Risk and Return

Formula for calculating investment required for desired payout indefinitely:

Desired Payout(Expected Rate of Return / 12) = investment amount

The weighted average of the expected annual return of all portfolio components is known as the portfolios

Expected Annual Return

An analyst is charged with recommending whether a company should proceed with a project to expand its operations. The cost of capital for this project is 5%. What does the Internal Rate of Return (IRR) need to be for the project to likely be approved?

Over 5%

If the Net Present Value of a project is positive, what can you conclude about the likely outcome of the investment's return?

The return on the investment will exceed the Required Rate of Return.

Dollar-weighted return allows investors to see

a snapshot of their overall investments in relation to their financial goals.

Time-weighted return allows investors to compare

the performance of one manager to the performance of another manager.

An investor must decide if the current market price of a 20-year bond that pays semi-annual interest is fairly valued. To assess the value of the bond using discounted cash flow methodology, the investor must include which of the following in DCF calculations? [A]Coupon payments [B]Bond ratings [C]The relevant bond market index value [D]Common stock dividends

A - DCF calculations on bonds include the discount rate, coupon payments, and the principal payment at maturity.

Which of the following statements about discounted cash flow methods of evaluating investments is false? [A]Holding period return (HPR) is a discounted cash flow method.[B]Net Present Value (NPV) is a discounted cash flow method.[C]Internal Rate of Return (IRR) is a discounted cash flow method.[D]Discounted cash flow methods take into account the time value of money.

A - Holding period return is another way of saying Total Return and Total Return does not discount cash flow.

Which of the following calculations considers the inflows and outflows of cash in a portfolio? [A]Internal Rate of Return (IRR) [B]Standard Deviation [C]Future Value [D]Yield to Maturity

A - Internal Rate of Return is the calculation which considers inflow and outflow of cash in a portfolio.

What measures is used to compare a security's volatility to the market as a whole?

A stock's beta measures the security's volatility relative to the market as a whole or relative to a specific benchmark (such as the S&P 500).

The formula for alpha is:

Alpha = Realized Return - (Market Return x Beta)

Which of the following statements is MOST ACCURATE when it comes to Discounted Cash Flow (DCF) Methodology? [A]The reliability of the numbers found using DCF is always accurate in relation to actual market returns. [B]The reliability of the numbers found using DCF is entirely dependent upon the reliability of figures and discount rates input into DCF equations. [C]DCF Methodology is most frequently used by technical analysts. [D]DCF Methodology cannot be used reliably in the analysis of bonds.

B 0 When it comes to Discounted Cash Flow Methodology and figures like Net Present Value and Internal Rate of Return, the reliability of the numbers found using this methodology is entirely dependent upon the reliability and accuracy of the numbers used as input.

What type of measurement directly includes performance of a benchmark index?

Beta measures the market risk of a particular security relative to a specific benchmark, which is usually the S&P 500 Index.

Which pricing methodology, model, or theory uses the following formula? Expected Return = Risk-Free Rate of Return + [Beta x (Market Return - Risk-Free Rate of Return)]

CAPM evaluates the expected return of an asset or investment by setting it equal to the risk-free rate of return plus a risk premium adjusted with beta (via the beta)--assuming investors demand higher returns for greater risks.

When calculating a stock's value using the dividend discount model, an investor would discount the [A]average dividend amount paid over the past five years.[B]average dividend amount paid over the past five years. [C]the forecasted net income for the company. [D]the forecasted dividend for the company for a stated timeframe.

D - The dividend discount model (DDM) is a financial analysis tool that is used to determine the price of a common stock based on potential future dividends.