Formulas Portfolio Basics/Fixed income
Portfolio rebalancing
To reallocate, just shift funds from over performing assets to those that are underperforming
A barbell strategy is
Using only short tem and long term bonds (2 ends of the barbell)
The formula for Total Return is: A. Dividend yield plus growth divided by original investment B. Dividend yield divided by average investment value C. Ending investment value minus beginning investment value divided by number of years that the investment was held
A. Dividend yield plus growth divided by original investment
Exchange rate risk exists when making an investment in a: A. foreign security when the U.S. dollar strengthens B. foreign security when the U.S. dollar weakens
A. Foreign security when the US dollar strengthens
When looking at the Price/Book Value ratio of a corporation, "Book Value" is best described as: A. Net Intrinsic Value B. Net Accounting Value C. Net Market Value
B. Price/Book value ratio is best described as Net accounting Value. The Price/Book Value Ratio of a corporation is the company's Market Price (per share) / Common Stockholders' Equity (per share).
The portfolio return measure that calculates a mean rate of return from a probability distribution of all potential rates of return is: A. Total return B. Expected return C. Internal rate of return D. Holding period return
Expected return Expected return assigns a probability percentage to each possible investment outcome (yield); multiplies that percentage by the yield; and then adds up the total. The result is the average (mean) expected yield.
The cost of money is known as the?
Interest rate The higher the interest rate, the higher the cost of borrowing.
Dollar weighted Average return is the same as?
Internal rate of return.
Tactical asset allocation is a method of: A. stock selection B. market timing C. portfolio rebalancing D. portfolio diversification
Market timing
An investor believes that interest rates will be flat or falling into the future; and that prices may deflate. The MOST appropriate investment is: A. Long term U.S. Government bonds B. Real estate C. Gold D. Large Capitalization stocks
A. Long term U.S. Government bonds In periods of deflation, interest rates fall. A fixed income security's price will go up as interest rates fall. Furthermore, since prices are deflating, the fixed interest payments received are able to buy more and more over time. This is the best investment choice. In times of deflation, real estate prices fall; as do gold prices. Stock prices tend to fall as well, since companies are forced to cut their prices to maintain sales volume.
The effect on the prices of securities due to the "changing tastes, likes and dislikes" of investors is: A. market risk B. business risk C. regulatory risk D. opportunity cost
A. market risk
Which investment offers the BEST protection against inflation risk? A. Common stocks B. Tangible assets C. Long-Term Corporate Bonds D. Treasury Bonds
B. Tangible assets When there is steep inflation, the best investments are money market instruments and tangible assets (e.g., precious metals, real estate). Money market instruments do not suffer inflation risk and because interest rates are high when there is inflation, they give a nice rate of return
If tax rates fall, the value of municipal bonds will: A. increase B. decrease C. be unaffected D. become volatile
B. decrease If tax rates fall, the value of "tax-free" municipal bonds will decrease. Lower tax rates make tax-free interest income less valuable.
To find the equivalent tax-free yield, one would: A. multiply the taxable yield by the tax bracket B. multiply the taxable yield by (100% minus the tax bracket) C. divide the taxable yield by the tax bracket D. divide the taxable yield by (100% minus the tax bracket)
B. multiply the taxable yield by (100% minus the tax bracket)
The method for computing return as shown in a mutual fund performance chart is:
Time weighted average return. It shows the growth that would be achieved for a one time investment into that fund. In contrast dollar weighted average accounts for all cash flows in the fund and cash redemptions.
Current Liabilities
-Accounts payable -Wages payable -Taxes Payable -Interest Payable
Current assets
-Cash & marketable securities -Accounts Receivable -Inventory
The interest rate that is used as the "risk free" rate of return is the: A. Discount rate B. 90-day Treasury Bill rate C. 90-day Eurodollar rate D. Federal funds rate
90- day treasury bill Note- 1 year treasuries can also be used.
A customer holds a $250,000 portfolio invested solely in U.S. Government bonds. If the equities market were to rally because of the expectation of a growing economy, while market interest rates remained stable, the risk associated with holding the bond portfolio would be: A. opportunity cost B. default risk C. liquidity risk D. reinvestment risk
A. opportunity cost Opportunity cost" is the return on investment that is forgone by choosing an underperforming asset class. By staying invested in T-Bonds, the customer will earn a lower rate of return as compared to the return that can be achieved from investing in equities in a bull market. For example, if the customer earns 4% on the T-Bonds, but equities grow by 10% over the same period, the opportunity cost is 6%. But, of course, T-Bonds are safe - they have no default risk and also no liquidity risk.
The measure of incremental return earned for taking on incremental risk is: A. (Total Return - Risk Free Return) / Standard Deviation B. (Sum of All Cash Flows / # of Years) / Investment Amount C. (Annual Income + Annual Accretion - Annual Amortization) / Average Life D. (Total Return - Risk Free Return) / Duration
A. (Total Return - Risk Free Return) / Standard Deviation The Sharpe Ratio ((Total Return - Risk-Free Rate of Return) / Standard Deviation) measures incremental return earned for taking on incremental risk. Standard deviation is the statistical measure of risk, and what gives this question away is that only Choice A has "Standard Deviation" as part of the answer.
The "time value of money" is the: A. potential to earn interest on money which affects its relative value B. after tax return of an investment C. original principal amount plus any interest accrued during a specific time period D. incremental return of an investment over the return of a risk free security
A. potential to earn interest on money which affects its relative value
The formula for total return is?
Annual income + annual capital gain / Original investment
Net worth
Assets - Liabilities = Net worth
Assets Formula
Assets = Liabilities + Net worth
The formula for ROI is?
Average annual cash flow / Initial investment The average annual cash flow is $100 + $200 + $300 = $600/3 years = $200 per year. Since $1,000 was invested, the ROI is $200 / $1,000 = 20%.
Adding an asset class of foreign securities to a portfolio's structure: A. increases risk B. decreases risk C. has no effect on risk D. is a prohibited practice
B. Decreases risk Diversification across differing asset classes and investment vehicles, including foreign securities reduces risk.
The advantage of buying a foreign index fund as compared to direct investing in foreign stocks is that it: A. minimizes the risk of changing currency values B. is easier than individually investing in foreign stocks C. reduces tax liability when dividends are distributed D. minimizes the business risk of the investments
B. It is much easier than individually investing
The quantitative method of evaluating investments that use periodic cash inflows and outflows is A. inflation-adjusted return B. net present value C. total return D. expected return
B. Net present value Net present value uses compound interest to discount future cash inflows and outflows to their "net present value" - that is, their value in today's dollars
If Congress decides to lower income tax rates, municipal bond yields will:
B. rise
The lowest investment grade rating is: A. B B. BB C. BBB D. CCC
C. BBB
Equity investments fall out of favor with investors due to a period of steep economic decline and stock prices fall broadly. This is an example of: A. cyclical risk B. business risk C. market risk D. economic risk
C. Market Risk When investors like stocks, they buy them and stock prices rise. When investors don't like stocks, they either sell them or don't buy them and prices fall. This is market risk.
Net working capital formula
Current Assets - Current Liabilities = Net working cap
Current Ratio formula
Current Ratio = Current assets/Current liabilities
What is NOT a statistical measure? A. Arithmetic average B. Sharpe ratio C. Correlation coefficient D. Quick ratio
D. Quick ratio
All of the following are required to find the future value of an investment EXCEPT: A. projected growth rate B. investment time horizon C. present value of the investment D. anticipated interest rate volatility
D. anticipated interest rate volatility To find the future value of a sum, simply take the sum's present value and multiply it by (1 + Growth (or Interest) Rate) for each year of the investment's time horizon. For example, a 3 year investment of $100 at a 5% growth rate will grow to $100 x 1.05 x 1.05 x 1.05 = $115.76 at the end of 3 years.
All of the following terms relating to mortgage backed securities are synonymous EXCEPT: A. Call risk B. Contraction risk C. Prepayment risk D. Extension risk
D. extension risk Call risk, contraction risk, and pre payment risk all mean the same thing
What is "financial leverage?"
Debt as a percentage to equity Leverage is the amount of debt that a company has in its capital base.
Dividend Payout Ratio
Dividend Payout ratio= Common Dividends paid/Earnings for common
Dividend Yield Ratio
Dividend yield ratio = Annual income/market price
The rate of return that an individual investor earns over time in a mutual fund, including the timing of cash inflows and outflows, is the:
Dollar weighted average return. Because investors often chase pas performance, they will buy a fund too late and dollar weighted avg is often lower than time weighted return.
Dividend discount Model formula
Expected rate of return / RRR - Div growth rate
CAPM identifies the: I investments with the highest expected return II investment with the lowest expected return III investments with the highest standard deviation relative to the expected return IV investments with the lowest standard deviation relative to the expected return
I,IV Efficient Market Theory uses "CAPM" - the Capital Asset Pricing Model - to find the best investments in the market. The efficient set of investments are those that give the highest expected return relative to their risk-class.
When looking at the Price/Book Value ratio of a corporation, which statements are TRUE? I The numerator on the equation is based on liquidation value II The numerator in the equation is based on market value III The denominator in the equation is based on liquidation value IV The denominator in the equation is based on accounting value
II,IV Price/Book value of a corporation is the company's Market price/ common stock holders equity.
Total Return
Income (dividends for equities; interest from bonds) + Growth
The risk of tax law changes that may negatively affect securities held in a portfolio is called:
Legislative risk
Debt/Equity ratio formula
Long term debt/stock holders equity
Investment policy statement
Once portfolio composition is selected, this is documents in a statements called the investment policy.
Which ratio is the BEST measure of a company's solvency?
Quick Ratio Solvency is the same is liquidity. This ratio takes is the same as current Ratio but minus the inventory. This is more stringent and also called the acid test.
Quick Ratio Formula "acid test"
Quick Ratio = Current assets - inventory / Current Liabilities
A trader would buy a security if the expected rate of return was greater than the:
RRR required rate of return
Return on investment (ROI)
Sum of all cash flows from investment / # of years / Investment amount
What happens to the rate of return calculation on a non-callable bond if the rate of interest stays the same and the time intervals shorten? A. The rate of return increases B. The rate of return declines C. The rate of return is unchanged
The rate of return will increase
What is the trading characteristic of a Fixed UIT? B. They are securities which are redeemable with the sponsor C. The sponsor makes an OTC market in trust units D. The securities are illiquid and cannot be traded
The sponsor makes an otc market in trust units
RRR
is the min rate of return required to induce a person to make an investment.
Buy and hold is an appropriate strategy when investing in:
mutual funds Because mutual funds are managed by an investment adviser, they are designed to be a "buy and hold" investment. The fund manager is constantly deciding which securities positions to add to, or subtract from, the portfolio to maximize returns
An investment in Treasury Bills has: A. interest rate risk B. purchasing power risk C. credit risk D. no risk
no risk. This is because they are AAA and are very short term.
The "inside market" is
the high bid and low ask.
When constructing a bond portfolio, "laddering" the portfolio means that
the portfolio is structured with short term, intermediate term and long term investments.
