Midterm: Investment and Common Stocks

Topics: Investment, Capital asset pricing model, Stock market Pages: 10 (1851 words) Published: October 20, 2013
Midterm Study Guide – FISV6056
Professor Tim Howes
Fall 2012

1. Definition of investment:
A current commitment of $ for a period of time in order to derive future payments that will compensate for: The time the funds are committed
The expected rate of inflation
Uncertainty of future flow of funds

2. Geometric vs. arithmetic – understand and be able to calculate difference between the two. HPR (Holding Period Return) =
HPY (Holding Period Yield) = HPR – 1
GM = * = the product of all the annual HPRs
AM = /n * = the sum of all the annual HPYs

3. The basic trade-off in the investment process is: between the anticipated rate of return for a given investment instrument and its degree of risk.

4. The larger the variance of returns, everything else remaining constant, the greater the dispersion of expectations and the higher the risk.

5. The nominal risk free rate of interest is a function of: the real risk free rate and the rate of inflation.

6. The ability to sell an asset quickly at a fair price is associated with: Liquidity risk 7. What will happen to the security market line (SML) if the following events occur, other things constant: (1) inflation expectations increase, and (2) investors become more risk averse? Shift up and have a steeper slope

8. Modern portfolio theory assumes that most investors are risk: Risk averse

The common stock of XMen Inc. had the following historic prices.

Price of X-Tech

9. Refer to Exhibit. What was your arithmetic mean annual yield for the investment in XMen Industries. HPR = 90/50=1.8

10. Refer to Exhibit. What was your geometric mean annual yield for the investment in XMen? Annual HPY =

11. In constructing the portfolio, the manager should?
False) In constructing the portfolio, the manager should maximize the investo’s risk level.

12. Asset allocation concept/definition: It is the process of deciding how to distribute an investor’s wealth among different countries and asset classes for investment purposes.

13. What is insurance for?
False) Term life insurance provides both a death benefit and saving plan. The current outlay of money to guard against a potentially large future loss is commonly known as Insurance

1) Life Insurance: Providing death benefits and possibly, additional cash values. Term life and whole life insurance
Universal and variable life insurance
2) Non-life Insurance
Health insurance & Disability insurance
Automobile insurance & Home/rental insurance
3) Cash Reserve
To meet emergency needs
Equal to six months living expenses

14. What are the life cycle phases?
Accumulation phase: Early to middle years of working career
Consolidation phase: Past midpoint of careers. Earnings greater than expenses Spending/Gifting phase: Begins after retirement

15. What are the steps of the portfolio management process?
Develop a policy statement
Study current financial and economic conditions
Construct the portfolio
Monitor investor’s needs and market conditions
False) Sell all assets and reinvestment proceeds at least once a year.

16. The first step in the investment process is the development of a(n): Policy Statement

17. Which of the following is not considered to be an investment objective? a) Capital preservation
b) Capital appreciation
c) Current income
d) Total return
e) None of the above (all are considered investment objectives) Ans: E

18. The policy statement may include a Benchmark against which a portfolio's or portfolio manager's performance can be measured.

19. Once the portfolio is constructed, it must be continuously: Monitored

20. Which of the following statements is true?
Except for tax-exempt investors and tax-deferred accounts, annual tax payments increase investment returns. b.
The only way to maintain purchasing power over time is to invest in...
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