FCS 316 Chapter 9
what are the 3 standard deviations?
+/- 1 (68%) +/- 2 (95%) +/- 3 (99%)
The following investment return will result in what dollar weighted return? An initial outlay of $50,000, with three years of additional outflows of $10,000 each, and inflows as follows: $0 the first year, $20,000 in years 2 and 3, and sale of the property at the end of year 3 for $75,000.
18.32%.
Mutual fund XYZ has a beta of 1.5, a standard deviation of 12%, and a correlation to the S&P 500 of 0.50. How much return of fund XYZ is due to the S&P 500? A)
25%
Given a mean of 13% and a deviation of 9%, what is the range for 99% of all possible results?
3 standard deviation: -14% to 40%.
Mutual fund XYZ has a beta of 1.5, a standard deviation of 12%, and a correlation to the S&P 500 of 0.80. How much return of fund XYZ is due to the S&P 500?
64%
What is the weighted average beta of the following portfolio?• Stock L has a beta of 1.45 and constitutes 10% of the portfolio;• Stock M has a value of $120,000, with a beta of 0.93;• Stock N makes up 40% of the portfolio with a beta of 0.65• Stock O, with a 2.2 beta, has a dollar value of $180,000.
A) 1.25
A fixed income security whose price has fallen as a result of an increase in interest rates in the market place is said to be subject to:
A) Interest rate risk.
Which of the following returns do mutual funds use when reporting a five-year historical return?
A) Time-Weighted Return.
Walt Drizzly stock is currently trading at $45 and pays a dividend of $3.50. Analysts project a dividend growth rate of 5%. Your client, Mickey, requires a rate of 12% to meet his stated goal. Mickey wants to know if he should purchase stock in Walt Drizzly. A) Yes, the stock is undervalued. B) No, the stock is overvalued. C) No, the required rate of return is higher than the projected growth rate. D) Yes, the required rate is higher than the expected rate.
A) Yes, the stock is undervalued.
An investor with a required rate of return of 12.5% is looking at a stock that currently pays a $3.75 dividend per share, has a dividend growth rate of 6%, and is selling in the market for $60.00 per share. What would you recommend? A) Buy; it meets the buyer's return requirements and is underpriced. B) Buy; it does not meet the buyer's return requirements, but it is underpriced. C) Do not buy; it does not meet the buyer's return requirements and is overpriced. D) Do not buy; it meets the buyer's return requirements, but is overpriced.
A. should've got $61.15
Kalinda has an investment with the following annual returns for four years:• Year 1: -2%• Year 2: 9%• Year 3: 15%• Year 4: 5%What is the Arithmetic Mean (AM) and the Geometric Mean (GM) for Kalinda's investment?
AM = 6.75%, GM = 6.57%.
Michael has an investment with the following annual returns for four years:Year 1: 12%Year 2: -5%Year 3: 8%Year 4: 18%What is the arithmetic mean (AM) and what is the geometric mean (GM)?
AM = 8.25%, GM = 7.91%.
Which of the following investment characteristic(s) listed below which describe(s) closed-end investment companies? A) Passive management of the portfolios. B) Shares of the fund are normally traded in major secondary markets.
B only. they are not always passively managed.
What is the return that a client should expect from a security that last year returned 11.7% with a standard deviation of 14.6%, a beta of 1.2, when the overall market return is expected to be 10.93%, and U.S. Treasury Bills are expected to earn 3.56%?
ER = Rf + B (Rm - Rf ) 12.4%
The weighted average return (WAR) formula
Fair market value / total portfolio value x expected return = weighted return Total all the weighted returns up at the end to get your expected average return
A risk tolerance questionnaire identifies an investor's investment goals and guides the investor regarding appropriate investment choices.
False
The risk of a portfolio can be measured through determination of the interactivity of beta and the covariance of securities in the portfolio
False it can be measured through determination of the interactivity of the standard deviation and covariance of securities in the portfolio
Beta measures the total risk of an investment
False, Beta measures assets systematic risk relative to market portfolio
Balanced funds typically invest in a total mix of both fixed income securities and bonds
False. fixed income securities and EQUITY securities
A closed-end investment company is an investment company where investors purchase their shares from an sell them back to the mutual fund itself
False. they trade on the stock exchange
what is the holding period return formula
HPR = (Selling price - purchase price +/- cash flows) / purchase price
What is the information ratio formula
IR = (actual return of the portfolio - return of the benchmark) / SD of the active return
Which index should Trina use as a benchmark when evaluating the performance of her XYZ mutual fund? Index 1 Index 2 Index 3 Index 4 Beta 0.75 / 1.1 / 1.25 / 1.5 r-squared 0.80 / 0.90 / 0.95 / 0.50
Index 3. Always select the index that explains "the most" of a funds return. 95% of the return, as measured by r-squared, for fund XYZ is explained by Index 3.
Sylvia has a two assets in her portfolio, asset A and asset B. Asset A has a standard deviation of 40% and asset B has a standard deviation of 20%. Fifty percent of her portfolio is invested in asset A and 50% is invested in asset B. The correlation for asset A and asset B is 0.90. What is the standard deviation of her portfolio?
Less than 30%.
What is the Net Asset Value formula?
Market Value of Investments Held - Liabilities / Shares Outstanding
Which of the following would be considered a systematic risk? A) Business Risk. B) Financial Risk. C) Company-specific Risk. D) Market Risk.
Market risk (others: Purchasing power risk, Reinvestment rate risk, Interest rate risk, Market risk, Exchange rate risk)
What is the price earnings approach formula
PE = Price per share / earnings per Share
What are characteristics of an open-end investment company?
Passively and actively managed Funds are traded directly with the fund not secondary markets
What are disadvantages to mutual funds?
Poor performance relative to investment benchmarks Liquidity constraints - the fund will not be fully invested which means having lower rates of return than what could be achieved if the fund was fully invested. This is because funds must maintain cash reserves that are univested Fees, loads, and expenses Built in capital gains
If the risk/return performance of a stock lies above the Security Market Line, the stock is said to have a:
Positive alpha.
How do you find the rate of return?
R = Rf + b(Rm -Rf)
Municipal bonds that are backed by the income from specific projects are known as:
Revenue
How do you find the risk premium?
Rm - Rf
Elvin's investment portfolio consists of several types of stocks, bonds, and money market instruments. The portfolio has an overall standard deviation of 12%, a beta of 1.06, and a total return for the year of 11%. Elvin is considering adding one of two alternative investments to his portfolio. Stock A has a standard deviation of 13%, a beta of 0.87, and a correlation coefficient with the portfolio of 0.6. Stock B has a standard deviation of 11%, a beta of 0.97, and a correlation coefficient of 0.95. Which stock should Elvin consider adding to his portfolio, and why?
Stock A because it has a lower correlation coefficient. In the process of adding new investments to a portfolio, the lowest correlation coefficient makes the best addition to a portfolio from a risk perspective. Closest to negative one (-1) is always best.
As a measure for risk, the Capital Market Line (CML) uses the:
The CML (Capital Market Line) uses standard deviation, while the SML (Security Market Line) uses the beta as its "risk" measurement.
Which method of portfolio evaluation allows the comparison of a portfolio manager's performance to the expected return, using Beta as the measure of risk?
The Jensen Model
default risk is
The risk that a company will be unable to meet its debt obligations
Coefficient of Determination is a measure of how much return is a result of the correlation to the market or what % of a security's return is a result of the market
True
Jensen's Alpha is an absolute risk adjusted performance measurement that indicates whether the fund manager exceeded expectations or underperformed
True
Mortgage REITs issue construction and mortgage loans with returns being in the form of interest on the loans.
True
Risks associated with bond investment include interest rate, reinvestment rate, purchasing power, default, and call risks.
True
The Capital Market Line specifies the relationship between risk and return in all possible portfolios
True
The expected return is a function of the riskiness of an investment and is the rate of return expected for an asset or investment portfolio.
True
Treynor ratio is a relative risk adjusted performance indicator that compares a Treynor ration for one fund to the Treynor ratio for another fund.
True
What are the characteristics of a municipal bond unit investment trust?
Unit investments do not make additions to investments once the trust has been structured. Shares are not bought or sold after structuring and the portfolio is self-liquidating.
Standard deviation measures
a security's performance relative to expectations of performance.
what is the EAR (Effective annual rate) and formula
an investment's annual rate of return when compounding occurs more than once per year. EAR = (1+ i/n) ^n - 1
what risk can be eliminated by diversifying your portfolio?
business, financial, country, default, executive, accounting, government/regulation risk
The investment planning process includes
creating an investment policy statement examines the eternal environment involves selecting a portfolio consistent with the investment policy statement includes the periodic monitoring, updating, and evaluating of investment performance.
the geometric return is known as the simple average return
face that is the arithmetic return/mean
the efficient frontier compares various securities based on their risk-return relationship
false. it compares various portfolios
Calls give the holder the right to see the underlying security at a certain price by a certain date
false. they give them the right to BUY
Characteristics of close-end funds
offer a limited # of shares; offer no price guarantees; do not always sell at net asset value
Characteristics of unit investment trust
passive management portfolios and self-liqudiating investments usually holding bonds until maturity. can own equities
In computing portfolio performance, the Sharpe index uses ______________, while the Treynor index uses ________________ for the risk measure.
standard deviation; beta. remember Sharpe and standard both have S
General obligation bonds are backed by
taxing power of the issuing body
financial risk is
the extent to which a firm uses debt or leverages borrowed funds to finance its assets
Alpha reveals
the level of over or underperformance of the security relative to market expectations.
r-squared measures
the percentage of return due to the market.
R squared measures
the percentage of return that is explained by changes in the market.
Beta reveals what and measures what?
the relationship of a given security's movement relative to that of the market. and measures systematic risk
Purchasing power is what? what type of risk is it?
the risk that inflation will cause prices to increase. systematic
How do you find next period's dividend?
this period's dividend X by (1 + dividend growth rate)
a normal distribution describes how returns are dispersed around the average return
true
The zero growth dividend model assumes that a security pays annual income or a dividend, each and every year, and the amount of the dividend does not change. What's the formula?
true V = D/r
Correlation coefficient and covariance measure
two stocks movements relative to one another.
