Investments Review - Exam 1
the distribution of assets across different classes to create a portfolio with the desired risk and return characteristics
the 3 different asset classes
Capital Gains Yield
the change in price during a period divided by the beginning price
a rating of a bond issuer's ability to repay interest and principal.
the gain or loss in dollars on and investement owned over a period of time.
income received for holding the investment expressed as a percentage of the beginning price.
an asset that can be sold quickly without a significant price concession.
Rate of Return
the return on an investment measured as a percentage of the originally invested sum that accounts for all cash flows and capital gains or losses; allows for comparison among different types of investments.
Total Market Capitalization
aka market cap
stock priced multiplied by the # of outstanding shares of a stock, or the total value of the company's stock
the amount and frequncy of fluctuations in the price of a security, commodity, or a market index within a specified time period.
What is the relationship between Bonds and Interest Rates?
It's an inverse relationship.
As interest rates lower the price of bonds increase.
As interest rates rise the price of bonds lowers.
Name 3 examples of Cash Investments
90 day trasure bills
money market accounts
negotiable certificat of deposits
Advantages of Cash Investments
Capital Preservation & Liquid Assets
Disadvantages of Case Investments
Low returns resulting from low risk attributes
A bond is a sort of ________
What is the time frame for the following:
Short Term Bonds
Intermedicate Term Bonds
Long Term Bonds
short term: 1-3 yrs
intermediate term: 3-6 yrs
long term: more than 6 yrs
Domestic bonds are categorized by _______ and/or ________.
Quality (AAA, AA, etc)
Maturity(1yr, 3yr, 6yr, etc)
Define Interest Rate Risk
Bond prices are inversely related to interest rates, so as the interest rates increase the price of bonds will decrease.
Define Downgrade Risk
(aka credit risk) The credit quality rating of a bond owned may decline.
Define Default Risk
The risk that the corporation will go bankrupt and not be able to pay back the "borrowed" money.
The _______ the credit quality, the ______ the interest rates the issuer will have to pay.
(can also be reversed)
What are two rating agencies discussed in class?
Moody's and S&P
In general, BBB and higher rated bonds are considered _____-_____(less likely to default), while lower-rated bonds are considered High Yield or ____ bonds and have a greater possibility of _______.
What is a general "rule of thumb" regarding asset allocation and how do you achieve it?
Diversification, by diversifying among different asset classes to reduce overall risk by investing in a variety of asset classes and balance risk & reward.
Diversification involves spreading your money within the different __________ ______ among different _____ classes.
What did the Asset Allocation Study - "Determinants of Portfolio Performance" done by Brinson, Hood, and Beebower in 1986 tell investors?
Portfolio perfomance is overwhelmingly influenced by asset allocation.
What are two options public companies have to raise money?
Sell bonds or issue additional shares of stock
What are twthe two primary objectives of Money Market(MMKT) funds?
Liquidity and Capital Preservation
Of these ratings, which ones would not be classified as Junk Bonds?
Aaa D A AA C B CC D Ba BBB Caa
What the relationship between the interest rate and the credit rating of a bond?
A short-term Bond typically matures in what time frame?
What are the two ways that Bonds are classified?
Quality and Maturity
What is the highest rating for a junk bond?
How does Diversified(TRS) classify bonds on DDOL Investment Mix Worksheet?
Short term bonds
Intermediate/Long term bonds
Risk that corporation goes bankrupt and cannot pay back money.
Risk that arises from the change in price of one currency agains another.
Risk that an investor experience loses due to fluctuation in securities prices.
Risk that a company's quality rating adversely changes.
Risk that purchasing power is lost.
Risk that an investment's returns suffers as a result of instability in a country.
Historically, stock have been the asset class with the highest return potential when compared with bonds and cash. This result is best achieved by what type of investor?
Long term investors
Define Income and Growth in relation to stocks.
Income is dividends and growth is capital gains.
What can stock build wealth?
The average return over a long period of time for stocks is over 10%.
When someone reference the market they are referring to what gauge?
Dow Jones Industrial Average
Companies listed on the NasdqComposite Index are considered to have high _______ potential.
Which index is most common replicated as a fund by many providers?
What two components are combined to form the Investment Behavior Box?
Market Capitalization and Investment Style
Draw and fill in the Investment Behavior box.
Large Cap Value |Large Cap Blend |Large Cap Growth
Mid Cap Value |Mid Cap Blend |Mid Cap Growth
Small Cap Value |Small Cap Blend |Small Cap Growth
Contries that have met certain criteria relating to economic size, wealth and quality, depth and breath of markets. (i.e. UK, France, Germany, Canada, Australia)
Companies whose stock prices are expected to increasee at a faster rate than the overall market.
Often companies that are not as well-known as larger companies.
Invests in U.S. companies and non U.S. companies.
Typically older, larger and more well-known companies.
Companies whose stock prices are considered low relative too the underlying value of the company.
Includes young companies that are just starting out.
A combination of companies whose stock prices are expected to increase rapidly and companies whose stock prices are considered "discounted".
Invests only in non U.S. companies.
Nations with social or business activity in the process of rapid growth and industrialization. (i.e. Brazil, Russia, India, China)
Value companies typically pay ____ dividends while Growth companies typically pay ____ dividends.
A mutual fund is an investment vehicle that _____ money of ______ investors.
Why are Mutual Funds redeemable?
The mutual fund family must purchase the mutual fund back at the same price.
What two types of asset classes are offered with Mutual Funds?
stocks & bonds
What are the advantages or benefits of Mutual funds?
Professional portfolio management
What are the disadvantages of Mutual funds?
Investors do not have control
What are two pieces of information found in the Prospectus?
fees & expenses
Mutual fund's portfolio consists of many securities and becasue of this investors are guaranteed against loss.
True or False
A PPT will see the expense ratio for a Mutual fund taken out of their account on an annual basis.
True or False
State the advantages of dollar cost averaging.
By contributing regular and equivalent amounts this causes the cost and purchase to balance and helps when market fluctuates.
State the advantages of Rebalancing.
Maintains the appropriate asset allocation by rebalancing periodically so that the portfolio does not become more or less aggressive than intended.