Unit 10 - Analytical Methods Flashcards
The balance sheet of a corporation shows $4 Million in Cash and $2 Million in accounts receivable. Current liabilities is $4 Million. What’s the Quick Asset Ratio?
The Quick Asset Ratio equals 1.5. ($4M + $2M / $4M = 1.5)
True or False: The Quick Asset Ratio includes inventory in the current assets.
False, we exclude inventory from the current assets.
A client’s portfolio has a 0.91 correlation to the market. If the client is looking for diversification, would you most likely add a stock with positive or negative correlation?
Negative Correlation.
Which stock would you recommend to a client? Stock A: 12% expected return and 8% standard deviation; or Stock B: 12% expected return and 5% standard deviation.
Stock B. You would select the stock with the lower standard deviation (less volatility) if the expected return is the same.
How do you calculate Alpha?
(Total Portfolio Return - Risk-Free Rate) - (Portfolio Beta x [Market Return - Risk-Free Rate])
If the S&P 500 returns 10% and you’re holding a stock with a beta of 1.5, what would be the stocks approximate return?
The stock would return 15%.
What type of computation are you using when trying to project what $50,000 today is worth in 10 years? Future Value, Present Value or Net Present Value?
Future Value
If you want to leave your child with $12,000 per year in perpetuity, what lump sum would you need if the expected annual return is 5%?
$240,000 ($12,000 / 5% = $240,000)
What’s the mean return for a portfolio that returned 6%, 12% and 3%?
7% (6+12+3 / 3 = 7)
What’s the mean, median and mode of the following set of numbers? (2-6-8-10)
Mean: 6.5%
Median: 7 (6+8/2 = 7)
Mode: No mode because numbers are all unique
What will always be higher: Arithmetic Mean or Geometric Mean?
Arithmetic Mean because the geometric mean always uses compounding.
If an investor uses an 8% expected return when calculating Net Present Value, will the future value be higher or lower if it actually returns 10% over the period?
The future value will be higher because the actual return was higher than the expected return.
What is the Rule of 72?
To determine the number of years in which an investment will double, simply divide 72 by the expected annual return. For example, a $2,000 investment yielding 6% will double in 12 years. (72 / 6 = 12 years)
What’s the dividend yield of a company paying an annual dividend of $1 per share with a current market price of $50?
2% Dividend Yield ($1 / $50 = .02 or 2%)
What’s the dividend payout ratio for a company paying a $1 annual dividend with $2 earnings per share?
50% Dividend Payout Ratio (1/2 = 50%)
