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Series 65 (FIN-451) > Unit 20 > Flashcards

Unit 20 Flashcards

Analytical Methods

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Series 65 flashcards
1
Q

Discount factor

A

(1 + r)n

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2
Q

Rule of 72 equation

A

72 ÷ rate (whole number) = # of years

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3
Q

Definition of IRR

A

Method of computing long-term returns that takes into consideration time value of money

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4
Q

What yield is used in IRR

A

Yield to maturity

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5
Q

Is IRR or NPV generally considered more importnat

A

NPV

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6
Q

What IRR is always expressed as

A

A percentage

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7
Q

What NPV is expressed as

A

Dollar amount

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8
Q

What term duration is used for

A

Measuring the sensitivity of a debt security when faced with changes in interest rates

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9
Q

The lower the coupon rate, what is bond’s duration

A

Longer

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10
Q

The longer a bond’s maturity, what is bond’s duration

A

Longer

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11
Q

If we find two bonds with the same duration, which one offers greater interest rate risk protection

A

The one with higher convexity

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12
Q

Which of the following is the most useful in determining the price volatility of a bond to a significant change in interest rates?

A

Convexity

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13
Q

What factors are needed to compute future cash flow (3)

A
  1. Principal amount
  2. Coupon rate
  3. Number of interest payments
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14
Q

What an analyst would use the discounted cash flow method for

A

Finding fair value of a security

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15
Q

When comparing the arithmetic mean to the geometric mean, which will always be higher

A

Arithmetic mean

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16
Q

Mid-range calculation

A

Lowest number + highest number / 2

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17
Q

What measure shows which investments significantly outperformed the average of the other investments

A

Mean

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18
Q

Alpha computation

A

(Actual portfolio return – risk-free rate) – (portfolio beta × [market return – risk-free rate])

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19
Q

What to do if risk-free rate is not given on exam

A

Leave it out of calculation

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20
Q

Difference between beta and standard deviation

A

Beta only measures systematic (market) risk, standard deviation measures both systematic and unsystematic

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21
Q

Formula for working capital

A

Current assets – current liabilities

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22
Q

What working capital is

A

Amount of capital or cash a company has available

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23
Q

Current ratio calculation

A

Divide the current assets by the current liabilities

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24
Q

Formula for book value per share

A

Tangible assets – liabilities – par value of preferred /
Shares of common stock outstanding

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25
Q

Earnings available to common

A

Remaining earnings after the preferred dividend has been paid

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26
Q

EPS formula

A

Earning available to common / # of shares outstanding

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27
Q

Current yield formula

A

Common dividends / share value

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28
Q

Dividend payout ratio

A

Annual common dividends / EPS

29
Q

What ratio do some fundamental analysts believe is more important than P/E

A

Sales to earnings ratio

30
Q

What does bond’s YTM reflect

A

IRR

31
Q

What relationship within bonds is linear

A

Duration and time to maturity

32
Q

What happens to bonds with higher coupons when market rates rise

A

Decline less than those with lower coupons

33
Q

Goal of a constant dollar plan

A

Maintain a constant dollar amount in stocks, moving money in and out of a money market fund when necessary

34
Q

Goal of a constant ratio plan

A

Keeping asset allocations the same throughout rebalancing

35
Q

What Dividend Discount Model states

A

Fair current market value of a stock should be equal to the present value of all future dividends

36
Q

Are preferred stock dividends fixed?

A

Yes

37
Q

What growth style of portfolio management focuses on

A

Stocks of companies whose earnings are growing faster than most other stocks and are expected to continue to do so

38
Q

What growth managers are looking for

A

Earnings momentum

39
Q

What value style of portfolio management focuses on

A

Undervalued or out-of-favor securities whose price is low relative to the company’s earnings or book value

40
Q

What a contrarian is

A

Investment manager who takes positions opposite of that of other managers or in opposition to general market belie

41
Q

Micro-cap market capitalization

A

Less than $300 million

42
Q

Small cap market capitalization

A

Between $300 million and $2 billion

43
Q

Mid cap market capitalization

A

$2 billion to $10 billion

44
Q

Large cap market capitalization

A

More than $10 billion

45
Q

3 bond strategies

A

Barbell, bullet, laddering

46
Q

Ladder strategy

A

Bonds are bought at the same time with different maturity dates

47
Q

Capital market assumptions (7)

A
  1. Money is always borrowed at the risk-free rate of return
  2. All investors are rationale
  3. Time horizon is equal for all investors
  4. No personal income taxes
  5. No inflation
  6. Assets can be infinitely divisible
  7. No mispricing within capital markets
48
Q

How to calculate return using security market line (CAPM)

A

([Return of the market - risk-free rate] × beta) + RF rate

49
Q

What CML measures risk through

A

Standard deviation

50
Q

What SML measures risk through

A

Beta

51
Q

What weak form market efficiency says

A

Current stock prices have already incorporated all historical market data and trends (Only fundamental analysis will produce returns)

52
Q

What semi-strong form market efficiency says

A

Current stock prices not only reflect all historical price data but also reflect data from analyzing financial statements, industry, or current economic outlook (only insider trading will produce returns)

53
Q

What strong form market efficiency says

A

Security prices fully reflect all information from both public and private sources

54
Q

What efficient market hypothesis is also called

A

Random walk theory

55
Q

Purpose of dollar cost averaging

A

Reduce the investor’s average cost to acquire a security over the buying period relative to its average price

56
Q

Do passive or active portfolio managers use rebalancing

A

Passive

57
Q

What CAPM assumes

A

The optimal portfolio should be the one with the highest Sharpe ratio of all possible portfolios

58
Q

What selling a futures contract also means

A

Taking a short position

59
Q

What growth investors look for in a P/E rati

A

20:1 or higher

60
Q

Best strategy for hedging a short position

A

Buying calls

61
Q

What “lower limit” is called in technical analysis

A

Support level

62
Q

What “upper limit” is called in technical analysis

A

Resistance level

63
Q

What determines “risk-free” rate of return

A

91-day Treasury bill

64
Q

An efficient portfolio is one that offers…

A
  1. The most return for a given amount of risk
  2. The least risk for a given amount of return
65
Q

What takes short-term market fluctuations and smooths them out

A

Charting moving averages

66
Q

Technical theory that assumes small investors are usually wrong

A

Odd lot

67
Q

When the customer elects to receive distributions in cash, what happens

A

His proportional interest in the fund will decline

68
Q

Which of bond strategy is the least active?

A

Bullet

69
Q

What is considered an asset class in and of itself

A

REIT

Series 65 (FIN-451) (13 decks)

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