CRPC -Module 2

What are 3 elements investment strategies depend on?

1. An identifiable goal. 2. A method to obtain the goal. 3. Competencies and resources to sustain that strategy.

What elements should an Investment Policy contain?

1. Clear statement of client's investment goals. 2. A statement identifying the investment vehicles and investment strategies deemed suitable for the portfolio. 3. A statement of risk level acceptable to the client. 4. A statement of how the client's assets should be allocated among the suitable classes of investments and statement of philosophy under which they should be managed. 5. A provision for periodic review.

What are the 4 steps to asset allocation?

1. Determine which asset class to use. 2. Determine the percentage each asset class should represent 3. Select Securities 4. Review performance and investment climate.

What are advantages of stocks?

1. Growth/appreciation 2. Income/dividends

What are disadvantages of real estate?

1. Illiquidity 2. Management 3. High minimum investment 4. High transaction costs 5. Immobility of assets 6. Economic and tax risk

What are 2 strategies that are used when managing the bonds in a portfolio?

1. Ladder strategy 2. Barbell strategy

What are the different types of real estate?

1. Land 2. Residential Real Estate 3. Commercial Real Estate 4. Industrial Real Estate

What are disadvantages of cash equivalents?

1. Low returns- Inflation risk

What are advantages of cash equivalents?

1. Low risk 2. Offers liquidity 3. Good parking spot 4. Adds diversity

What are advantages of fixed income securities?

1. Moderate to low risk. 2. Steady income potential

What are the approaches to a tactical asset allocation?

1. Period revision of asset mix through value investing. 2. Momentum investing 3. Moving assets away from successful assets and into ones that have been least successful.

What are disadvantages of fixed income securities?

1. Reinvestment and call risk 2. Interest rate risk 3. Purchasing power risk

What are disadvantages of stocks?

1. Risky

What are the 3 quantitative techniques for evaluating performance that relate to return and risk?

1. Sharpe Index 2. Treynor Index 3. Jenson Index (alpha)

What are things contrarians look at to give them cues for buying?

1. Short selling 2. Specialist Sentiment 3. Mutual fund cash positions and investment advisory opinion 4. Put Call Ratio

What are the 3 approaches to asset allocation?

1. Strategic 2. Tactical 3. Core Satellite

What are advantages of real estate?

1. Tax benefits 2. Inflation hedge 3. Leverage

What is the purpose of an investment policy?

1. To provide a foundation of goals, time horizons, and constraints on which the client portfolio is constructed. 2. Provide a basis for review, performance evaluation, and adaptation of changing conditions.

What are examples of unsystematic risk?

Business risk Financial risk Credit risk Default risk Liquidity risk Marketability risk Event risk

What are examples of systematic risk?

Purchasing power risk Reinvestment risk Interest rate risk Market risk Exchange rate risk

What is correlation?

The degree to which 2 securities move relative to one another.

How should you decide on a fund based on the sharpe ratio?

The fund with the highest sharpe ratio should be chosen as it has experienced the best returns relative to the amount of risk taken.

What is beta?

The measure of a securities systematic risk. It is the measure of the volatility of an assets relative to the volatility of an appropriate benchmark.

What is business risk?

The risk that involves unique characteristics of a company, such as management, business plan, product life, competition, and financial strength.

What are value investors?

These are investors who select stocks that are low in price relative to empirical measures of earnings, sales, net current assets, and book value.

What is value averaging?

This aims to have the market value in the account increase by a definite dollar amount at regular and period time intervals.

What is a strategic asset allocation?

This allocation seeks to identify the asset mix that will provide optimal balance between the expected risk and return for a long investment period.

What is a tactical asset allocation?

This approach seeks to position the portfolio into assets, sectors, and individual securities showing the most promise of returns.

What is the Jenson Index?

This index compares the expected rate of return to the actual rate of return.

What is the treynor index?

This index relates to the return of an investment or portfolio to the degree of systematic or market risk taken.

What is the sharpe index?

This index relates to the return on an investment or portfolio to the total degree risk is taken. The fund with the highest sharpe ratio should be chosen as it has experienced the best returns relative to the amount of risk taken.

What is a core satellite asset allocation?

This is a combination of a strategic and tactical asset allocation approach.

What is the coefficient of variation?

This is a relative measure of risk and allows risk comparison among different investments.

What is a value stock?

This is a stock that has a below average P/E ratio.

What is a growth stock?

This is a stock that has earnings that are expected to grow at a high rate and are characterized by high P/E ratios, high price to book ratios, high price to cash flow ratios, and high returns on equity.

What is technical analysis?

This is based on the idea market trends exist, those trends repeat, and stock price incorporates supply and demand for the stock.

What is the Contrarian Investment Strategy?

This is ones willingness to buy securities that are out of favor and sell those that have become popular. They believe what you read in the newspaper has already ended.

What is a direct investment of real estate?

This is outright ownership or partnership of the real estate.

What is an indirect investment of real estate?

This is real estate owned through a limited partnership, corporation, or REIT.

What is the efficient market hypothesis?

This is the idea that current market prices of securities reflect all information about issuers and future expectations of their investors.

What is the small firm effect?

This is the idea that small cap investors are getting more bang for their buck.

What is standard deviation?

This is the measure of total risk that tells the investor how far away from the mean return a security's returns are likely to vary.

What is duration?

This is the price sensitivity of the bond or bond portfolio to changes in interest rate.

What is unsystematic risk?

This is the risk that can be diversified away.

What is systematic risk?

This is the risk that cannot be diversified away.

What is momentum investing?

This is when investors move money from assets that are not performing well to assets that are performing well.

What is sector rotation?

This is when one shifts portfolio assets from one sector of the economy to another in anticipation of broad based economic developments.

What is a top down analysis?

This is when you first look at the economy as a whole and then identify the sectors that would benefit from the forecast of the economy.

What is a bottom up analysis?

This is when you first look at the fundamentals of the firm and then analyze the sector growth outlook.

What is barbell strategy?

This strategy splits the bond portion of the portfolio between short term and long term bonds.

What is a laddered strategy?

This strategy staggers equal amounts of bond holdings along different maturities.

What is the yield to maturity?

This yield factors in yearly interest along with the difference between the bonds current price and its value at maturity.

What is the yield to call?

This yield factors in yearly interest until the bond is expected to be called along with the different between the current price and the call price.

Fund JKL has a mean return of 8% and a standard deviation of 12, and its returns are evenly distributed. This would mean that 68% of the time its returns would fall between a. -4% and +20% b. +4% and +20% c. -8% and +8% d. -16% and +32%

a. -4% and +20%

What is the equation for current yield?

annual interest rate/current price

Rex owns a corporate bond that currently sells for $1,090. The coupon rate is 9%, and the bond matures in 23 years. The bond is callable in eight years at $1,020. What is the yield to call of this bond? a. 6.84% b. 7.66% c. 7.93% d. 8.13%

b. 7.66%

Assuming the market is currently returning 12% and the beta of your stock is .8. What percentage return can you expect on your stock? a. 2.4% b. 8.0% c. 9.6% d. 14.4%

c. 9.6%

Which one of the following statements is correct? a. Reinvestment, exchange rate, and liquidity risk are examples of systematic risk. b. Default, purchasing power, and political risk are examples of nondiversifiable risk. c. A company without debt will have no financial risk, but will have business risk, which is a type of unsystematic risk. d. Default, call, and liquidity risk are unique to bonds and not applicable to stocks.

c. A company without debt will have no financial risk, but will have business risk, which is a type of unsystematic risk.

An investor has a 6%, $10,000 par value bond that matures in 15 years. The yield to maturity on similar bonds currently is 5.5%. What is the price of this bond? a. $1,050.62 b. $5,779.16 c. $9,509.99 d. $10, 506.23

d. $10, 506.23

Hector has been investing for years, and has approximately three quarters of his portfolio invested in stock index and bond index funds, which he rebalances periodically. He has the remainder of his portfolio invested in oil and health care stocks, which he believes provide above-average price appreciation potential over the next few years. His style of asset allocation would be best described as a. strategic b. tactical c. dynamic d. core/satellite

d. core/satellite

Jezebel owns four stocks in various industries. She has come to you to assess the risk she is taking. You inform her that her portfolio is subject to which one of the following types of risk, and why? a. purchasing power risk, because stocks fluctuate with inflation. b. systematic risk, because the stocks she owns are in various industries. c. political risk, since companies are subject to the laws of the countries in which they operate d. unsystematic risk, because she owns only four stocks.

d. unsystematic risk, because she owns only four stocks.

Beta is a measure of a stock's a. range of returns b. total risk c. variability d. volatility

d. volatility

What is the equation for the Coefficient Variation?

standard deviation/mean