QBANK

Question 1

Compared with a direct investment in real estate, investing in real estate investment trusts (REIT) most likely offers a distinct advantage regarding

Answer 1

REITs are PLCs that invest in a portfolio of commercial or residential properties, typically relying on leverage to finance and hold larger portfolios that can enhance returns. In REITs, shares are publicly traded and the investment portfolio is diversified, providing two key advantages:

Liquidity and Income Stability

Question 2

What is a REIT, RMBS, CMBS

Answer 2

Real estate Investment Trust
Residential mortgage backed security
Commercial mortgage backed security

Question 3

Explain the efficient market hypothesis

Answer 3

Three forms of markets

Weak, Semi Strong and Strong.

Weak: Markets reflect historical data only

Semi strong: Markets reflect historical and public information

Strong: Markets reflect private, public and historical information

Question 4

Calculate and explain a continuous uniform distribution

Answer 4

A situation with an infinite equally likely possible outcomes between A and B

Formula =

F(X) =

x - a

/

b - a

a= startpoint
b= endpoint
x= observation

Question 5

What is a utility function.

What is an indifference curve

What is the assumption for indifference curves

What is the preference for a risk averse investor

Answer 5

Investor’s utility functions represent their preferences regarding the trade-off between risk and return (i.e., their degrees of risk aversion).

An indifference curve is a tool from economics that, in this application, plots combinations of risk (standard deviation) and expected returns among which an investor is indifferent

They are plotted based on returns and risk, so the assumption is these are the only important factors

Less risky

Question 6

Standard II(B) - What is required to be guilty?

Answer 6

An action that distorts the securities price that was INTENDED to decieve

Question 7

What is a production function?

Explain the formula, its components

What is the most important factor in a production function

Answer 7

They are used to identify sources of economic growth and estimate an economy’s stable GDP growth rate

Y = A x F(L,K)

Y= agregate economic output (income or GDP)
A= technology
L = Supply of labour (num workers x hours worked)
K - capital stock (all equipment and structures used in prod)

Increased total factor productivity (technological improvemen) results in production processes capable of making more higher-quality goods per unit of input

Technological impact is most important for developed countries

Question 8

What is capital rationing

What is post auditing

What is project sequencing

Answer 8

the process of allocating funds to projects when companies do not have enough funds for all profitable projects

process of comparing a completed project’s results to it’s expected results

This is when the ability to undertake one project is contingent on the success of another

Question 9

Explain and calculate du pont 3 and 5 stage

Answer 9

The DuPont system of analysis is an approach that can be used to analyze return on equity (ROE). It uses basic algebra to break down ROE into a function of different ratios, so an analyst can see the impact of leverage, profit margins, and turnover on shareholder returns. There are two variants of the DuPont system: The original three-part approach and the extended five-part system.

1. Return on Equity = NI / Average SH Equity

NI / Revenue x Revenue / Average sh equity

3. Return on Equity = Net Profit margin x Total asset turnover x Leverage

NPM = NI / Revenue
Total Asset Turnover = Revenue / Avg Total Assets
Leverage = Average total assets / average sh equity

NI / Revenue =

NI / EBT (tax burden)

EBT / EBIT (interest burden)

EBIT / Revenue (ebit margin)

Question 10

Calculate Spot Price from Forward Price

Answer 10

Forward Price / 1+R + Cost of carry

Question 11

Calculate Forward price from spot price

Answer 11

FV Spot Price - FV (benefit - cost)

Question 12

How does a profession maintain trust?

Answer 12

When members conduct reflects the professions ethical principles

Question 13

Explain how interest, dividends and tax are treated for US GAAP and IFRS.

Answer 13

Category US GAAP IFRS
Interest Received CFO CFO / CFI
Interest Paid CFO CFO / CFF

Dividende Received CFO CFO / CFI
Dividends Paid CFF CFO / CFF

Tax CFO Any (mostly CFO)

Question 14

What is the capital allocation line?

What is the efficient frontier?

Answer 14

The capital allocation line represents a combination of risk-free assets and risky assets, reflecting various risk-return trade-offs in a portfolio.

In contrast, the capital market line represents the efficient frontier of portfolios that maximize return for a given level of risk, assuming a risk-free rate.

Question 15

Calculate a percentile

Answer 15

(N+1) x percentile / 100

Question 16

Explain pricing vs valuation of a swap

Answer 16

Pricing: Setting the terms so that the contract has an initial value of 0.

Valuation: Deciding the contracts value after initiation

Question 17

Calculate the expected return of an asset, based on the capital asset pricing model

Answer 17

E(R) = Rf + B (Rm - Rf)

E(Ri) = Estimated Return on an asset
Rf = Risk free rate
B = Beta
Rm = Market return
(Rm - Rf) = market risk premium

Question 18

Calculate the market risk premium, based on the capital asset pricing model

Answer 18

Market Risk Premium = (Rm - RF)

Re - Rf

/

B

Re = Cost of equity capital
Rf = Risk free rate
B = Beta

Question 19

Explain how the treatment of an impaired asset with a finite life (e.g a patent).

Answer 19

• Impairment analysis is done after a significant event acts as a trigger
• Impairment treatment is the same as for tangible assets
• The impairment will flow through the INCOME STATEMENT and be reflected in NET INCOME
• Impairment will reduce the value of the asset on the BALANCE SHEET

Question 20

Calculate the Treynor ratio

Answer 20

Rp - Rf
/
Bi

Rp = Stock or portfolio return
Rf = Risk Free rate
Bi = Beta

Question 21

Calculate the Sharpe Ratio

Answer 21

E(Rp) - Rf

/

SDp

E(Rp) = expected return portfolio
Rf = Risk free rate
SDp = Portfolio standard deviation

Question 22

Explain the change in polarity principle

Answer 22

The change in polarity principle asserts that once breached, a support level becomes a resistance level. Similarly, resistance levels become support levels upon a breach

Question 23

Describe bond credit enhancements and uses

Answer 23

Internal
Subordination - credit tranches
Overcollateralization
Reverse accounts - excess cash received from financed asset deposited in safe accounts

External
letter of credit - guarantees from financial institutions (not insurers)
surety bonds - payment guarantees issued by insurers
cash Collateral accounts - cash deposited by guarantor for issuer to borrow

Question 24

Explain the different types of risk for a company

Answer 24

Macro, Business, Financial

Macro - E.g Fiscal policy - affects most companies

Business E.g competition, execution risk - affects a company’s operating profit

Financial - affects a firm’s net income and is impacted by the proportion of debt in the capital structure.

Financial risk is affected by a firm’s capital structure, which exposes a firm to variability in it’s net income, which is in turn affected by macros and business risk. therefore, financial covers all risks.

Question 25

Explain a pull vs a drag in liquidity

Answer 25

Pull = Speedup of cash OUTFLOWS
Drag = Slowdown of cash INFLOWS

Question 26

Explain the different monetary policies from the central bank

Answer 26

1. Open market operations

Trade Securities (normally gov)
Expansionary: Buy Securities
Contractionary: sell securities

2. Policy interest rate

Set Rate used to signal markets
Expansionary: lower
Contractionary: raise

3. Reserve Requirements

Set reserve requirements for bank deposits
Expansionary: decrease
Contractionary: increase