FP13-Investment Planning
Frank's current portfolio has an expected return of 10% and a standard deviation of 3%. Asset A has an expected return of 17%, a standard deviation of 6%, a beta of 1.3, and a correlation of -1.0 with Frank's portfolio. Asset B has an expected return of 18%, a standard deviation of 2%, a beta of 1.0, and a correlation of 0.03 with Frank's portfolio. Asset A's correlation with the S&P 500 is -0.72, and Asset B's correlation with the S&P 500 is 0.98. The S&P 500 is expected to increase 5% in the upcoming year. Based on the information provided, choose the CORRECT statement.
Asset B is highly correlated with the S&P 500, and its beta is 1.0, indicating an expected increase similar to that of the S&P 500. Asset B has a correlation with the S&P 500 of 0.98 and a correlation with Frank's portfolio of only 0.03. Thus, Frank's portfolio is not highly correlated with the S&P 500. Asset A's coefficient of determination with respect to the S&P 500 is -0.72 × -0.72 = 0.52, or 52%, indicating that beta is a poor measure of risk for Asset A.
One of the characteristics of real estate investment trusts (REITs) is that they generally
Most real estate investments are not readily marketable. Therefore, an investor in real estate can generally expect some difficulty in converting a property to cash if cash is needed quickly. However, a REIT securitizes real estate properties, thereby allowing REIT investors to easily sell REIT shares in the open market. REITs must flow through at least 90% their income to investors; therefore the investors and not the REITs pay tax on these distributions.
Which of the following are advantages of dividend reinvestment plans? The investor avoids having to account for the cost basis of shares. Discounts are available on stocks bought with dividends. They are a convenient and low-cost way of accumulating shares of stock. Reinvested dividends are tax-deferred income.
Option IV is an incorrect statement because dividends are not tax deferred. They are taxable (potentially at preferential rates) as income at the time they are received. Option I is incorrect because cost basis is needed to compute taxable income when the shares are sold in the future.
A call option with an exercise price of $105 is selling in the open market for $4.25 when the market price of the underlying stock is $102. What is the intrinsic value of this option?
The answer is $0. This call option is out-of-the-money; thus, its intrinsic value is zero.
Debbie owns a five-year AAA rated municipal bond with a coupon rate of 3.50% (paid semiannually). If the comparable yield for this quality bond is currently 2.75%, what is the present value of her bond?
The answer is $1,034.81. The present value of her bond is $1,034.81, calculated as follows: N = 10 (5 × 2); I/YR = 1.375 (2.75% ÷ 2); PMT = 17.50 (3.50% × 1,000 ÷ 2); FV = 1,000; solve for PV = 1,034.81, or $1,034.81.
Ronald owns a Hydro Industries 7% convertible bond. The bond is convertible into 30 shares of Hydro Industries, which is currently trading at $43 per share. The investment value of the bond is $980, and the current market price of the bond is $1,433. What is the conversion value of Larry's bond?
The answer is $1,290. Conversion value = conversion ratio × market price of common stock, or 30 × $43 = $1,290.
Chuck owns a convertible bond that has a conversion price of $40 per share and a coupon of 5.5%. Interest is paid semiannually. The current market price of the stock is $41 per share. The investment value of the bond is $940, and the bond currently sells for a market price of $1,120. What is the downside risk of this bond?
The answer is $180. The downside risk of a convertible bond is the dollar or percentage decline from the current market price of the convertible bond to the investment value of the bond: $1,120 - $940 = $180.
Juan has an investment portfolio consisting of 30% MIJ stock with a beta of 1.76, 40% ABC stock with a beta of 0.98, and 30% LFM stock with a beta of 2.09. What is the weighted beta for Juan's portfolio?
The answer is 1.547. The portfolio's weighted beta is calculated as follows: (0.30 × 1.76) + (0.40 × 0.98) + (0.30 × 2.09) = (0.528 + 0.392 + 0.627) = 1.547
Based on the following information, which of the following is the expected rate of return for Softco Corporation? Stock's beta0.80 Forecasted market rate of return15% Risk-free rate of return6.5%
The answer is 13.30%. Using the capital asset pricing model, the expected rate of return is 13.30% [6.5% + (15% - 6.5%)0.80].
Rex, Ltd., has assets of $400 million and liabilities of $200 million. Last year, the company earned $45 million and paid out $15 million in dividends. Using the formula g = return on equity × retention rate, what is the growth rate for Rex, Ltd.?
The answer is 15.0%. $400,000,000 - $200,000,000 = $200,000,000 of equity; $45,000,000 earnings ÷ $200,000,000 equity = 0.225, or 22.50% ROE $45,000,000 earnings - $15,000,000 paid out in dividends = $30,000,000 of retained earnings; $30,000,000 ÷ $45,000,000 = 0.6667 retention rate g = ROE × RR
During the past year, the stock market had a return of 8%, while the risk-free rate of return was 3%. Fund B had a realized return of 12%, a standard deviation of 15, and a beta of 1.20. Jensen's alpha for the fund is
The answer is 3.00%. Alpha = 12% - [3% + (8% - 3%)1.20] = 12% - 9% = 3%
Assume the nominal return on 30-year U.S. T-bonds is 6.5%, and the inflation rate is 1.75%. Which of the following is the real rate of return on the T-bonds?
The answer is 4.67%. The real rate of return is 4.67%, calculated as follows: {[(1 + 0.065) ÷ (1 + 0.0175)] -1} × 100 = 0.0467, or 4.67%.
Ashley purchased a five-year corporate bond with a 6.25% coupon paid semiannually. The bond is callable after three years for a price of $1,025. Assuming the bond is currently trading at $1,045, calculate its yield to call.
The answer is 5.38%. Yield to call: PV = -1,045, FV = 1,025, PMT = 31.25 (6.25% × 1,000 ÷ 2), N = 6 (3 × 2), solve for I/YR = 2.69 × 2 = 5.38%. The yield to call is 5.38%, which is lower than the coupon rate of 6.25%, further validating that the bond is trading at a premium.
Five years ago, XYZ Company issued a 20-year bond with a 4.75% coupon paid semiannually. The bond may be called at 104% of par, 10 years after issue. Assuming the bond is currently selling for $990, calculate the bond's yield to call.
The answer is 5.68%. The bond's yield to call is calculated as follows: Note: XYZ Company has the option to call the issue in five years. PV = (990) N = 10 (5 × 2) PMT = 23.75 (47.50 ÷ 2) FV = 1,040 (1,000 × 1.04) Solve for I/YR = 2.84 × 2 = 5.68%
If the market interest rate is 7.27%, the current yield of a bond with a 9% coupon, $1,000 par, selling for $1,120, and maturing in 10 years is
The answer is 8.04%. The current yield is the coupon payment divided by the market price of the bond: ($90 ÷ $1,120) x 100 = 8.04%.
Angela purchased a corporate bond currently selling for $925 in the secondary market. The bond has a coupon rate of 7.75% and matures in 12 years. Which of the following is the yield to maturity on this bond?
The answer is 8.77%. The yield to maturity on this bond is as follows: PV = -925 PMT = 38.75 (7.75% × 1,000 ÷ 2) FV = 1,000 N = 24 (12 × 2) Solve for I/YR = 4.387 × 2 = 8.77%
Which of the following statements regarding the use of economic conditions in an efficient market are CORRECT? If investors believe that economic conditions will continue to be positive, stock prices will rise. Currently available information about future economic conditions can be used to forecast future stock prices. A person using the principles of the arbitrage pricing theory in an efficient market can correctly forecast future security prices.
The answer is I only. In an efficient market, all known information regarding the present and the future is already discounted into securities prices. Nothing can be gained by making investment decisions based solely upon the available information. According to the weak form of the efficient market hypothesis (EMH), a person who uses fundamental analysis to forecast the future by doing any top-down approach may be right some of the time, but not all of the time.
Select the CORRECT statements regarding the taxation of futures contracts. Gains and losses on futures contracts are considered capital gains or losses regardless of the tax nature of the underlying asset. At the end of the year, net gains or losses on futures contracts are treated as 60% short-term and 40% long-term.
The answer is I only. Statement II is incorrect. At the end of the year, net gains on futures contracts are treated as 60% long-term and 40% short-term.
Steve and Haley, ages 48 and 45 respectively, invest in large-cap stocks, international stock mutual funds, and rental real estate. They consider themselves moderately aggressive investors. Their investment portfolio is subject to which of these investment risks? Investment manager risk Financial risk Exchange rate risk Default risk
The answer is I, II, and III. Their investment portfolio is subject to all of these risks except default risk. Investment manager risk is associated with the skills and philosophy of their mutual fund portfolio managers. Financial risk is the risk that a company's financial structure may negatively affect the value of an equity investment. By holding investments in international stock mutual funds, they are subject to exchange rate risk.
DIV Corporation's current market value is $50 million, with 2 million shares outstanding. The board of directors votes to pay a stock dividend of 10%. Which of the following statements is CORRECT? DIV Corporation's overall market value will be $55 million following the stock dividend. DIV Corporation's per-share stock price will be $22.73 following the stock dividend. DIV Corporation's per-share stock price will be adjusted upward following the stock dividend. DIV Corporation will have 2.2 million shares outstanding following the stock dividend.
The answer is II and IV. DIV Corporation's overall market value will remain unchanged at $50 million, with 2.2 million shares outstanding. The stock price per share will be adjusted downward to $22.73 ($50,000,000 ÷ 2,200,000).
Choose which of these statements regarding Treasury notes or Treasury bonds is CORRECT. Both Treasury notes and Treasury bonds have a maturity date of no more than 10 years. Treasury notes are issued at their stated par value. Treasury bonds are issued at a discount. The actual price of a newly issued Treasury note or Treasury bond is determined at auction.
The answer is II and IV. Treasury notes and Treasury bonds are both issued at their stated par value with the actual price of new issues determined at auction. Treasury notes have a maturity date of no more than 10 years; Treasury bonds have a maturity date of greater than 10 years.
Identify which of the following statements regarding U.S. Treasury bills is CORRECT. They are sold at face value. Because T-bills have a maturity date of 52 weeks or less, they are not subject to the original issue discount taxation rules that apply to other bonds.
The answer is II only. U.S. Treasury bills are purchased in minimum denominations of $100 and are sold at a discount from face value.
Which of these are advantages of dividend reinvestment plans? Reinvested dividends are tax deferred. They help firms raise new capital. They give investors a systematic way to accumulate capital. Companies build goodwill by offering these plans to shareholders.
The answer is II, III, and IV. Dividends are taxed regardless of whether they are reinvested. DRIPs allow firms to raise new capital if they issue new shares under the program. DRIPs enable investors to systematically invest in a security on a dollar-cost-averaging program. Companies find that their investors become more loyal when they invest through a dividend reinvestment plan
Which one of the following performance measures is an absolute measurement as opposed to a relative measure?
The answer is Jensen's alpha. Jensen's alpha is an absolute measure (can be used on its own), whereas Sharpe, Treynor, and price-to-sales are relative measures.
Brian and Kellie purchased savings bonds for their children's future college education expenses. What series of bonds did they choose if the savings bonds are inflation-indexed and may be used to pay for higher education costs on a tax-favored basis?
The answer is Series I. Series I savings bonds are an inflation-indexed debt security issued by the U.S. government. The accrued interest on Series I bonds may be completely excluded from income tax if the bond proceeds are used to pay for qualified higher education costs.
Which of these statements is correct when the yield curve is upward sloping for a 3-month to 5-year range and is flat for a 5-to 30-year range?
The answer is a 30-year bond will have a similar yield and a similar interest rate risk as those of a 20-year bond. Interest rate risk is a function of the maturity of a bond. Longer-term bonds have higher interest rate risk as they exhibit more volatility to changes in interest rates.
An investor who carefully chooses a bond that has a duration that matches the investor's required holding period is practicing
The answer is an immunization strategy. An investor who chooses a bond that has a duration equal to the investor's desired holding period is practicing immunization. Because a bond's reinvestment rate risk and price risk tend to 'offset' each other, immunization can be used to cancel out interest rate risk.
An investor wants all of her bonds to mature in 10 years. She buys two bonds immediately, two bonds two years from now, and two more bonds four years from now. As a result, the bonds purchased immediately have a maturity of 10 years, the bonds purchased two years later have a maturity of eight years, and the bonds purchased four years later have a maturity of six years. Select the type of bond strategy she is using for her portfolio. A)
The answer is bond bullet. When using the bond bullet strategy, an investor purchases a series of bonds with similar maturities focused on one point in time. This strategy may be an effective method in matching duration to the cash needs of an investor.
You currently own 100 shares of a stock that has increased in value from $15 to $35 per share. You do not want to sell the stock but want to protect yourself against a large downturn in the market. Which of the following is an effective action on your part?
The answer is buy a $30 put option on the stock. The purchase of a put option on the stock will provide downside protection without limiting the investor's upside.
Daniel has several investment company products within his retirement portfolio. One of these investments trades on an exchange, may trade at a premium or discount to its net asset value, and has a fixed capital structure. These features illustrate which of these investments?
The answer is closed-end investment company. A closed-end investment company (closed-end fund) is a type of company whose shares trade in the secondary market.
An investor considering investing in a particular security is more concerned with
The answer is expected return. Expected return is what determines an asset's value. The expected return must be greater than the investor's required return to induce the investor to make the investment. Historical return is only important to the extent that it may impact future return.
According to Markowitz, an investor's optimal portfolio is determined when the investor's
The answer is highest indifference curve is tangent to the efficient frontier. The optimal portfolio for an investor is determined as the point when the investor's highest indifference curve is tangent to the efficient frontier.
An investor who creates a long straddle most likely expects the underlying security to
The answer is increase in volatility. Long straddle profits if the volatility of the underlying security increases more than is reflected in current option prices, which would increase the value of both the call option and the put option. Either a significant increase or a significant decrease in the underlying price would benefit the holder of a long straddle. If the investor was expecting only an increase in price, long call would be a better choice of investment (as the premium paid on the long put would be a waste).
Portfolio immunization is designed to mitigate which type of risk?
The answer is interest rate risk. A bond portfolio is immunized when the duration of the portfolio is equal to the time horizon of the investor, thereby mitigating both interest rate risk and reinvestment rate risk.
he following combinations will result in a bond with the greatest price volatility?
The answer is low coupon and long maturity. Price volatility is measured by duration. Duration is inversely related to the bond's coupon rate and directly related to the bond's term to maturity.
Which of these investments is advisable during periods of rising interest rates?
The answer is money market mutual funds. Short-term money market instruments are attractive during periods of rising interest rates. U.S. Treasury bills and negotiable CDs are also advisable. These investments do not experience significant erosion in value in response to increasing interest rates.
If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors in the higher tax brackets, ABC is a(n)
The answer is municipal bond fund. Municipal bonds are considered second only to U.S. government securities in terms of safety. Furthermore, whenever you see a question about an investor in a high tax bracket, always look for the answer choice with municipal bonds; the tax-free income is the key.
A beta coefficient of 1.3 indicates that a stock
The answer is that the stock is more volatile than the market. A beta that is higher than 1.0 indicates that the stock's volatility and risk are higher than that of the market.
If an investment has a correlation coefficient of 0.80 with the market, which of the following performance measures is the best measure of risk
The answer is the Sharpe ratio. Because the correlation coefficient is 0.80, the coefficient of determination (R squared) is 0.64. Therefore, only 64% of the returns from the investment can be explained by the market (i.e., systematic risk represents 64%). Beta only measures systematic risk, which means that 36% of outcomes will not be captured by beta. Thus, Treynor and Jensen are not appropriate because they use beta.
Wendy traveled to France and converted U.S. dollars into euros when the exchange rate was USD 1.42 for each euro. When Wendy returned from France, she had some euros left over and converted them back into U.S. dollars. At that time, one dollar was worth .77 euros. Wendy wants to know if she made or lost money on the euros she exchanged back into U.S. dollars. You inform her that
The answer is the dollar has strengthened, and she lost money. When she returned, she would have preferred the euro to strengthen against the dollar; that way, she could have received more dollars.
The segment of the security trading marketplace that allows for institutional investors to trade with other institutional investors outside of normal trading hours is known as
The answer is the fourth market. The segment of the security trading marketplace that allows for institutional investors to trade with other institutional investors outside of normal trading hours is known as the fourth market.
If a U.S. resident buys a Japanese bank stock that subsequently rises in price, while the Japanese currency strengthens relative to the U.S. currency, which of these situations is most likely to occur when the investor sells the stock at a gain?
The answer is the net gain will be increased due to the currency change. Strong Japanese currency means a weak U.S. currency, which increases the net gain on the transaction. LO 5.5.2
To measure the performance of an investment manager, which of the following methods of computing returns should be used?
The answer is time-weighted return. The time-weighted return should be used to measure the performance of an investment manager.
Diversification reduces
The answer is unsystematic risk. Unsystematic risk can be diversified away by investing in approximately 10-15 large company stocks in different industries and 25-30 small company stocks in different industries. Systematic risk cannot be reduced by diversification.
The issuer-specific component of the variability in a stock's total return that is unrelated to overall market variability is known as
The answer is unsystematic risk. Unsystematic risk is unique to a single security, business, industry, or country and may be reduced by diversification.
alpha formula
(total portfolio return - risk-free rate) - (portfolio beta x [market return - risk-free rate])
STD DEV OF A FUND IN CALCULATOR
2ND 7 ENTER YIEDS OVER YEARS IN X1,X2,X3... 2ND 8 DOWN TO sX
Covariance
A measure of linear association between two variables. CORR. COEF(P) * STDDEV1*STDDEV2
coefficient of variation
A measure of relative variability computed by dividing the standard deviation by the mean and multiplying by 100.
Which type of hedge should a wheat farmer select?
A short hedge—sell wheat futures contracts as a hedge against a decline in the price of wheat.
To design a market capitalization weighted index, which of the following approaches should be used?
A stock with a market capitalization value of $50 million will have 10 times the impact of a stock with a market capitalization value of a $5 million company.
Treynor Ratio
Tp = rp - rf / Bp - provided on formula sheet -Uses the arithmetic averages for portfolio and risk-free rates -AKA reward / volatility ratio (fluctuations around the market mean or average) - Higher is better -Use is R2 is greater than .70 -Uses beta (systematic risk only)
Wash Sale
Selling a security at a loss for tax purposes and, within 30 days before or after, purchasing the same or a substantially identical security. The IRS disallows the claimed loss.If this event occurs, the basis of the new stock or securities will include the unrecovered portion of the basis of the formerly held stock or securities.
Yankee bonds
U.S. dollar-denominated debt securities issued by foreign governments or corporations and traded in U.S. securities markets. are not subject to exchange rate risk and may be effective diversifiers within a portfolio
bond ladder
Bonds are purchased with different maturity dates. As a bond matures, a new long term bond is purchased. A strategy where investors divide their investment dollars among bonds that mature at regular intervals in order to balance risk and return
UNSYSTEMATIC RISK
Business , financial, debt equity, default, political, tax, investment mgmt, liquidity, marketability, credit and country risk
BVMV
Buying stocks with high book value to market value
Jenson (alpha) Ratio
Expresses risk of diversified portfolios Systematic risk only - volatility Look for high R squared, and look for highest positive alpha or highest treynor
You are about to recommend the purchase of an additional mutual fund to add to a client's portfolio, with the objective of reducing the portfolio's total risk. Upon analysis of several funds, you determine that the standard deviations of the current portfolio and each of the potential new funds are equal, but that the correlation coefficients of these funds with the current portfolio are as shown in the answer choices below. Which of the funds should you recommend?
Fund D: correlation coefficient = -0.08 According to modern portfolio theory, total portfolio risk, as measured by standard deviation, is lowered by combining securities in a portfolio so that individual securities have negative (or low positive) correlations between each other's rates of return.
Aidan purchased 100 shares of MNO stock on margin three years ago when the stock price was $32 per share. Today MNO stock is selling for $42 per share. Over the past three years, MNO has paid total dividends of $1 per share. Assuming Aidan's broker requires an initial margin of 50% and charges 6% annual margin interest, calculate his holding period return for the three years.
HPR = [(ending value - beginning value) +/- cash flows] ÷ initial investment = {[($4,200 - $3,200) + $100] - [6% × 50% × $3,200 × 3]} ÷ $1,600 = 50.75%.
Which of the following statements about preferred stock are true? Its market fluctuations are greater than the long-term bond market fluctuations. It is more risky than debt. Its dividends are recomputed yearly. It has no interest rate risk because it is a stock and not a bond.
I and II Because preferred stock is perpetual, without a fixed maturity date, it tends to fluctuate more than bonds. Preferred stock is also more risky than debt because in the event of bankruptcy, stockholders are paid after bondholders. Preferred dividends are fixed and not changed after being set by the issuing corporation. Preferred stock does have interest rate risk because of its fixed dividend.
An investor who makes the assumptions that security prices reflect all available information, that organized exchanges can execute trades rapidly, that security prices change rapidly in response to new information, and that security prices follow random patterns is a believer in
In its purest form, the efficient market hypothesis suggests that investors are unable to outperform the market on a consistent basis. The fundamental assumption of the theory is that current stock prices reflect all available information for a company and that prices rapidly (or immediately) adjust to reflect any new information.
When a bond is trading at a premium the yield is ___ than the coupon rate
LESS THAN.
Which of the following combinations of risks is associated with art and other collectibles?
Liquidity risk and market risk
Intrinsic value of a call option
Market Price of Underlying Asset - Exercise Price of Option
Yadira owns 20 stocks across several sectors of the economy that are part of the S&P 500 index, typically known as "blue chip" stocks. Her investments are exposed to which of the following risks?
Market risk
BOND DURATION
Measures the sensitivity of a bond's price to interest rate movements. The approximate percentage the value of the bond will fall for each 1% increase in market interest rate.Duration is the average weighted time it takes the bondholder to receive the interest and principal payments from a bond in present value dollar
Unit Investment Trusts
Money pooled from many investors is invested in portfolio fixed for life of fund. SOLD AT NAV.+COMM. , LIQUIDATED @ MATURITY, NOT TRADED ON EXCHANGES
how do you measure systematic risk
R squared ( correlation coefficient squared)
coefficient of determination
R^2 measures the proportion of total variation in the response variable that is explained by the least-squares regression line.
The anticipation of inflation suggests that the investor should
Real assets, which includes gold and real estate, should do well in inflationary times. Bonds do poorly because interest rates will increase to fight inflation, and increases in interest rates cause bond prices to fall.
Sharpe Ratio
Reward-to-volatility ratio; ratio of portfolio excess return to standard deviation. measures excess return per unit of risk -the larger the better
Which of the following are implications of the weak form of the efficient market hypothesis (EMH)? Stock prices fully reflect all historical price behavior. Consistently superior performance is common. Fundamental analysis may produce superior investment performance. Fundamental and technical analysis can produce superior investment performance.
Technical analysis is not considered valuable under any of the forms of the EMH; fundamental analysis is considered valuable under the weak form only.
CAL stock has a current annual dividend of $1.25 that has been growing at a constant rate of 4.5% per year. Assuming the stock is currently selling for $40, and your required rate of return is 7.5%, should you buy the stock at today's price?
The answer is yes, because the stock is undervalued. On the basis of the constant growth dividend discount model, the intrinsic value of CAL stock is $43.54, calculated as follows: V = [$1.25 × (1 + 0.045)] ÷ (0.075 - 0.045) V = $1.30625 ÷ 0.03 V = $43.54
Net Operating Income (NOI)
The income projected for an income-producing property after deducting losses for vacancy and collection and operating expenses. The key to this problem is to recognize that interest expense and depreciation are not included in expenses when calculating NOI.
VALUE OF APARTMENT RENTALS USING NOI & GIVEN CAP RATE FORMULA
Value = NOI ÷ capitalization rate = $364,080 ÷ 0.09 = $4,045,333
open-end investment company
a firm that can issue an unlimited number of shares that it buys and sells at a price based on the current market value of the securities it owns; also called a mutual fund
As related to portfolios, indifference curves depict
an individual's preference for level of risk and expected return. Indifference curves can never intersect and the higher the indifference curve, the more satisfied the investor. For risk-averse investors, the curve will tend to be very steep, indicating that a relatively large amount of additional return is necessary to entice the investor to assume the additional risk of a potential inv
January Effect
buy in december Tendency for small stocks to have large returns in January.
weak form efficiency
current prices reflect all information derived from trading -includes current and past stock prices and trading volume
Downside risk
difference between the market price and the floor value
Close-End Investment Company
investment company with a fixed number of outstanding shares that are bought and sold through secondary markets
capital asset pricing model (CAPM) shows a
linear relationship between risk and return.
SYSTEMATIC RISK
measured by beta, nondiversifiable,ex. purchasing power, reinvestment, interest rate, market, exchange rate risk
arbitrage pricing theory (APT) suggests that the relationship between a stock's risk and return is
not linear
the most popular form of investment asset for small or individual investors.
open-end investment company
The value for a preferred stock is its dividend divided by
prevailing interest rates.preferred stock's value is based on prevailing interest rates.
Sharpe Ratio Formula
return of portfolio - risk free return --------------------------------------- standard deviation
Systematic Risk
risk of breakdown in the financial system, particularly due to spillover effects from one market into others
commercial paper
short-term unsecured debt issued by large corporations
Size effect:
small-cap companies have outperformed large-cap companies on a risk-adjusted basis
Risk Adjusted Basis calculation (Coff of variation)
std dev / expected return
Liquidity
the ease with which an asset can be converted into the economy's medium of exchange
Technical analysts believe the trend in security prices is determined solely by
the interaction of economic supply and demand.
Capital Market Line
the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio allows investors to see that the risk and the potential return of various asset classes do increase along a relatively straight line.
Two months ago, an investor purchased a call option trading for $3 with an exercise price of $30. The stock's market price was $32. What was the time value of the call option? A)
time value = option premium − intrinsic value = option premium − (stock's market price − exercise price) = $3 − ($32 − $30) = $1
Gold mining stocks are approximately how volatile in comparison to U.S. large-cap stocks?
twice
Lending Portfolio
type of portfolio containing risk-free and risky Assets (assets not liablities)As the investor proceeds back along the CML toward the risk-free rate of return, he is becoming conservative in making investments and is investing more in risk-free government securities
standard deviation of a portfolio formula:
σρ=√(0.65)2(18)2+(0.35)2(23)2+2(0.65)(0.35)(6)
