Unit 23 (3)

Question 1

Current return/current yield

Answer 1

Annual dividend or interest divided by current market price

Question 2

Yield to maturity

Answer 2

YTM of a bond is actually its internal rate of return and will be lower than the holding period return if coupons are reinvested at a rate higher than the YTM

Question 3

Total return

Answer 3

Annual dividend or interest plus appreciation, or minus depreciation, divided by original cost

Annual dividend + appreciation/original cost

Annual dividend - depreciation/ original cost

Question 4

Annualized return

Answer 4

Total return on a 12 month basis

Question 5

After tax return

Answer 5

Total return minus taxes

Question 6

The inflation adjusted return of a TIPS is always what?

Answer 6

The coupon rate

Question 7

Total return is not related to what?

Answer 7

The variability of a portfolios return

Question 8

Real rate of return

Answer 8

Adjusts for inflation as based on the CPI

Question 9

Sharpe ratio

Answer 9

Measure of a stock’s risk adjusted return. Subtract the risk free rate (90 day at bill) from the security’s actual return and divide that by the standard deviation

Question 10

Small cap

Answer 10

300mil-2bil

Question 11

Mid cap

Answer 11

2-10bil

Question 12

Large cap

Answer 12

Over 10bil

Question 13

What index tracks small caps?

Answer 13

The russel 2k

Question 14

What index tracks mid caps?

Answer 14

S&P 400

Question 15

What index tracks large caps?

Answer 15

S&P 500

Question 16

An investors holding period would exceed the bonds YTM if

Answer 16

The coupons were reinvested at a rate exceeding the YTM. YTM calc assumes reinvestment of the bond’s interest at the coupon rate. If you can get better than that, the holding period return would be increased.

Question 17

Your firm tracks mid-cap securities. You would be tracking stocks in the

Answer 17

SNP 400

Question 18

Which of the following is used to measure risk adjusted returns?

1. Correlation
2. Beta
3. Sharpe ratio
4. Standard deviation

Answer 18

The sharpe ratio is used to measure risk adjusted returns. Beta does enable you to evaluate potential market risk, but strictly-speaking, does not measure risk-adjusted return. Standard deviation measures volatility and correlation measures one stocks movement to another

Question 19

What does standard deviation measure?

Answer 19

Volatility

Question 20

GHI common stock has a $10 par value and is selling currently for $60. If the quarterly dividend is $1, what is the current yield?

Answer 20

Remember you need to add the quarterly dividend to get the annual total. So, 4/60 = 6.7%

Question 21

Compute inflation adjusted return for
20 year bond
5% coupon
Purchase price 90

Answer 21

First notice that the purchase price was 90, which is 10% lower than par, so the coupon will be 5% higher, roughly 5.5%. Take that minus the CPI and you get 3.5%, the answer they gave was 3.56%

Question 22

Which index tracks only 65 stocks?

Answer 22

Dow Jones Composite

Question 23

What is the only price weighted index on the exam?

Answer 23

Dow Jones Composite. All others are cap weighted

Question 24

How is the Dow Jones Composite made up?

Answer 24

65 total stocks
30 industrial
20 transports
15 utility

Question 25

A moderately conservative investor interested in growth would follow what index?

Answer 25

SNP 500. It tracks the largest companies and as a result, is most suitable for a growth oriented investor with moderate risk tolerance.

Question 26

If you were looking for the riskiest index to invest in

Answer 26

Russel 2k and MSCI EAFE index are riskier

Question 27

What is the MSCI EAFE index composed of?

Answer 27

Foreign securities

Question 28

You buy 100 shares of kapco for $120 per share. You get a dividend distribution during the year of $260 and at the end of the year the stock is worth $13,000. What is your holding period return?

Answer 28

You divide the total return by the income. So, $260 plus $1000 gain = $1260/$12,000 = 10.5%

Question 29

How do you calculate holding period return?

Answer 29

Add the dividends or interest to any appreciation, then divide that by the original investment. Or, subtract the depreciation from the dividends or interest, then divide that by the original cost

Question 30

Inflation adjusted return

Answer 30

Take the total return minus the CPI Bond with 8% coupon and CPI IS 3% = 5% inflation adjusted return You buy stock @ $20 with an annual dividend of $1. You sell the stock a year later for $24. Total return is $5 or 25%. If CPI is 6%, inflation adjusted return is 19%

Question 31

Probable return

Answer 31

Take the probabilities times the possible returns and add them together. If one is negative, take the probability times the negative rate and simply add that to the rest. 40% chance of 10% , 30% chance of 15%, 30% chance of -8% .4*.1 + .3*.15 + .3*-.08 = .061 or 6.1%

Question 32

What is not part of the Sharpe ratio?

Answer 32

Beta

Question 33

Dollar weighted return reflects the IRR

Answer 33

The time weighted return does not use IRR

Question 34

If you wanted to evaluate the performance of a portfolio manager you would calculate the

Answer 34

Time weighted return. Bc managers have no control over the deposits and withdrawals made by clients

Question 35

Nasdaq Composite

Answer 35

More than 3,000 OTC companies

Question 36

EAFE

Answer 36

Index of foreign stocks. Stands for Europe, Australasia, and Far East

Question 37

Wilshire 5000

Answer 37

All US Equity securities with readily available price data. Broadest coverage of US stock markets

Question 38

SNP 500

Answer 38

400 industrials, 20 transports, 40 public utilities, 40 financial institutions

Question 39

To compute the real rate of return for a security, it is necessary to know all of the following except? 1. Purchase price 2. CPI 3. Beta 4. Annual dividend

Answer 39

You don’t need the beta. The real rate of return is the actual return less the inflation rate as measured by the CPI

Question 40

Real rate of return

Answer 40

Actual return minus the inflation rate as measured by the CPI

Question 41

If making a sales presentation to a client about a mutual funds historical returns, you are required to explain the difference between the

Answer 41

Current yield and total return

Question 42

When soliciting investment company shares, you can discuss returns but must fully explain the

Answer 42

The difference between current yield and total return

Question 43

If the CPI rose 5% during the past year, during which time your client held a 6% bond, what would be the approximate annualized inflation adjusted return?

Answer 43

1%. Inflation would have reduced your clients purchasing power by 5% leaving an inflation adjusted return of 1%