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