RPA2

Question 1

Investing with Ethical objectives in mind - human rights, child labour, environmental considerations ect.

Answer 1

Socially Responsible Investing (SRI)

Question 2

Physical Assets on a balance sheet

Answer 2

Real Assets

Question 3

Conflict of interest between shareholders (principals) and executives (agents). Execs are more concerned with advancing their own interests rather than aligned with shareholders.

Answer 3

Agency Problem

Question 4

turning non-liquid or non-marketable assets into marketable securities (i.e. mortgages, loans)

Answer 4

Securitization

Question 5

Reward to variability ratio. How much excess return investors earn per additional unit of risk (over the risk free rate) taken on

Answer 5

Sharpe

Question 6

Method used to measure and quantify the level of financial risk within an investment portfolio over a specific time frame.

Answer 6

Value at Risk (VAR)

Question 7

Short-term, marketable, liquid, low-risk debt securities sometimes called “cash equivalents” because of their safety and liquidity.

Answer 7

Money Market

Question 8

Includes longer-term, riskier securities such as stocks and bonds.

Answer 8

Capital Market

Question 9

Short-term debt obligation backed by the federal government with a maturity of less than one year.

Answer 9

Treasury Bill

Question 10

Calculation of the interest rate paid by a bond using the APR (simple interest rate) formula

Answer 10

Bond Equivalent Yield

Question 11

Calculation of the interest paid by a bond using a compound interest formula

Answer 11

Effective Annual Yield

Question 12

Quoted on an annual percentage rate basis rather than as an effective annual yield. This is calculated by determining the semi-annual yield and then doubling it.

Answer 12

Yield to Maturity

Question 13

A unit of equity investors receive in exchange of an ownership stake in the Company.

Answer 13

Common Stock

Question 14

Same ownership interest as common stockholders, but they do not have the right to vote. In exchange for giving up their right to vote, they are given a preferred claim over common shareholders to any dividends declared by a corporation.

Answer 14

Preferred Shares

Question 15

Instruments which provide payoffs that depend on the value of other assets, such as commodity or bond/stock prices or on market index values.

Answer 15

Derivative Market

Question 16

Derivative contracts which give the buyer the right, but not the obligation, to buy or sell a specific number of securities for a specific price on or before a specific expiration date, an the seller the corresponding obligation to buy or sell the securities for that price if they are trading at or above/below that price.

Answer 16

Call and Put Options

Question 17

The assumption of considerable business risk in obtaining commensurate gain

Answer 17

Speculation

Question 18

The risk premium, the incremental expected gain from taking on a risk (a positive expected profit beyond that provided by the risk-free alternative).

Answer 18

Commensurate Gain

Question 19

An investment prospect with a risk premium equal to zero

Answer 19

Fair Game

Question 20

The difference between the expected return on a risky asset and the rate of return available from risk-free assets.

Answer 20

Risk Premium

Question 21

A score an investor assigns to alternative investment portfolios based on their respective expected returns and risks.

Answer 21

Utility Value

Question 22

A tool for selecting investments based on the expected returns and variances of those returns.

Answer 22

Mean-Variance Criterion

Question 23

This curve connects all portfolios with the same utility according to their expected return & standard deviation points. It presents the risk-return requirements of the investor at a certain level of utility.

Answer 23

Indifference Curve

Question 24

The total amount a portfolio includes of “risky” and “risk-free” assets

Answer 24

Complete Portfolio

Question 25

Risk-free Assets

Answer 25

money market or T-bills

Question 26

A line showing the expected return and risk as measured by standard deviation of every single combination of risk-free and risky assets available to an investor for capital allocation

Answer 26

Capital Allocation Line (CAL)

Question 27

The slope of the capital market line which increases with each unit of risk added

Answer 27

Sharpe (Reward to variability ratio)

Question 28

A line representing a passive investment strategy comprising virtually risk-free, short-term T-bills and a fund of common stock mimicking a broad market index

Answer 28

Capital Market Line (CML)

Question 29

A portfolio in which the risk-reward combination yields the max returns possible (i.e provides the highest utility to the investor) under the current and anticipated circumstances.

Answer 29

Optimal Portfolio

Question 30

Expected return of a portfolio in proportion to the amount of risky and risk-free assets it holds

Answer 30

Expected return of Complete portfolio

Question 31

The best returns available for the lowest level of volatility or risk - the optimized portfolio's expected return

Answer 31

Expected return of Optimal portfolio

Question 32

The standard deviation (square root of variance) of a portfolio in proportion to the amount of risky/risk-free assets that it holds.

Answer 32

Standard Deviation of a Complete Portfolio

Question 33

The standard deviation (square root of variance) of the best returns available for the lowest level of volatility/risk - the optimized portfolio's expected return

Answer 33

Standard deviation of Optimal portfolio return

Question 34

The process of spreading funds available for investment accross assets.

Answer 34

Diversification

Question 35

Risks inherent in the WORLD economy/financial system that can't be entirely diversified away from

Answer 35

Systemic risk

Question 36

This determines the degree of similarity between two random variables/the extent to which the returns on two assets move together.

Answer 36

Correlation

Question 37

Risk specific to individual assets. Company-specific risk, unique risk, diversifiable risk

Answer 37

Non-Systemic Risk

Question 38

The value that expresses the correlation between variables; falls between the range of 1 and -1

Answer 38

Correlation coefficient

Question 39

Measure of EXTENT TO Which returns on two risky assets change in tandem

Answer 39

Covariance

Question 40

A set of portfolios with the maximum return for a given standard deviation.

Answer 40

Markowitz Efficient Frontier

Question 41

Predictable continuing trends in security returns that are impossible in the efficient market.

Answer 41

Market Anomalies

Question 42

Returns of stocks with low P/E ratios are higher than stocks with high P/E ratios, even after adjusting for risk.

Answer 42

Price Earning (P/E) effect

Question 43

Average annual returns are consistently higher on small market capitalization firms.

Answer 43

Small-firm effect

Question 44

Stocks that tend to do well will REVERSE & underperform the market for as long as a year. Underperforming stocks begin outperforming for an extended time period.

Answer 44

Reversal Effect

Question 45

While conventional financial theories presume that investors are rational, this theory assumes they aren't

Answer 45

Behavioural bias

Question 46

When people give too much weight to recent experience vs. prior experience when making forecasts, tending to make forecasts too extreme

Answer 46

Forecasting error

Question 47

When people are too slow (too conservative) in updating their beliefs in response to new information.

Answer 47

Conservatism bias

Question 48

When people overestimate their abilities and the precision of their beliefs/forecasts

Answer 48

Overconfidence error

Question 49

Assuming a small sample is representative of a large population. Incorrect patterns can be inferred and trends are extrapolaed too far into the future

Answer 49

Representativeness error

Question 50

Instead of rationally viewing every current and future dollar as identical, individuals divide their current/future funds into separate categories & assign different levels of utility to each category of funds.

Answer 50

Mental accounting

Question 51

Assumes that losses/gains are valued differently. Investors make decision based on perceived gains instead of perceived losses.

Answer 51

Prospect Theory

Question 52

Simultaneous purchases & sale of an asset to profit from a difference in the price (a zero-risk, zero-net investment strategy that still generate profits)

Answer 52

Arbitrage

Question 53

The risk that the price doesn't eventually converge to intrinsic value or don't do so fast enough is an arbitrage opportunity

Answer 53

Fundamental Risk

Question 54

Rolling average of stock prices based on a short, intermediate, or long period. Ratio of average volume in declining issues to average volume in advancing issues.

Answer 54

Trin Static

Question 55

This theory holds that small investors tend to miss key market turning points. They buy stock after a bull market has already run its course/sell too late in a bear market. This can be identified by amount of orders numbering less than 100 shares.

Answer 55

Odd Lot Trading Index

Question 56

Total return received from holding an asset (income + changes in value) over a period of time asset is held (time horizon).

Answer 56

Holding - Period Return (HPR)

Question 57

Sum of a series of numbers/count of that series of numbers vs. formula used specifically for compounded investments

Answer 57

Arithmetic Average vs. Geometric Average (time weighted)

Question 58

Incorporates size/timing of cash flows. An effective method to calculate return on an investment portfolio with sizable cash inflows and outflows throughout the year

Answer 58

Internal Rate of Return (IRR) (Dollar weighted rate of return)

Question 59

Measures a portfolios excess return per unit of risk but uses beta (instead of standard deviation) as the measurement of risk

Answer 59

Treynor Ratio

Question 60

Analyzing portfolios based on the characteristics of underlying securities vs. comparing portfolio's total returns to total returns of various indexes and making inferences based on how closely the portfolio returns resemble those of he indexes.

Answer 60

Holding based vs return based analysis

Question 61

NAV (net asset value) struck once per day. Purchases and redemptions may involve a "load" which is a sales charge paid to the seller

Answer 61

Open-ended fund

Question 62

Doesn't redeem or issue shares. Shares are traded on organized exchanges and can be purchased through brokers just like other common stock.

Answer 62

Closed End Fund

Question 63

Funds which invest in money market securities, including gov. & corporate issues. The NAV of a share is fixed so there are no tax implications such as capital gains or losses.

Answer 63

Money Market Fund

Question 64

Fund that specialize in the fixed income sector

Answer 64

Fixed Income Fund

Question 65

Funds which hold both equities & fixed income securities in relatively stable proportions.

Answer 65

Balance and Income Fund

Question 66

These funds invest primarily in stock, but may hold fixed income/other types of securities and some money market securities to provide liquidity necessary to meet potential redemption of shares.

Answer 66

Equity fund

Question 67

Funds which try to match the performance of a broad market index by buying securities included in a particular index in proprotion to the security's representation to that index.

Answer 67

Index Fund

Question 68

A marketable security that tracks an index, commodity, bonds, or basket of assets like an index fund. It owns the underlying assets and divides ownership of those assets into shares.

Answer 68

ETF Exchange Traded Funds

Question 69

Alternative to investing in individual securities

Answer 69

Commingled fund

Question 70

Arises because hedge funds report returns to database publishers only if they choose. They may do so only when prior performance is good.

Answer 70

Backfill bias

Question 71

Structured as private partnerships & subject to minimal regulations; involve investment pooling.

Answer 71

Hedge Fund

Question 72

Strategies that attempt to predict price movements in either direction vs strategies that practice arbitrage to exploit price inefficiencies

Answer 72

Directional vs. Non-Directional hedge fund strategies

Question 73

Investible ownership stakes in companies which are not publicly traded

Answer 73

Private Equity

Question 74

Fees paid to cover commissions to selling agents & to deter investors from rapidly switching in/out of funds

Answer 74

Front End Load

Question 75

Assets in pooled funds are segregated from insurers' general funds & owned by investors in the fund

Answer 75

Pooled segregated fund offered by insurer

Question 76

When unsuccessful funds tat cease operation stop reporting returns and leave a database, leaving behind only the successful funds.

Answer 76

Survivorship bias

Question 77

Institutional fund managers provide services to pension plan sponsors that aren't large enough/lack the resources to manage plan investments themselves.

Answer 77

Pooled fund offered by institutional pension fund manager

Question 78

Leaves the initial investment intact until redeemed. May apply to the initial or final asset value.

Answer 78

Back End Load

Question 79

Expresses the value of each share held in a managed fund. Investment companies pool assets of individual investors and divide claims to those assets among those investors.

Answer 79

NAV - Net Asset Value

Question 80

A means of paying brokerage firms for their services through commission revenue, as opposed to through normal direct payments (hard-dollar fees

Answer 80

Soft Dollars

Question 81

Outlines 6 responsibilities of plan sponsors: Determining Plan Design; Setting Benefit Structure; Establishing, amending & terminating the pension plan; Determining level/nature of benefits; developing/adopting a funding policy plan.

Answer 81

CAPSA Guideline #6

Question 82

Outlines criteria for plan sponsor to consider when choosing accounts: Purpose of CAP, # of investment options to be made available, fees, CAP sponsor's ability to periodically review options, diversity/demographics of CAP members, degree of diversification among options, liquidity of options, level of risk associated with options.

Answer 82

CAPSA Guideline #3

Question 83

If plan admin. determines it doesn't have structures, processes, resources, skills, knowledge & expertise in place, it would be prudent for it to delegate these tasks.

Answer 83

Prudent Delegation

Question 84

After tasks are delegated, plan admin. remains responsible, should monitor activities to ensure they're appropriately & prudently carried out.

Answer 84

Delegated activities

Question 85

Document used to outline factors affecting pension funding/solvency, its ability to meet financial obligations & how those factors relate to plan's investment policies

Answer 85

SIP&P - Statement Investment Policy & Procedures

Question 86

5 criteria from federal legislation that the SIP&P must meet: Legislative reqs, prescribed elements, considerations for DB plans, considerations in managing investment risk & review, filing & disclosure requirements

Answer 86

Federal Investment Rules

Question 87

Weighted portfolio based on index/combination of indexes. Used to monitor investment manger's performance/set expectations for fund based on portfolio of investments chosen.

Answer 87

Benchmark Portfolio

Question 88

5 step process to start/run a plan on an ongoing basis which differs slightly for DB and DC plans

Answer 88

Investment Cycle

Question 89

Metrics of an investment portfolio that can be measured with #'s (% allocation permitted in derivative investments) vs. those which affect outcomes, but can't be measured with precise #'s (credit quality of fixed income, style of manager)

Answer 89

Quantitative and Qualitative factors

Question 90

An approach that starts with a broad international/national economic outlook, then compares relative attractiveness of markets.

Answer 90

Top down

Question 91

An approach that starts with analysis of fundamentals (dividend yield, P/E ratio, earnings growth) of each security under consideration & places values on securities within the current economic/market/industry outlook.

Answer 91

Bottom Up

Question 92

Criteria for evaluating investment in an company that examines environmental, social & governance aspects of the company beyond a traditional security analysis

Answer 92

ESG Factors (Environmental, Social and Governance)

Question 93

Fess payable to an investment mgmt. firm for ongoing mgmt. of a portfolio. Can be asset based, performance-based, a combination of both.

Answer 93

Investment management fees

Question 94

Combine multiple fees into one bundle & can include any combination of mgmt. transaction, custody, other admin fees

Answer 94

Investment management fees

Question 95

An approach to investment that acknowledges relevance to investor of environmental, social & governance factors & long-term health & stability of the market as a whole

Answer 95

Responsible investing

Question 96

Investments seeking to generate a market rate of financial return along with specific social, economic & environmental (SEE) benefits

Answer 96

Economically Targeted Investments

Question 97

Avoiding concentration risk in a portfolio by spreading investments among different asset classes

Answer 97

Screening

Question 98

Institutional investors are seen as part of a network of fiduciaries. Each investor performs specialized, complex functions in an interdependent marketplace.

Answer 98

Public Fiduciary Hypothesis

Question 99

Funds which maintain a defined asset allocation. From aggressive to conservative.

Answer 99

Target Risk funds

Question 100

Funds which target retirement year & change asset allocations from aggressive to conservative as date approaches. Final allocation sees member through retirement

Answer 100

Target retirement date fund