______ portfolio management.

A

If an adviser attempts to exceed the performance of the market, it is using active portfolio management.

162
Q

List the risks associated with investing in 30-year U.S. Treasury bonds.

A

Inflation risk and interest-rate risk

163
Q

What is commonly used to measure an asset’s risk-free rate of return?

A

The interest rate on a U.S. T-bill

164
Q

The interest rate on a U.S. T-bill is commonly used to measure an asset’s _________ rate of return.

A

The interest rate on a U.S. T-bill is commonly used to measure an asset’s risk-free rate of return.

165
Q

What is the risk that Congress may enact tax law changes that negatively impact the value of an investment?

A

Legislative risk

166
Q

What is the risk that changes in tax law could impact securities prices?

A

Legislative risk

167
Q

True or False: When the market suffers a large, general decline, most stocks are affected.

A

True. Stocks are subject to the risks of the market as a whole.

168
Q

What risk is based on the possibility that new laws may have a negative impact on an investment’s value?

A

Legislative risk

169
Q

What risk is based on the possibility that new regulations may have a negative impact on an investment’s value?

A

Regulatory risk

170
Q

Which market is considered negotiated?

A

The over-the-counter (OTC) market in which market makers negotiate prices (e.g., the OTCBB)

171
Q

Define positive financial leverage.

A

It is when the return achieved is greater than the cost of borrowing.

172
Q

Define negative financial leverage.

A

It is when the return achieved is less than the cost of borrowing.

173
Q

What is the fair value of a bond?

A

The discounted present value of the sum of the future payments

174
Q

Highly regulated companies, such as utilities, are subject to __________ risk.

A

Highly regulated companies, such as utilities, are subject to regulatory risk.

175
Q

What is the formula for determining an asset’s total return?

A

(Ending Value - Beginning Value + Dividends/Interest) ÷ Beginning Value

176
Q

What is the formula for determining holding period return?

A

(Ending Value - Beginning Value + Dividends/Interest) ÷ Beginning Value

177
Q

What is a common method used to calculate the returns on an equity indexed annuity?

A

Point-to-point indexing

178
Q

Describe positive financial leveraging.

A

Paying less interest than earnings received (e.g., client pays 4% on a margin loan, but earns 10% on stock gains)

179
Q

Define range.

A

Range is the difference between the largest value and smallest value of a given set of numbers.

180
Q

Identify the range from the following set of numbers: 7, 3, 5, 4, 4, 6

A
  1. Range is calcuated by starting with the largest value (7) and then subtracting the smallest value (3).
181
Q

Identify the range from the following set of numbers: 10, 12, 5, 1, 7, 7, 8, 4

A
  1. Range is calcuated by starting with the largest value (12) and then subtracting the smallest value (1).
182
Q

Both the Down Jones Industrial Average and the S&P 500 Index are _____-cap indexes.

A

Both the Down Jones Industrial Average and the S&P 500 Index are large-cap indexes.

183
Q

The S&P 400 Index is a ___-cap index.

A

The S&P 400 Index is a mid-cap index.

184
Q

The Russell 2000 Index is a _____-cap index.

A

The Russell 2000 Index is a small-cap index.

185
Q

_________ stock pays higher than average dividends.

A

Income stock pays higher than average dividends (e.g., stocks of utility companies).

186
Q

What is the formula for calculating a bond’s current yield?

A

Annual Interest ÷ Current Market Price

187
Q

Stop and stop-limit orders are triggered when a round lot trades at, or through, the _____ ______.

A

Stop and stop-limit orders are triggered when a round lot trades at, or through, the stop price.

188
Q

If an investor is long stock, a sell stop order can be used to limit ___________ risk.

A

If an investor is long stock, a sell stop order can be used to limit downside risk.

189
Q

If an investor is short stock, a buy stop order can be used to limit _________ risk.

A

If an investor is short stock, a buy stop order can be used to limit upside risk.

190
Q

Stop orders become _________ orders once they are triggered/activated.

A

Stop orders become market orders once they are triggered/activated.

191
Q

Stop-limit orders become ________ orders once they are triggered/activated.

A

Stop-limit orders become limit orders once they are triggered/activated.

192
Q

If an asset outperforms the market when prices are up, but underperforms when prices are down, what is its beta?

A

Its beta must be greater than 1.00.

193
Q

What ratio tests a company’s ability to pay its current liabilities with its current assets, but excludes inventory?

A

The Quick Asset Ratio (the Acid Test)

194
Q

Are inflationary periods characterized by rising or falling interest rates?

A

Rising

195
Q

Assuming a 12% rate of return, how long will it take $50,000 to double?

A

Six years. Using the Rule of 72, 72 divided by the rate of return determines the number of years (72 ÷ 12 = 6 years).

196
Q

True or False: Securities with a correlation coefficient of zero are considered uncorrelated.

A

True

197
Q

True or False: Tactical asset allocation is changing a portfolio’s asset mix due to impending market and economic factors.

A

True

198
Q

What is another name for diversifiable risk?

A

Non-systematic risk

199
Q

What is another name for non-diversifiable risk?

A

Systematic risk

200
Q

What type of risk does beta measure?

A

Non-diversifiable

201
Q

What types of securities tend to have a high beta?

A

Growth stocks

202
Q

What types of securities tend to have a low beta?

A

Defensive stocks

203
Q

In a declining market, is a high beta security expected to outperform or underperform the market as a whole?

A

Underperform

204
Q

In a rising market, is a low beta security expected to outperform or underperform the market as a whole?

A

Underperform

205
Q

A stock with a positive alpha is generally considered a _______ opportunity by an analyst.

A

A stock with a positive alpha is generally considered a buying opportunity by an analyst.

206
Q

List some forms of business risk that apply when investing in individual equity securities.

A

Poor management, obsolete products, changing market conditions

207
Q

True or False: The longer an investor’s time horizon, the more concerned he is with market fluctuations.

A

False. The longer the time horizon, the less concerned he is with market fluctuations.

208
Q

Which type of risk is non-diversifiable?

A

Market risk

209
Q

A security has appreciated from $10 to $15 over three months and has paid no dividend. What is the annualized return?

A

200%, which is calculated by multiplying the holding period return (50%) by four quarters

210
Q

True or False: The longer a bond’s duration, the less sensitive the bond’s price is to changes in interest rates.

A

False. The longer the duration, the greater a bond’s price sensitivity to changes in interest rates.

211
Q

Which is a better hedge against inflation, investing in stocks or bonds?

A

Historically, stocks have outperformed inflation. Since bonds are fixed income instruments, they are hurt by inflation.

212
Q

An investor buys stock that returns 2% for the year rather than a T-Bond yielding 6%. The ____________ cost is 4%.

A

An investor buys stock that returns 2% for the year rather than a T-Bond yielding 6%. The opportunity cost is 4%.

213
Q

12 years ago, Tina invested $25,000 which has now grown to $100,000. What is the annual growth rate of her investment?

A

In 12 years, the money doubled twice (every six years). Using the Rule of 72, 72 divided six years = 12%.

214
Q

Do investors who favor passive strategies believe markets are efficient or inefficient?

A

Efficient. Rather than trying to time the market, they may rebalance their portfolios periodically (e.g., quarterly).

215
Q

Is indexing considered an active or passive portfolio management strategy?

A

Passive, since the composition of the benchmark index generally remains the same.

216
Q

What are large-cap stocks?

A

Stocks of mature companies with a long history of dividend payments

217
Q

What are mid-cap stocks?

A

Stocks of companies that are more volatile and growth-oriented than the large-cap stocks

218
Q

What are small-cap stocks?

A

Typically stocks of new companies with more volatility, but also with more growth potential

219
Q

What are micro-cap stocks?

A

Stocks of emerging companies that would generally be suitable only for speculative investors

220
Q

Over the last three months, a stock rose from $50 to $51 and paid a $.25 dividend. What is its annualized return?

A

The three-month return is 2.5% ($1.25 ÷ $50). A quarterly return is annualized by multiplying by four (2.5% x 4 = 10%).

221
Q

A bond is yielding 8% and the rate of inflation is 3%. What is the bond’s real interest rate?

A

8% - 3% = 5%. Real interest rate measures the true yield once inflation is factored out.

222
Q

True or False: In a weak-form efficient market, technical analysis will be useful.

A

False. In a weak-form efficient market, only fundamental analysis will be useful.

223
Q

True or False: Strong-form market efficiency advocates believe they can beat the market.

A

False. Strong-form market efficiency states that no person can beat the market.

224
Q

Which form of market efficiency declares that only insiders can regularly beat the market?

A

Semi-strong

225
Q

True or False: A bottom up approach to investing uses the economy as a main factor in determining which stocks to buy.

A

False. Bottom up investing uses company specific items (e.g., earnings and dividend payments) to pick stocks.

226
Q

An investor who follows the __________ style of investing bets against market trends.

A

An investor who follows the contrarian style of investing bets against market trends.

227
Q

True or False: Investors who are planning to hold bonds until maturity have no risk.

A

False. Opportunity risk (the risk of missing out on a superior investment) is a risk these types of investors face.

228
Q

Define reinvestment risk.

A

The risk that an investor will not be able to reinvest her principal at the same interest rate.

229
Q

What happens to the U.S. trade deficit if the dollar is weakening?

A

The trade deficit will shrink as U.S. goods become cheaper for foreign consumers.

230
Q

What is required to make the dollar weighted return and the time weighted return equal?

A

Remove or subtract any deposits into and/or withdrawals out of the portfolio

231
Q

True or False: A buy-and-hold strategy is considered an active/tactical investment strategy.

A

False. A buy-and-hold strategy is considered a passive/strategic investment strategy.

232
Q

A 20-year U.S. Treasury zero-coupon bond is most susceptible to _________ risk.

A

A 20-year U.S. Treasury zero-coupon bond is most susceptible to inflation risk.

233
Q

A capital needs analysis is done to determine a client’s _________ needs in order to fund future financial goals.

A

A capital needs analysis is done to determine a client’s insurance needs in order to fund future financial goals.

234
Q

What is the risk that environmental regulations could impact the prices of securities?

A

Regulatory risk

235
Q
A
236
Q
A
237
Q

What is the formula for working capital?

A

Total Current Assets - Total Current Liabilities

Series 66 (12 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions