Series 65 Chapter 15 - Portfolio Management and Investment Risk

Holding period return equation is

(Start value -End value + Investment income)/Start value

An example of a risk free return investment is a

3 month treasury bill

To calculate the rate of return for the money to double divide

72 by the number of years in which the money needs to double

In the rule of 72, to calculate the number of years it will take the principal amount to double based on a given rate of return divide

72 by the rate of return

TIPS pay a fixed rate of interest but the principal

Changes based on the CPI

Growth stocks have a high expectation of

Earnings growth

The Internal Rate of Return is used to

Estimate the profitability of potential investments

Municipal bonds are exempt from

Federal tax

The present value of the investments is what the investor needs to

Invest today to have the future value

The correlation of a portfolios assets is the degree to which

Investments move in the same direction of the market in which they trade

Blue chip stocks are typically

Leaders in their industry

Value stocks tend to sell at a

Low price to earnings ratio

Dollar cost averaging is a strategy where the investor will buy a fixed dollar amount of shares regardless

Of the market price

The present value of perpetuity is

Payment/rate of return

A dollar weighted portfolio includes investment

Returns and deposits or withdrawals from a portfolio

Interest rate risk refers to the risk of

Rising interest rates on the value of existing bonds

The Capital Asset Pricing Model attempts to describe the relationship between

Risk and return for securities

Diversifiable/non systematic risk is a risk that is

Specific to a particular sector

The Sharpe Ratio equation is

The portfolio return - risk free rate/standard deviation

Standard deviation is the measure of risk as evidenced by

The variability between returns

The Sharpe Ratio indicates the amount of return earned per

Unit of risk

The ability to tolerate risk is not simply based on financials but also a clients

Values

Beta is the measure of the

Volatility of a security compared to the market

Special situation stocks are associated with companies that may be involved in events that

Will affect their earnings such as mergers

The future value represents what an investment

Will be worth at some point in the future

When a payment is made in perpetuity it means that the payment will

Be made forever

Systematic rebalancing is a method of

Buying and selling assets on a periodic basis

When interest rates are rising, utility stocks are

Adversely affected

Strong form efficiency suggests that current stock prices reflect

All information both public and private

What type of stocks does the Wilshire 500 index track?

All of the stocks in the United States

Weak form efficiency suggests that current stock prices reflect

All past information and it is not possible to generate superior returns

Semi strong form efficiency suggest that current stock prices reflect

All publicly available information and superior returns can be generated by non public information

Opportunity risk is the loss of benefits that

An investor would have gained from taking an alternative action

The current yield of a stock is

Annual dividend/current market price

The current yield of a bond is

Annual interest/current market price

Since holding periods differ it is useful to

Annualize returns to compare performance

The greater a portfolio's Sharpe Ratio, the

Better its risk adjusted performance has been

The premise of time value of money is that receiving money now is

Better than receiving it later (The money now can be used for a return)

Event risk is the risk that an event will cause a decline in the market and securities, these events are called

Black swan events

Positive alphas represent

Buying opportunities

Suitability is dependent on whether the investment was appropriate for the customer not simply whether they

Can afford the losses

A capital goal that needs to be achieved within a specific period is often referred to as a

Capital need

The Net Present Value is the

DCF Value - Market price of the bond

Currency risk is the risk that the value of foreign investments will

Decrease in the future due to changes in exchange rates

The rate of return in the present value is referred to as the

Discount rate

In the dividend discount model, to figure out the stocks price the equation is

Dividend/discount rate

In addition to financial return, investors may be concerned with the social and

Environmental impacts of the companies in their investment portfolios

The dividend discount model is a way to value the price of a stock by using an

Estimate of future dividends and discounting them back to the present value

Discounted cash flow analysis finds the present value of

Expected future cash flows using a discount rate

The discount rate is an

Expected rate of return

Alpha represents the difference between an assets

Expected return and its actual return

The risk premium is the investment return an asset is

Expected to yield in excess of the risk free return

Corporate bonds are taxable at the

Federal, state and local level

Inflation risk exists when investment provides investors with a

Fixed payment

Market risk is the day to day

Fluctuations of the market that can cause loss

Non diversifiable/systematic risk is a risk that is

Focused on the entire market

Time weighted return is the compounded

Growth rate of $1 over the period being measured

Speculative stocks are considered

High risk and have wide fluctuations in price

The more spread out the returns are, the standard deviation is

Higher

The actual return of a stock without the risk free return is considered

Market return x beta + alpha

Sector rotation is an investment strategy that involves the

Movement of money from one industry to another in attempt to beat the market

The modern portfolio theory suggests that an optimal portfolio is one that has assets that are

Not correlated at all with each other

A Monte Carlo simulation is a model used to predict the

Outcome of an event, with the potential for random variables present

Indexing involves maintaining investments that are

Part of major stock indexes

If the Efficient Market Hypothesis is true the investing

Passively will outperform active investment strategies

The expected return is the

Possible return of a portfolio (They are in no way guaranteed)

Complexity risk is the risk that an investments structure is complicated enough that

Predicting future gains or losses will be difficult

Dollar weighted return solves for the rate of return that makes the

Present value of an investment exactly equal to the present value of future cash flows

Reinvestment risk is the risk that a bond investor will not be able to reinvest the

Principal amount at the same interest rate after a bond has matured

Strategic asset allocation is periodically

Rebalancing a clients portfolio to maintain optimal allocation

Regardless of the economic stage defensive stocks

Remain stable and have consistent earnings

An optimal portfolio provides the greatest amount of

Return for a given amount of risk

What types of stocks does the Russell 2000 index track?

Small and Mid cap companies

The one problem with the buy and hold strategy is that as the asset mix of the portfolio drifts

The risk/reward characteristics are altered

Systematic rebalancing can be based on

Time or value

Active strategies involve trying to

Time the market