Unit 15 Flashcards
A capital needs assessment analyzes a client’s future goals and needs. What are some the main things that will be considered?
-retirement planning
-college funding
-risk of death before meeting a saving goal
-life expectancy
-rate of inflation
-earnings
The Contrarian style of investing is one that bets against market trends and does not adhere to the prevailing consensus opinion. This particular investment style usually focuses on companies that are out of the mainstream and that have _____________.
low P/E ratios
Taxable equivalent yield for a tax-free bond calculation:
Tax-free yield ÷ (100% - Tax rate %)
Net Present Value Calculation
Present Value - Current Market Price = NPV
If the NPV is greater than zero, the investment will increase the investor’s wealth
Weak form efficient market
All past prices and data are fully reflected in current prices
Semi-strong form efficient market
All public data, including historical pricing, is reflected in current prices
Strong form efficient market
Both public and non-public information is reflected in current prices
________ is a measurement of a security’s volatility as compared to an index such as the S&P 500 Stock Index.
Beta
A high beta (greater than one) indicates that a company is more volatile than the benchmark index. Utilities and other defensive industry stocks tend to have low betas.
When is the internal rate of return (IRR) used?
When determining the rate that makes the net present value of an investment zero
The dividend discount model attempts to estimate the true value of stock prices by calculating the _________ value of _________ dividend payments.
present; future
The inflation-adjusted rate of return, also referred to as the real interest rate, is calculated as follows:
yield minus inflation rate
__________________ states that financial markets are efficient and that the prices of securities reflect all known information; therefore, it is impossible to outperform or time the market.
Efficient Market Hypothesis (Theory)
What is alpha?
a measure of non-systematic risk
______ risk represents the day-to-day potential for an investor to experience losses due to market fluctuations in securities’ prices.
Market risk
_____ risk refers to the negative effects that rising interest rates may have on the value of existing bonds
Interest-rate risk
_________ bonds, since they are generally long-term and have no interest payment, are extremely vulnerable to interest-rate risk.
Zero-coupon
_______ risk exists when an investment provides investors with a fixed payment
Inflation risk (also known as purchasing-power risk)
_____ risk is the risk that a bond investor will not be able to reinvest the principal amount at the same interest rate after the bond is called or matures.
Reinvestment risk
_____ risk is the risk that a significant event will cause a substantial decline in the market value of all securities (i.e. Covid, 9/11)
Event risk
______ risk is the risk that certain circumstances or factors may negatively impact the operation or profitability of a given company.
Business risk
______ risk is the risk that regulatory changes may have a negative impact on an investment’s value.
Regulatory risk
____ risk is the risk that new laws may have a negative impact on an investment’s value.
Legislative risk
_____ risk is the risk that an investment’s return may suffer as a result of political changes or instability in a country. This risk is typically associated with emerging markets countries and may include acts of war, terrorism, and military coups.
Political risk
_____ risk is the risk that investors may be unable to dispose of a securities position quickly and at a price that’s closely related to recent transactions. T
Liquidity risk
_____ risk is defined as the loss of benefits that an investor could have received by taking an alternative action.
Opportunity risk (opportunity cost)
_____ risk is the possibility that the value of foreign investments will decrease in the future due to changes in exchange rates
Currency risk (exchange-rate risk)
_____ risk is the risk that an investor could lose all or a portion of her investment. This is the risk that’s assumed when an investor buys any security other than a risk-free security.
Capital risk
_____ risk is the risk that a bond issuer will not make payments as promised.
Credit risk
_____ risk is the risk that a bond issuer may decide to redeem its bonds and repay the bondholders prior to maturity.
Call risk
____ risk is the risk that an investment’s structure is complicated enough that predicting future gains and losses will be difficult or impossible.
Complexity risk
An investor might purchase a stock with a high P/E ratio because _________________
they expect higher future earnings
Under the Capital Asset Pricing Model, risk is defined as:
Deviation in returns
The _________, which is also referred to as the time-weighted return, is the best way to measure the performance of a mutual fund.
geometric mean
A stock’s beta is a measure of its ______ risk.
market
Modern Portfolio Theory is based on the following two assumptions:
1) Investors will try to maximize their returns, and 2) Investors generally seek to assume as little risk as possible.
Is market risk diversifiable?
No
(Market risk is also called Non-diversifiable risk)
_____________ measure the performance of an investor’s actual investment over a defined period.
Dollar-weighted returns
_____________ assume that a fixed-dollar amount was invested and then measure how that amount would have performed over a defined period.
Time-weighted returns
