INVESTMENTS TEST 2

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shorunke86
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77265
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INVESTMENTS TEST 2
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2011-04-04 22:57:37
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INVESTMENTS TEST
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INVESTMENTS TEST 2
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  1. OF GEOMETRIC AND ARITHMETIC MEAN WHICH IS MOST IMPORTANT?
    GEOMETRIC
  2. WHAT ARE NOMINAL RATES OF RETURN (R)?
    THE RETURN THAT WE OBSERVE DIRECTLY
  3. WHAT ARE REAL RATES OF RETURN (r)?
    THE RETURN THAT PURGES THE RATE OF INFLATION
  4. WHAT IS THE FISHER EFFECT?
    THE FACT THAT THE NOMINAL RATE SHOULD HAVE A RELATION WITH THE EXPECTED INFLATION RATE
  5. IN TERMS OF ASSET ALLOCATION, ALL ASSETS CAN BE BROUGHT DOWN TO 2 CLASSES. WHAT ARE THEY?
    • RISKY ASSETS
    • RISK FREE ASSETS (T-BILLS)
  6. IF A PORTFOLIO DOES CONTAIN BOTH RISKY AND RISK FREE ASSETS IT IS CALLED A
    COMPLETE PORTFOLIO
  7. WHAT IS A CAPITAL ALLOCATION LINE?
    PLOT OF RISK RETURN COMBINATIONS AVAILABLE BY VARYING PORTFOLIO ALLOCATION B/W A RISK FREE ASSET AND RISKY PORTFOLIO
  8. WHAT IS THE SLOPE OF A CAL LINE CALLED ?
    SHARPE RATIO
  9. EVERY PORTFOLIO ON THE SAME CAL HAS THE SAME.......
    REWARD TO VOLATILITY RATIO
  10. IF THE RISKY PORTFOLIO CONSIDERED IS THE MARKET PORTFOLIO, CAL BECOMES THE
    CAPITAL MARKET LINE (CML)
  11. WHAT IS RISK AVERSION?
    THE EXTENT TO WHICH SOMEONE DISLIKES RISK
  12. THE GREATER RISK AVERSION LEADS TO A
    LARGER PROPORTION OF FUNDS BEING INVESTED INTO THE RISK FREE ASSET
  13. WILLINGNESS TO ACCEPT HIGHER LEVELS OF RISK FOR HIGHER LEVELS OF RETURNS MAY RESULT IN
    LEVERAGED COMBINATIONS (BORROWING FUNDS TO INVEST IN THE RISKY PORTFOLIO)
  14. WHAT IS MARKET RISK?
    • DUE TO FACTORS COMMON TO THE WHOLE ECONOMY
    • ( CANNOT BE ELIMINATED)
  15. WHAT IS ANOTHER TERM FOR MARKET RISK?
    SYSTEMATIC RISK AND NONDIVERSIFIABLE RISK
  16. WHAT IS UNIQUE RISK?
    • DUE TO FACTORS SPECIFIC TO ONE OR A FEW COMPANIES
    • (CAN BE ELIMINATED)
  17. WHAT IS ANOTHER TERM FOR UNIQUE RISK?
    FIRM SPECIFIC RISK, IDIOSYNCRATIC RISK, NONSYSTEMATIC RISK OR DIVERSIFIABLE RISK
  18. BY INCLUDING DIFFERENT SECURITIES IN A PORTFOLIO, THE UNIQUE RISK (BUT NOT THE MARKET RISK) OF SECURITIES TEND TO CANCEL OUT AS....
    THE # AND TYPE OF SECURITIES INCREASE
  19. THE SMALLER THE CORRELATION COEFFICIENT.....
    THE GREATER THE RISK REDUCTION POTENTIAL FOR THE PORTFOLIO
  20. IF p= anything over one then
    NO RISK REDUCTION
  21. WITH MANY RISKY ASSETS, THE ASSET COMBINATIONS THAT RESULT IN THE LOWEST LEVELS OF RISK FOR GIVEN RETURNS (OR THE HIGHEST RETURNS FOR GIVEN LEVELS OF RISK) ARE...........
    OPTIMAL
  22. THE OPTIMAL COMBINATIONS ARE DESCRIBED AS THE.......
    EFFICIENT FRONTIER

    THESE COMBINATIONS/PORTFOLIOS ARE DOMINANT
  23. IF THERE EXISTS A RISK FREE ASSET, THE COMBINATIONS OF A RISKY PORTFOLIO AND THE RISK FREE ASSET WILL....
    DOMINATE
  24. WHEN YOU HAVE MANY RISKY ASSETS AND A RISK FREE ASSET THE OPTIMAL COMIBINATIONS RESULT IN A
    LINEAR EFFICIENT FRONTIER
  25. SHOULD THE REWARD TO VOLATILITY RATIO (SHARPE RATIO) BE BIG OR SMALL?
    BIG!!

    IT IS THE COMPENSATION PER UNIT OF S.D
  26. WHAT IS THE CAPM MODEL?
    AN EQUILBRIUM MODEL THAT UNDERLIES MODERN FINANCE THEORY

    SHOWS RELATION B/W RISK AND RETURN

    DERIVED USING PRINCIPLES OF DIVERSIFACTION W/ SIMPLIFIED ASSUMPTIONS
  27. WHAT ARE THE ASSUMPTIONS FOR CAPM?
    INVESTORS ARE PRICE TAKERS

    SINGLE PERIOD INVESTMENT HORIZON

    INVESTMENTS LIMITED TO TRADED FINANCIAL ASSETS

    INVESTORS ARE RATIONAL MEAN VARIANCE OPTIMIZERS

    INFORMATION IS COSTLESS AND AVAILABLE TO ALL INVESTORS

    INVESTORS HAVE HOMOGENOUS EXPECTATIONS

    UNLIMITED BORROWING AND LENDING AT THE RISK FREE RATE

    NO TAXES AND NO TRANSACTION COSTS
  28. WHAT IS RISK PREMIUM?
    RATE OF EXPECTED RETURN IN EXCESS OF THE RISK FREE RATE
  29. WHAT IS EXCESS RETURN?
    RATE OF REALIZED RETURN IN EXCESS OF THE RISK FREE RATE
  30. RESULTING EQUILIBRIUM STATES THAT ALL INVESTORS HOLD THE SAME PORTFOLIO OF____________
    RISKY ASSETS
  31. WHAT IS THE MUTUAL FUND THEOREM?
    THE MARKET PORTFOLIO CONTAINS ALL SECURITIES IN THE MARKET, AND THE PROPORTION OF EACH SECURITY IN THIS PORTFOLIO IS ITS MARKET VALUE AS A PERCENTAGE OF THE ENTIRE MARKET



    • A $5B .5 5/10
    • B $3B .3 3/10
    • C $2B .2 2/10
    • _____________________
    • 10B 1 1


    • $5
    • A=5/.5= 2.50
    • B=5/.3=1.50
    • C=5/.2=1.00
  32. IN CAPM, WHAT IS PORTFOLIO BETA?
    THE WEIGHTED AVERAGE OF THE INDIVIDUAL BETAS WHERE THE WEIGHT OF A SECURITY IS THE PROPORTION OF FUNDS INVESTED IN THAT SECURITY
  33. WHAT IS A SECURITY MARKET LINE (SML)?
    GRAPHICAL REPRESENTATION OF THE EXPECTED RETURN-BETA RELATION AS PREDICTED BY THE CAPM
  34. WHAT IS A SECURITY CHARACTERISTIC LINE (SCL)?
    A PLOT OF A SECURITY'S EXCESS RETURN AS A FUNCTION OF THE MARKETS EXCESS RETURN.
  35. WHAT IS ALPHA?
    THE ABNORMAL RETURN ON A SECURITY IN EXCESS OF WHAT WOULD BE PREDICTED BY CAPM
  36. WHAT IS ARBITRAGE PRICING THEORY (APT)?
    ARISES IF AN INVESTOR CAN CONSTRUCT A ZERO INVESTMENT PORTFOLIO WITH A SURE PROFIT DUE TO SECURITY MISPRICING
  37. WHAT IS A ZERO INVESTMENT PORTFOLIO?
    A PORTFOLIO WITH ZERO NET INVESTMENT ESTABLISHED BY BUYING ONE SECURITY OR PORTFOLIO AND SHORTING ANOTHER AT THE SAME TIME
  38. DIFFERENCES B/W APT AND CAPM?
    APT APPLIES TO WELL DIVERSIFIED PORTFOLIOS AND NOT NECESSARILY TO INDIVIDUAL STOCKS

    WITH APT IT IS POSSSIBLE FOR SOME INDIVIDUAL STOCKS TO BE MISPRICED- NOT LIE ON THE SML

    APT IS MORE GENERAL IN THAT IT GETS TO THE EXPECTED RETURN AND BETA RELATIONS WITHOUT THE ASSUMPTION OF THE MARKET PORTFOLIO

    APT DOES NOT SPECIFY HOW MANY FACTORS SHOULD BE INCLUDED IN THE MODEL
  39. WHAT IS THE EFFICIENT MARKET HYPOTHESIS?
    PRICES OF SECURITIES SHOULD FULLY REFLECT ALL AVAILABLE INFORMATION
  40. WHAT IS THE EMH RATIONALE?
    COMPETITION- EVERYONE LOVES A FREE LUNCH

    AS LONG AS PRICES DO NOT REFLECT ALL AVAILABLE INFORMATION AND ARBITRAGE OPPORRTUNITIES EXIST, COMPETITION AMONG INVESTORS WILL MAKE THE PRICES TO REFLECT ALL INFORMATION
  41. WHAT ARE THE EMH PREDICTIONS?
    STOCK PRICES SHOULD FOLLOW A RANDOM WALK--- SHORT TERM PRICE CHANGES ARE RANDOM AND UNPREDICTABLE

    EXPECTED RETURN SHOULD STILL BE POSITIVE IN THE LONG RUN

    THE PRICE OF A (NON DIVIDEND PAYING) STOCK SHOULD HAVE A POSITIVE TREND IN THE LONG RUN BUT BE RANDOM AROUND THE TREND.
  42. WHAT IS WEAK FORM EMH?
    ALL INFORMATION CONTAINED IN THE HISTORY OF PAST TRADING IS REFLECTED ONTO PRICES
  43. WHAT IS SEMI-STRONG EMH?
    ALL PUBLICLY AVAILABLE INFORMATION
  44. WHAT IS STRONG FORM EMH?
    ALL RELEVANT INFORMATION, INCLUDING INSIDER INFORMATION
  45. IN TERMS OF EMH, WHAT IS ACTIVE MANAGEMENT?
    FOCUS ON SECURITY ANALYSIS AND TIMING
  46. IN TERMS OF EMH, WHAT IS PASSIVE MANAGEMENT?
    BUYING A WELL-DIVERSIFIED PORTFOLIO WITHOUT ATTEMPTING TO FIND MISPRICED SECURITIES
  47. IF THE MARKET IS EFFICIENT, WHY PRACTICE PORTFOLIO MANAGEMENT?
    DIVERSIFICATION

    TAX CONSIDERATION

    MATCHING INVESTORS RISK PREFERENCES
  48. WHAT HAS BEEN SEEN FROM MUTUAL FUND AND PROFESSIONAL MANAGER PERFORMANCE?
    MIXED EVIDENCE OF PERSISTENT POSITIVE AND NEGATIVE PERFORMANCE
  49. WHAT ARE EMPIRICAL ANOMALIES?
    RETURN PATTERNS THAT ARE NOT SUPPOSED TO OCCUR IF THE EMH HOLDS, YET WE OBSERVE THEM IN REALITY
  50. INVESTOR BEHAVIORAL BIASES

    WHAT ARE FORECASTING ERRORS?
    TOO MUCH WEIGHT IS PLACED ON RECENT EXPERIENCES
  51. INVESTOR BEHAVIORAL BIASES

    WHAT IS OVERCONFIDENCE?
    INVESTORS OVERESTIMATE THEIR ABILITIES AND THE PRECISION OF THEIR FORECASTS
  52. INVESTOR BEHAVIORAL BIASES

    WHAT IS CONSERVATISM?
    INVESTORS ARE SLOW TO UPDATE THEIR BELIEFS AND UNDER REACT TO NEW INFORMATION
  53. INVESTOR BEHAVIORAL BIASES

    WHAT IS SAMPLE SIZE NEGLECT/REPRESENTATIVENESS
    INVESTORS ARE TOO QUICK TO INFER A PATTERN OR TREND FROM A SMALL SAMPLE
  54. INVESTOR BEHAVIORAL BIASES HUMAN BEHAVIOR

    WHAT IS FRAMING?
    HOW THE RISK IS DESCRIBED, EX. RISKY LOSSES VS RISKY GAINS, CAN AFFECT INVESTOR DECISIONS
  55. INVESTOR BEHAVIORAL BIASES HUMAN BEHAVIOR WHAT IS MENTAL ACCOUNTING?
    INVESTORS MAY SEGREGATE ACCOUNTS IN THEIR MIND AND TAKE RISKS WITH THEIR GAINS THAT THEY WOULD NOT TAKE WITH THEIR PRINCIPAL.
  56. INVESTOR BEHAVIORAL BIASES HUMAN BEHAVIOR

    WHAT IS REGRET AVOIDANCE?
    INVESTORS BLAME THEMSELVES MORE WHEN AN UNCONVENTIONAL OR RISKY BET TURNS OUT BADLY
  57. INVESTOR BEHAVIORAL BIASES HUMAN BEHAVIOR

    WHAT IS PROSPECT THEORY?
    UTILITY DEPENDS ON CHANGES INSTEAD OF LEVELS OF CURRENT WEALTH
  58. INVESTOR BEHAVIORAL BIASES HUMAN BEHAVIOR

    WHAT IS THE DISPOSITION EFFECT?
    THE TENDENCY OF INVESTORS TO HOLD LOSERES TOO LONG AND SELL WINNERS TOO SHORT.
  59. WHAT ARE SECURED BONDS?
    • MORTGAGE BONDS (BY PROPERTY)
    • COLLATERAL TRUST BOND (BY SECURITIES)
    • EQUIPMENT OBLIGATION BOND (BY EQUIPMENTS)
  60. WHAT ARE UNSECURED BONDS?
    DEBENTURE
  61. WHAT IS A SINKING FUND?
    THE ISSUER HAS TO PERIODICALLY REPURCHASE SOME PROPORTIONS OF ITS OUTSTANDING BOND PRIOR TO MATURITY

    IN THE OPEN MARKET

    USE THE CALL PROVISION (THE SINKING FUND CALL)

    PAYMENTS TO A TRUSTEE (UNCOMMON)
  62. MOST BONDS IN THE US HAVE A PAR VALUE OF _$__________ AND MAKE _____________ COUPON PAYMENTS
    $1000, SEMIANNUAL
  63. BOND PRICE AND THE DISCOUNT RATE (THE YIELD TO MATURITY) HAVE A(N) ______________ RELATIONSHIP, HOWEVER, THE RELATIONSHIP IS NOT LINEAR BUT, ____________. THIS PROPERTY OF BOND PRICES IS CALLED ___________.
    INVERSE, CONVEX, CONVEXITY
  64. WHAT IS Current Yield?
    Annual coupon/bond price
  65. What is Yield to (first) Call?
    • Same formula as yield to maturity, but:
    • Call price replaces par (face) value

    Call date replaces maturity
  66. WHAT IS A Premium Bond
    Bond price > Par value

    Coupon rate > Current yield > Yield to maturity

    Bond price will decline to par over its maturity
  67. WHAT IS A Discount Bond
    Bond price < Par value

    Yield to maturity > Current yield > Coupon rate

    Bond price will increase to par over its maturity
  68. zero Coupon bond is a type of ?
    DISCOUNT BOND
  69. WHAT IS Default risk?
    How likely the issuer will NOT be able to make the specified payments

    • The higher the default risk, the higher the
    • default premium

    • A component of the yield to maturity
    • A compensation for investors to bear the default risk
  70. What is the Term Structure of Interest Rates?
    The relation between the yields to maturity and terms to maturity across bonds, holding other things equal
  71. What is a Yield curve?
    A graphic representation of the above relation, usually employs the yields on Treasury securities
  72. What is the Expectations Hypothesis?
    • The observed long-term rate (in)
    • over n periods is the result of observed short-term rate (i) and future
    • short-term rate(s)

    The future short-term rate is called the forward rate (f)

    (1+in)n= (1+i)t(1+f)n-t
  73. What is the Liquidity Preference Theory?
    Investorsdemand a liquidity premium on long-term bonds

    • Liquidity premium-The extra expected return demanded by investors as compensation for the “illiquidity”
    • on longer term bonds

    • Holding
    • other things equal, the long-term rate (yield) should be higher than the
    • short-term rate (yield)
  74. The
    liquidity preference theory alone would always predict a(n) ________________
    • upward-sloping yield
    • curve
  75. WHAT ARE SOME OTHER NAMES FOR GEOMETRIC RATES OF RETURN?
    TIME WEIGHTED, CHAIN LINKED
  76. WHICH IS MORE IMPORTANT, GEOMETRIC MEAN OR ARITHMETIC MEAN?
    GEOMETRIC

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