SIE Chapter 20

measures the sensitivity of a bond or portfolio of bonds to a given change in interest rates

Duration

What two approaches to asset allocation are considered to be efficient?

the buy-and-hold and systematic rebalancing approaches assume that markets are efficient.

What is tactical asset allocation?

trying to take advantage of temporary deviations from strategic allocation based on short-term capital market expectations

risk based on circumstances that are unique to a specific security and may be managed by diversifying the assets in a portfolio

unsystematic risk

based on its beta, a stock is expected to earn 5%. If the stock actually earned 8%, what is the alpha?

3%

What type of investment risk will a company experience as the result of diminished demand for its largest product in the marketplace? A. Business risk B. Credit risk C. Call risk D. Liquidity risk

A. Business risk

The risk that an issuer will default and not make interest payments to its bondholders is referred to as: A. Credit risk B. Call risk C. Liquidity risk D. Business risk

A. Credit risk

Diversification may reduce all of the following types of risk, EXCEPT: A. Market risk B. Liquidity risk C. Business risk D. Credit risk

A. Market risk

What is strategic asset allocation?

Allocating assets into an optimal portfolio based on a client's risk tolerance and investment objectives

Each of the following portfolio strategies follow an efficient market approach, EXCEPT: A. Indexing B. Buy and hold C. Sector rotation D. Portfolio rebalancing

C. Sector rotation

In a declining market, which of the following tends to outperform the market? A. A stock with a beta of 1 B. A stock with a beta of .5 C. A stock with a beta of 1.5 D. stocks will not outperform the market

B. A stock with a beta of .5

Which type of portfolio strategy generally avoids both ongoing transaction costs and tax consequences, but can result in the portfolio drifting over time - and failing to match the objectives and risk profile of the investor? A. Dollar cost averaging B. Buy and hold C. Sector rotation D. Portfolio rebalancing

B. Buy and hold A buy and hold approach will generally avoid both transaction costs and tax consequences since very few (if any) changes are made after the portfolio is established. However, as a result, the portfolio may drift from its original objectives due to changes in the market or the changes which impact the issuers of those securities.

A company with a high alpha is expected to: A. Perform worse than other investments B. Perform better than other investments C. Perform approximately the same as other investments D Alpha is not a measure of specific company performance

B. Perform better than other investments Alpha is a measure for determining how a specific company is performing as compared to its expected return. A company with a high alpha will be performing better than expected (relative to other investments that are used for the comparison).

Which of the following is MOST susceptible to inflation-rate risk? A. Short-term bonds with high coupons B. Short-term bonds with low coupons C. Long-term bonds with low coupons D. Long-term bonds with high coupons

C. Long-term bonds with low coupons Long-term bonds are more susceptible to inflation-rate risk than short-term bonds. In addition, long-term bonds with low coupons are subject to greater inflation-rate risk than similar bonds with high coupons.

the risk that an investor could lose all or a portion of her investment

Capital Risk

the possibility that foreign investments will be worth less in the future due to changes in exchange rates

Currency (Exchange-Rate) Risk

allow investors to take a position based on the value of a foreign currency as it compares to the U.S. dollar

Currency options

A U.S. company is purchasing goods from a German company and will ultimately need to pay for the goods in euros. In order to protect itself from a stronger euro, the U.S. company may: A. Sell euro puts B. Sell euro calls C. Buy euro puts D. Buy euro calls

D. Buy euro calls The U.S. company may utilize a hedging strategy, which is designed to protect it against a change in the euros value. In this example, the U.S. company is concerned about the rising value of the euro since it's required to pay for goods in euros. To protect itself, the company could purchase euro calls, which locks in the price at which the company will pay for euros. If the euro strengthens, the value of the euro calls will increase and be able to offset the cost of goods. Although selling euro puts will offer some protection, the amount of protection is limited to the premium received on their sale.

As the result of a change in the FDA's review standards, a pharmaceutical company has been denied approval for a new drug and has seen a significant decline in value. This is the result of: A. Legislative risk B. Political risk C. Business risk D. Regulatory risk

D. Regulatory risk

What is dollar cost averaging?

DCA is the act of buying the same dollar amount of a stock each month. This allows you to buy more shares when the stock's price is low and fewer shares when it is high. It can often be more successful than buying the same number of shares each month

essentially involves the client buying insurance to guard against the market moving against them

Hedging

involves either maintaining investments in companies that are part of major stock (or bond) indexes or investing in index funds directly

Indexing

the risk that new laws may have a negative impact on an investment's value

Legislative Risk

risk from the day-to-day potential for an investor to experience losses due to market fluctuations in securities' prices

Market risk

the possibility that the return of a selected investment is lower than another investment that was not chosen

Opportunity (Cost) Risk

the risk that foreign investors will lose money due to changes that occur in a country's government or regulatory environment

Political Risk

an investment strategy that involves moving money from one industry or sector to another in an attempt to beat the market

Sector rotation

risk caused by factors that affect the prices of virtually all securities

Systematic risk

True or False: since all bonds have some exposure to interest-rate risk, it's considered systematic or non-diversifiable

True

measures the risk that's specific to a particular company

alpha

The amount of non-diversifiable risk associated with a particular portfolio or asset

beta

the risk that an issuer may decide to pay back its bondholders prior to maturity

call risk