Quiz 2: Ch4-6 Combined

What are the 4 functions investment companies provide to investors?

1) Record Keeping and Administration: Issue status Reports, Keeping track of Capital gains distributions, dividends, investments and redemptions etc. 2) Diversification and Divisibility: Pooling money allows investors to hold fractional shares of various securities, allowing them to collectively act as large investors. 3) Professional Management Investment companies provide security analyst and portfolio managers who can achieve superior investment results for clients. 4) Lower Transaction Costs Trading large blocks of securities allows investment companies to save on brokerage fees and commissions. Reference pg 92

According to the Fisher hypothesis, what is the nominal interest rate if the expected inflation rate is 9% and the real interest rate is 4%? a) 4.8% b) 13.88% c) 13.36% d) 3.60%

1+Rnom = (1+Rreal)(1+i) = (1+ 4%)(1+9%) = 1.1336 1+Rnom = 1.1336 Rnom = 13.36% (C)

List two reasons for pursuing a passive investment strategy over an active strategy.

1. Lowest operating expenses because it requires minimal managerial effort. 2. Free-rider benefit

Briefly describe the two broad tasks that comprise portfolio construction:

1. The allocation of the overall portfolio between safe and risky assets, also called the Capital Allocation Decision. This decision is based on the risk-return trade-off and risk aversion, 2. Determining the composition of the risky portion of the portfolio by using a utility function to rank portfolios based on an individuals tolerance for risk.

True or False? ______. 1. The nominal interest rate is the growth rate of your money while the real interest rate is the growth rate of your purchasing power. ______. 2. The nominal rate of return is approximately the real rate of return less inflation. ______. 3. Supply, demand, and government actions are the three basic factors that determine real interest rate.

1. True 2. False - The real rate of return is approximately the nominal rate less inflation. 3. True Text book Pages 118-120.

What are the four fundamental factors that determine the level of interest rates? Why are these factors important?

1.The supply of funds from savers, primarily households 2.The demand for funds from businesses to be used in finance investments in plant, equipment, and inventories (real assets or capital formation) 3.The government's net demand for funds as modified by actions of the Federal Reserve Bank 4.The expected rate of inflation These factors are important because the level of interest rates is the most important macroeconomic factor to consider in investment analysis. Forecasts of interest rates directly determine expected returns in the fixed-income market.

What are the four main benefits of a mutual investment company for an investor?

@Record Keeping and Administration: Investment companies will publish periodic status reports, keeping track of capital gains distributions, dividends, investments, and redemptions, and they may reinvest dividend and interest income for shareholders. 2. Diversification/Divisibility: They enable small investors to invest in fractional shares of multiple types of securities. The investment company can act as large investors even if the individual cannot. 3. Professional Management: support full-time staffs of security analysts and portfolio managers who attempt to achieve superior investment results for their investors. 4. Lower Transaction Costs: Because they trade large blocks of securities, investment companies can achieve substantial savings on brokerage fees and commissions.

Define Sharpe Ratio and Sortino ratio. What is the difference between these two? What kinds of portfolios are measured by Sharpe ratio and Sortino ratio?

A Sharpe ratio is calculated by subtracting the rate of return on an investment considered risk-free, such as a U.S. Treasury bill, from the expected or actual return on an equity investment portfolio or on an individual stock, then dividing that number by the standard deviation of the stock or portfolio. The Sortino ratio variation of the Sharpe ratio only factors in the downside, or negative volatility, rather than the total volatility used in calculating the Sharpe ratio. The theory behind the Sortino variation is that upside volatility is a plus for the investment, and it, therefore, should not be included in the risk calculation. Sharpe Ratio includes both upside and downside risk while calculating the ratio. Sortino Ratio only looks at the downside risk of the portfolio. Analysts commonly prefer to use the Sharpe ratio to evaluate low-volatility investment portfolios. Analysts commonly prefer to use the Sharpe ratio to evaluate high-volatility investment portfolios.

Why would a risk manager want to use VaR as a risk measure?

A risk manager would use VaR to measure and control the level of risk exposure of a particular position, a portfolio, or to measure the firm-wide risk exposure.

Q. As inflation rates increase, investors will demand a higher ______ in return??

A. Nominal rate

A mutual fund's prospectus outlines which of the following? I. The fund's investment objectives. II. The fund's investment adviser. III. The fund's annual report. IV. The fund's portfolio manager V. The fund's fees and costs.

A. Only I, II, and III B. Only III, IV, and V C. All are outline in the fund's prospectus D. Only I, II, IV, and V Answer D.

Which of the following is not true of unit investment trusts (UITs)?

A. They're pools of money invested in a portfolio that is fixed for the life of the fund. B. UIT sponsors earn their profit by selling trust shares at a premium to the cost of acquiring them. C. They involve a high degree of turnover because the portfolio makeup is highly variable. D. UITs have steadily lost market share to mutual funds in the past several years. Answer: C - UITs have little active management because once established, the portfolio composition is fixed. They are often referred to as unmanaged & invest in relatively uniform types of assets. Investment text, pg 93

The real interest rate is defined as

A. the growth rate of your money B. the GDP growth rate C. the growth rate of your purchasing power D. the growth rate of the fed funds rate Answer: C pg 118 Investment textbook

Q: What is a breakpoint and which class of mutual fund shares is it associated with?

A: A breakpoint is a dollar threshold of investment into a fund or fund family that, once met, will reduce the front-end sales charge. Breakpoints are associated with class A mutual fund shares.

Q: What are the potential advantages and disadvantages of exchange-traded funds?

A: Advantages include: The funds are continuously traded, cost less, tax-efficient, and can be sold short. Disadvantages include: The price may not be accurate to the NAV (Net Value Asset) and they can only be purchased from a bro

What does the Fisher Hypothesis tell us about the nominal interest rate and inflation?

A: Irving Fisher argued that the nominal rate ought to increase one-for-one with expected inflation, E(i). rnom = rreal + E(i) This implies that when real rates are stable, changes in nominal rates ought to predict changes in inflation rates. While past data does not strongly support the Fisher equation, nominal interest rates seem to predict inflation as well as alternative methods.

Q: What 3 statistical measures must be equal in order to have a true normal distribution bell curve?

A: Mean, median, and mode must all be equal.

What are the two components of a Holding Period Return (HPR)?

A: The dividend yield plus the rate of capital gains .

Q: What is the definition of 'turnover'?

A: The ratio of the trading activity of a portfolio to the assets of the portfolio.

How do you compare returns on investments with different holding periods?

A: You express all investment returns as an Effective Annual Rate (EAR), which is the percentage increase in funds invested over a 1-year period.

What is the coefficient of risk aversion for risk averse investors?

A>0

Risk Lover

Accepts a fair game or gamble; the investor adjusts the expected return upward to take into account the "fun" of confronting the prospect's risk. Investors will always take a fair game because their upward adjustment of utility for risk gives the fair game a certainty equivalent that exceeds the alternative of the risk-free investment A<0; COEEFICIENT OF RISK AVERSION)

Question: Define ETFs and Closed End Mutual Funds. Provide a comparison for both. What are the tax implications for an investor for an ETF and a Closed End Mutual Fund.

An exchange-traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. A closed-end fund (CEF) or closed-ended fund is a collective investment model based on issuing a fixed number of shares which are not redeemable from the fund.

While the probability of losses ___ as the investment horizon lengthens, the magnitude of potential losses ___. a. Grows; Grows b. Grows; Falls c. Falls; Grows d. Falls; Falls

Answer C. This conclusion is based off table 5.5. It shows that the probability of return being less than 0(a negative return) decreases from 1 to 10 year investments and decreases again from 10 to 30 year investments. This implies that long-term investments are less risky than short-term investments, if magnitude is not taken into account. The wealth relative shows that the final value of the portfolio as a fraction of initially invested funds actually decreases from 1 to 10 year investments and decreases from 10 to 30 year investments. This more accurately represents investment risk over time.

What was the average risk premium offered on passive risky portfolios from 1926 to 2015? a) 10.9% b) 8.3% c) 9.6% d) 12.5%

Answer is B.

The effective annual rate (EAR) and the annual percentage rate (APR) are both used to annualize interest rates. What's the difference between the EAR and APR?

Answer: EAR: -Uses compounded interest -Used to calculate annual interest rates on longer-term investments (> 1year) APR: -Uses simple interest -Used to calculate annual interest rates on shorter-term investments (< 1 year)

Draw the graph and describe the relationship that determines the real interest rate Briefly describe the two entities that can shift the supply and demand curve and how.

Answer: The real interest rate in relation to funds is determined by an upward sloping supply curve and a downward sloping demand curve. The higher the real interest rate the greater the supply of household savings, and the lower the real interest rate the more businesses want to invest due to the lower rate on the funds they would need to finance new projects. Equilibrium real interest rate is the intersection of supply and demand. (Graph Image) The government and the Federal reserve can shift the supply and demand curve. Changes in monetary and fiscal policies can shift the curves to the left or right, i.e an expansionary monetary policy would shift supply to the right.

Question: If you plan to hold a mutual fund for over 20 years, would you prefer paying a load or 12b-1 fees?

Answer: A Load. Loads are paid only once for each purchase, whereas 12b-1 fees are paid annually. So, when holding the fund for a long time, a load would be preferable.

What type of investor is happy to engage in fair games and gambles? a) Risk Lover b) Risk-Neutral c) Risk Adverse d) Risk Taker

Answer: A Risk Lover a- A Risk Lover investors are happy to engage in fair games and gambles. b- Risk-neutral investors judge risky prospects solely by their expected rates of returns. c- Risk Adverse investors reject investment portfolios that are fair games or worse. d- Risk Takers are not defined in the book. This is a multiple distractor answer that is made to add complexity with being similar to Risk Lover. Page 167-170

Which security is viewed as a risk-free investment? (A) Stock (B) Treasury Bill (C) Municipal Bond (D) Corporate Bond

Answer: B Explanation: Treasury bills are back by the full, faith and credit of the US Government. We work under the assumption that by default, there are inherently without risk. Bond's still face default risk (depending on who you purchase from). There's a big difference between Joe Blow's new corporation and Disney. Municipal bond risk, remember orange county in 1991?

You have a $100,000 portfolio. 25% of your portfolio is risk-free assets and the remainder is risky assets (stocks and bonds). If you have 30% invested in bonds, how much money do you have invested in stocks within your complete portfolio (dollars and percentage of total portfolio)? A) $22,500, 52.5% B) $70,000, 70% C) $52,500, 52.5% D) $75,000, 75%

Answer: C $100,000 x 0.75 = $75,000 money invested in stocks and bonds $75,000 x 0.7 = $52,500 invested in stocks $52,500 / $100,000 = 52.5% of complete portfolio

What factor does NOT determine the level of interest rates? (A) The supply of funds from Savers (B) The demand of funds from Business (C) The bond market (D) The expected rate of inflation

Answer: C Explanation: The bond market has nothing to do with determining the level of interest rates. The Government's net demand of funds influences the level of interest rates in the country (which itself is determined by the FED).

What is NOT one of the four functions an investment company provides? (A) Record Keeping & Administration (B) Diversification and Divisibility (C) Professional Management (D) Higher Transaction Costs

Answer: D Explanation: Investment companies are able to buy and sell blocks of securities at a time, lowering per-transaction costs (not increasing).

What is the difference between a global funds and international funds?

Answer: Global funds invest in securities worldwide, including the U.S., while international funds only invest in securities of firms located outside the U.S.

Calculate the holding-period return (HPR) for a fund that currently has a price of $75, as an investment horizon of 1 year, at year end's price will be $88 and cash dividends over the year amounted to $3.

Answer: HPR= (Ending price of a share - Beginning price + Cash dividend)/Beginning price HPR= (88-75+3)/75 = .213 or 21.3% Page 126

Fill in the blank by circling an answer: Portfolios receive_______ (higher, lower) utility scores for higher expected returns and ________ (higher, lower) scores for higher volatility.

Answer: Higher;Lower

When graphing the risk and return trade off of potential investment portfolios, which quadrant is the most optimal? Which is the least?

Answer: Quadrant I is the most optimal, because it indicates a portfolio with a higher return for equal risk. The fourth quadrant is the least optimal because it indicates higher risk for a lower return. Quadrant II & III are acceptable, depending on the investors risk appetite.

Risk averse investors have___________indifference curves than less risk averse investors since they require a greater _____________ in expected return to compensate for an increase in portfolio risk.

Answer: Steeper, Increase

Suppose the nominal interest rate of a 1-year bank deposit had an interest rate of 9% and you expected inflation to be 4%, what would your real rate of interest be?

Answer: rreal=.09-.04/1+.04= 4.8%

Question: For risk-free rate= 7%, expected return of portfolio= 12%, and a standard deviation of portfolio= 18%, what is the optimal capital allocation for an investor with a coefficient of risk aversion A= 3?

Answer: y*= (.12- .07)/ 3*.18^2= .51 The investor should invest 51% of the investment budget in the risky-asset and 49% in the risk-free asset.

Which of the following is the risk-free asset? A. S&P 500 B. Corporate Bonds C. T-Bills D. Treasury Bonds E. Small Stocks

Both C and D... ? Treasury bonds are risk-free for individuals who hold bonds until maturity, where they ultimately mature at their full value. There can be risk for those who sell before maturity, and anyone investing in long-dated treasury funds are at risk of Treasury prices declining, impacting principal with a loss. T-Bills would describe the type of Treasury bond that is short-term, maturing within a year. Based on the short-term characteristic, it would be described as a more risk-free type of Treasury bond.

Give 2 examples of Exchange-Traded Funds, as well as the index they track.

Broad U.S. Indexes Ticker Index Traded Spiders SPY S&P 500 Diamonds DIA Dow Jones Industrial Cubes QQQ NASDAQ 100

Describe the CAL and how it relates to Passive Strategies

CAL is derived with the risk free and risky portfolio. A passive strategy is one that avoids security analysis, whether it is direct or indirect. Due to supply and demand factors in large capital markets, this strategy may be the best choice for many investors. One way to achieve this is to take a diversified portfolio of stocks that mirrors the value of each sector in the US markets.

Which of the following are fundamental factors that determine the level of interest rates: A) Supply of Funds from Savers and Demands for Funds from businesses B) The expected rate of inflation C) The government's Net Demand for funds as modified by actions of the federal reserve bank D) All of the above E) Answers A & B only

CORRECT ANSWER: D. All of the Above

Explain the cost of investing in mutual funds

Fee Structures: 1) Operating Expense 2) Front-end Load 3) Back-end Load 4) 12b-1 charger Fees must be disclosed in the prospectus

What are the differences between classes A, B, C and D shares as it pertains to their payments?

For Class A shares you pay most of your fees at the front-end. Class B shares charge a load or sales fee at the back-end. Class C shares have no front-end or back end fee, but charge a level annual feel.. Class D shares have no fees to buy or sell them.

Describe what a Hedge Fund is. Name the types of investment strategies hedge funds can use that are not typically open to mutual fund managers. Why are they able to use these investment strategies?

Hedge funds allow private investors to pool assets to be invested by a fund manager They are structured as private partnerships and have minimal SEC regulation Hedge funds are usually open to wealthy or institutional investors Typically require investors to agree to initial "lockups" where investments cannot be withdrawn which allows hedge funds to invest in illiquid assets Managers can use investment strategies such as derivatives, short sales, and leverage due to limited regulation by the SEC Hedge funds can invest in a wide range of investments with funds focusing on derivatives, distressed firms, currency speculation, convertible bonds, emerging markets, and merger arbitrage (Page 95 for Reference)

Income Funds tend to focus on companies that have high ______, while Growth Funds focus on companies that have high _______.

Income funds are primarily concerned with generating income and therefore hold securities with high dividend yields, while growth funds are concerned with generating high capital gains.

What are some advantages and disadvantages of index funds?

Index funds seek to match the investment returns of a specific market index through passive investment. Advantages of index funds include their low cost, inherent diversification, and low risk . The two major disadvantages include their lack of flexibility, and impossibility of big gains. Reference: Section 4.3

What is the Sharpe Ratio? What does it indicate?

It is the risk premium divided by the portfolio standard deviation. It is the slope of the expected return line. It helps determine how much return is required for one more unit of risk.

Risk Neutral

Judges risky prospects solely by their expected returns. Level of risk is irrelevant; there is no penalty for risk. In this portfolio for this type of investor, the certainty equivalent rate is the expected rate of return. A= 0; A= COEEFICIENT OF RISK AVERSION)

Suppose that you perform an analysis but find that your investment is not profitable according the Capital Market Line at the current amount you can invest but it is very close, what should you do?

Look at the potential for borrowing money to invest, this can push you past the 100% mark on the CML graph, but this can also have a major effect on the investors risk tolerance so it should be done with caution or when the return is expected to be very large.

What are mutual funds the common name for? And briefly describe equity funds and its two classifications.

Mutual funds are the common name for open-end investment companies. Equity Funds: Mostly invested in stock, but could hold other types of securities, i.e. fixed-income. Common to hold around 5% of their assets in money market securities to secure the necessary liquidity for the redemption of shares. * Income funds: Hold shares of firms with historically high dividend yields. Less risky and less volatile to changes in the economy. More concerned with the current income of the fund. * Growth funds: Focused on capital gains rather than current income. More responsive to economic changes and risker (growth stocks tend to be riskier thus making growth funds riskier)

Does holding a risky portfolio becoming safer in the long run?

No, this statement is not true. In fact the opposite is true; the longer you hold an investment the more riskier it becomes. The basis for this argument is the longer that a stock is held, the probability of an investment shortfall becomes lower. However, probability of shortfall is a poor measure of investment safety as it ignores the magnitude of potential losses.

What are the main differences in share purchasing and selling between an open ended managed investment companies, and a close ended managed investment company?

Open ended issues shares when investors purchase and redeem shares when investors cash out. Where as close ended shares outstanding is constant, investors have to cash out but selling to new investors.

name two characteristics of an open and closed funds:

Open-end funds: 1) redeem or issue shares at their net asset value 2) when investors wish to "cash out" their shares they sell them back to the fund. Closed-end funds: 1) do not redeem or issue shares 2) investors who wish to "cash out" must sell their shares to other investors

Which of the two types of managed investment companies always sells at Net Asset Value? Why?

Open-ended funds (mutual funds) will always be redeemed to the investor at Net Asset Value. This is because shares are only created for individual investors and redeemed by the mutual fund, at which point the shares cease to exist. Supply always equals demand.

Why does the Capital Allocation Line kink at point "P" on the graph?

Point "P" is 100% of the portfolio investment, in order to go past this point you would have to use leverage through borrowing. The slope will decrease at point "P" because the rate at which you can borrow funds will be higher than the risk-free rate.

Why would an investor prefer a portfolio on the higher indifference curve?

Portfolios on higher indifference curves offer a higher expected return for any given level of risk. So more reward for same level of risk.

What are 3 advantages of investing in ETFs?

Possible Answers: -ETFs trade continuously -ETFs can be sold short or purchased on margin (Unlike mutual funds that cannot) -ETFs have a tax advantage due to selling to other traders when in a redeeming position (Avoids capital gains taxes) -ETFs are cheaper to invest in than mutual funds -ETFs are purchased through a broker which reduces the cost of marketing, causing lower management fees

Risk Averse

Rejects investment portfolios that are fair games or worse. Consider only risk-free or speculative projects with positive risk premiums. Will "penalize" the expected rate of return of a risky portfolio by a certain percentage (or penalize the expected profit by a dollar amount) to account for the risk involved; greater the risk, larger the penalty A > 0 ; A = COEEFICIENT OF RISK AVERSION)

What is a key difference between risk averse, risk neutral, and risk lovers?

Risk averse: only accept risk-free or speculative prospect with positive risk premiums. Risk Neutral: judge risky prospects solely by their expected returns. Risk lover: they adjust the expected return upward to take into account the experience of confronting the prospect's risk.

What is the difference between risk-averse investors, risk-neutral investors, and risk lover investors?

Risk-Averse, Risk-Neutral, Risk Lover

What are the factors needed to determine your investments value after tax and how do they interact?

Rnom: nominal value of interest Rreal: real interest value i: inflation rate t: tax rate The nominal interest rate multiplied by the inverse of tax rate and reduced by inflation: Rnom*(1-t)-i OR the real interest rate multiplied by the inverse of tax rate and reduced by inflation then multiplied by the tax rate: Rreal*(1-t)-i*t OR the real interest rate plus inflation multiplied by the inverse of tax rate reduced by inflation: (Rreal+i)*(1-t)-i

What does it mean to have a high STD versus a low STD?

STD helps determine the market volatility or the spread of prices from their average price. When prices move wildly, STD is high, thus there is a higher risk. However, when prices are steady the STD is less risky.

A portfolio has a risk premium of 4.5% and a standard deviation of excess returns in calculated at 15%. Calculate the Sharpe Ratio. Define the Sharpe Ratio.

Sharpe Ratio = Risk Premium/SD of Excess Returns SR = .045/.15 SR = .3 The Sharpe Ratio measures the trade off between reward (risk premium) and risk (SD of excess returns). It is useful for portfolios but not for individual stocks.

Which return is an investor's tax liability calculated on? What is the impact of inflation?

Tax liability is calculated based on nominal returns. Inflation erodes after-tax real rate of return. Consider this example: you are in a 25% tax bracket, earning 10% returns while inflation is 3%. In reality, your before tax rate of return is roughly 7%, but you will be taxed (25% * 10% = 2.5%) instead of (25% * 7% = 1.75%). The after tax real return decreases by (3% * 25% = 0.75%).

What is the Capital Market Line?

The CML is a capital allocation line formed from investment in two passive portfolios - risk-free short term treasury bills (or money market fund) and fund of common stocks that mimics a broad market (such as the S&P500) The passive strategy avoids security analysis.

Compute the Utility Function and list the possible values of coefficient of Risk Aversion (A)

The Utility function is defined as • U = Utility • E(r) = Expected return on the asset or portfolio • A = Coefficient of risk aversion • σ2 = Variance of returns • ½ = A scaling factor U = E(r) - ½ A σ2 For Risk Averse Investors: A>0 For Risk-Neutral Investors: A=0 For Risk Lovers: A<0

Where do equally preferred portfolios lie on the Indifference Curve?

The mean-standard deviation plane

What will the indifference curve of a risk-averse investor look like when compared to the indifference curve of a risk-neutral investor?

The risk aversion of an investor will determine the slope of the indifference curve. An indifference curve of a risk-averse investor will be steeper than that of a risk-neutral investor. This is because for a given level of risk, a risk averse individual will require a higher return in exchange for the level or risk being taken than a risk-neutral individual, making their indifference curve much steeper.

What money market instrument is viewed as risk-free and why all money market instruments are essentially free of risk then name the three types of securities money market funds hold.

Treasury bills are commonly known as a risk-free asset. Money market instruments due to their short maturities and level of credit risk are basically risk-free. Treasury bills, other treasury or U.S. securities, and repurchase agreements are the three types of securities money market funds often hold.

Is the following statement True or False? Unit investment funds are actively managed once they are established.

True

Define turnover within a mutual fund and briefly describe its relationship to taxes.

Turnover is the ratio of the trading activity of a portfolio to the assets of the portfolio. A portfolio of $100 million with $50 million of trading activity would have a turnover ratio of 50%. Higher turnover means higher capital gains or losses, which are taxed at the appropriate rate for the shareholder. Index funds have very low turover (approx 2%) and are very tax efficient. Bodie, Kane, Marcus pp 102-103

What are the three types of investment companies and how do they differ?

Unit Investment Trusts: Use a fixed portfolio and are generally more passive than other investment types. Managed Investment companied: Funds that are more actively managed, comprised of open and closed ended funds based on when the stocks are created: either when they are issued to the buyer or from a pool sold from the company/a broker. Other Investment Organizations: Investments generally made as a partnership or using other collateral such as real estate.

What is Value at Risk (VaR) and expected shortfall?

Value at Risk (VaR) Loss corresponding to a very low percentile of the entire return distribution, such as the fifth or first percentile return Expected Shortfall (ES) Also called conditional tail expectation (CTE), focuses on the expected loss in the worst-case scenario (left tail of the distribution) More conservative measure of downside risk than VaR

Departures from normality often take place, which can result in negative returns. What two variables can be presented in analysis to show the plausibility of "black swan" events and other factors contributing to non-normal returns?

Value at Risk (VaR), and Expected Shortfall (ES).

In regards to risk, What would it mean if a distribution curve was skewed to the left?

When the distribution is skewed to the left, this means that the standard deviation is underestimating risk. The left skew of the distribution indicates that an investor may expect frequent small gains and few large losses.

Which is true for nominal rate of interest?

a) As the inflation rate decreases, investors will demand higher nominal rates of return b) As the inflation rate increases, investors will demand lower nominal rates of return c) AS the inflation rate increases, investors will demand higher nominal rates of return d) As the inflations rate decreases, investors will demand lower nominal rates of return Answer is C. Reference in chapter 5 power point, slide 6

Which one is false in terms of how mutual funds are sold?

a) Direct marketed funds b) Sales force distributed c) Financial supermarkets d) Indirect marketed funds. Answer D.

What type of mutual fund holds both stocks and bonds and are diversified based on the portfolio manager's forecast or the relative performance of each sector, hence engaged in market timing and not low risk?

a) Sector Funds b) Balanced Funds c) Asset Allocation and Flexible Funds d) Index Funds Page 96-97 Answer: C

Which of the following market risk measurements is fully determined by the mean and standard deviation of previous distributions, and measures the loss that will be exceeded with a specified percentage probability?

a) Value-at-risk b) Expected shortfall c) Lower partial standard deviation d) Frequency of extreme returns e) All of the above Answer: A

Which of the following statements are true? Explain. (Choose one) a) Risk adverse describes when you are more sensitive to risk. b) Investors who are risk averse seek any investment that is fair game or worse. c) A more risk-averse person would have a steeper indifference curve. d) More risk-averse investors will require a smaller risk premium for taking on a

c) A more risk-averse person would have a steeper indifference curve. A steeper indifference curve characterizes their higher required premium for taking on one additional unit of risk. The indifference curve will have the effect of a much higher y axis alongside a slower growth in the x axis. In other words, the investor will require a LOT more return promised in order to take any additional unit of risk.

Regarding mutual funds, an investment fund's __________ describes information about the investment policy for the specified investment fund. This can detail the types of securities held, and the type of group policy classification investment features that can be used to differentiate between multiple mutual funds.

prospectus

What is the Fischer Equation?

r(nom) = r(real) + E(i) nominal interest rate = real interest rate + expected inflation