# Series65 MOD 8 Risk & Evaluation

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1. What does Modern Portfolio Theory attempt to do:
• Attempts to Maximize return for a given amount of Risk
• Build Portfolios that have lower Collective Risk than Individual Components
2. Define CAPM, Capital Asset Pricing Model
• Used to determine Capital Asset Pricing Theory
• T-Bills are used as Proxy  (Risk-Free) return
• Return above the Risk -free Return = premium
• CAPT used to determine appropriate price
3. Monte Carlo Simulations use what factors:
• Interest Rates
• Inflation Rates
• Past Performance
• Expected Returns
4. BENCHMARK PORTFOLIOS are used to:
compare the relative performance of an actual portfolio against a model portfolio.
5. The value of money (present value) can decrease over time (future value)if the return does not keep up with inflation. This is known as the:
TIME VALUE OF MONEY
6. To determine the discounted cash flow of a bond it is necessary to know:
• Future value
• the discount rate
7. PRESENT VALUE is determined by:
assuming an investment rate of return and a target amount (goal) to be reached at the end of a period of years, and then calculating how much would have to be invested today to achieve that goal.
8. NET PRESENT VALUE is a calculation used to:
determine the present value of an investment based on the future value at a given rate of return (discount rate).
9. Formula:
Perpetuity
Annual payment to be received ÷ Annual compounded interest rate = Contribution needed for perpetual payments
10. Formula:
Rate of Returns
Basic Formula is Income + Appreciation ÷ Original Cost = Rate of Return
11. EXPECTED RETURN is the:
return an investor anticipates earning from an investment when the investment is made
12. TOTAL RETURN is the:
return an investor has received from an investment for the years that the investment was held.
13. TOP-DOWN APPROACH Investing:
• is an investment method in which the investor or analyst first looks at the general economy as a whole
• 2. particular industry
• 3. individual security within that industry
14. Quantitative refers to:
that which can be measured mathematically
15. BOTTOM-UP APPROACH Investor:
the investor/analyst looks for outstanding performanceof individual stocks in determining how a particular industry might perform.
16. The ACTIVE RETURN is:
a measurement of the difference between the actual return and the benchmark, and is a good indicator of the portfolio manager’s ability to supervise the portfolio.
17. HOLDING PERIOD RETURN is the:
return an investor has received from an investment for the specific years that the investment was held.
18. RISK-FREE RETURN is the expected return on:
T-bills or other risk-freeinvestments
difference between the EXPECTED RETURN and the RISK-FREE RETURN
20. The RISK-ADJUSTED RETURN is the:
difference between an investor’s TOTAL RETURN and the RISK-FREE RETURN
21. AFTER-TAX RETURN, or NET YIELD, is the:
Total Return minus any taxes
22. REAL RATE OF RETURN is:
the Total Return minus the inflation rate. Also referred to as the “INFLATION-ADJUSTED RETURN
23. The Rule of 72
determines how many years it will take to double the amount of the investment
expected interest and divided into 72
24. The Rule of 72
determine the compounded interest rate that was achieved
number of years an investment has taken to double and divide that into 72
25. The TIME-WEIGHTED RETURN, or GEOMETRIC MEAN, is a:
measure of the compound rate of growth in a portfolio. This concept is used to determine the performance of investment advisers and portfolio managers in comparison with one another
26. The DOLLAR WEIGHTED RETURN is:
an accounting method that factors in any deposits or withdrawals of capital to a portfolio and considers them part of the return, along with capital gains and losses
27. The current yield is the:
• nominal yield (rate) divided by the current market price.
• 8% bond selling at 90 (\$900)
• 8 divided by 90 = 8.88%
28. The nominal yield is:
• the amount the bond will pay per \$1,000/yr
• 8% bond will pay 8% of \$1,000
29. Yield to maturity and current yield move in the __________.
same direction
30. The yield to call moves in the ________
same direction as the yield to maturity
31. When a bond trades for less than par (at a discount price)
the yield to call will be higher than the nominal yield
32. When a bond trades for more than par:
the yield to call is lower than the nominal yield (there is a loss at maturity)
is the very real risk that the business an investor chooses to investin may go out of business.
34. MARKET RISK is the risk that securities that belong to the same class:
will all be affected similarly by changes in prices in the market. (systematic risk)
35. INTEREST-RATE RISK is the risk that:
an investor has when attempting to sell a debt security (bond) prior to the maturity date.
36. REINVESTMENT RISK
If the test question does not state whether the bond is held or sold, reinvestment risk is the correct choice for bonds with maturities under 20 years.
37. Define TREASURY INFLATION-PROTECTED
SECURITIES (TIPS)
• issued by the U.S. government
• The semiannual interest payments are based on the inflation-adjusted principal at the time the interest is paid, and when the interest rate is applied to the adjusted principal value, the amount of the payment increases
38. DURATION always affects:
the longest bonds the most, and if all bonds are relatively the same (within months), the lowest coupon is affected the most.
39. ACID TEST RATIO =
TOTAL CURRENT ASSETS - INVENTORY ÷ TOTAL CURRENT LIABILITIES
40. CURRENT RATIO =
TOTAL CURRENT ASSETS ÷ TOTAL CURRENT LIABILITIES
41. ALPHA is:
• a measurement of a stock or portfolio’s return independent of market related factors.
• It is the return in excess of the expected return and is used to determine the value of a company’s management team or a portfolio manager
42. A stock or portfolio is assigned an expected return per:
the capital asset pricing module (CAPM).
43. CAPM uses beta to:
measure relative volatility and expected return compared to the market
44. If a stock or portfolio’s return equals this expected return, it is said to have an
alpha of __
0
45. BETA (also called the BETA COEFFICIENT) is a measurement of:
the volatility of a stock or portfolio compared to the volatility of the stock market as a whole, a stock within its industry, or a portfolio of stocks with an index to which it is similar
46. R-SQUARED refers to the volatility of stocks in relation to the:
market prices of those stocks.
47. DELTA is a volatility measurement used to compare:
option premium movements with the price movements of the stocks underlying the option contract
48. STANDARD DEVIATION is a statistical measurement of:
a range of volatility and not a measure of the volatility of the particular investment.
49. The SHARPE RATIO compares a stock’s:
• The Sharpe ratio measures an investment’s return per unit of risk.
50. The CORRELATION COEFFICIENT is a:
• statistical measure of the degree of how 2 investments are related.
• It is a measure of volatility and can be used to comparethe performance of one investment with another.
51. An income statement lists:
the amounts received from selling goods and services, plus other items, and matches them against all the costs and outlays incurred to operate the company.
52. CASH FLOW is the:
amount of cash available to a company after the deduction of taxes, but with the addition of depreciation
53. When the increased return matches the increased risk, it is known as an:
EFFICIENT INVESTMENT

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 Author: Series65ForFab ID: 292124 Filename: Series65 MOD 8 Risk & Evaluation Updated: 2015-01-04 17:54:36 Tags: Series65 Folders: Description: Risk & Evaluation Show Answers:

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