Investments Review - Exam 1

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1

Asset Allocation

the distribution of assets across different classes to create a portfolio with the desired risk and return characteristics

2

the 3 different asset classes

stocks
bonds
cash

3

Capital Gains Yield

the change in price during a period divided by the beginning price

4

Credit Quality

a rating of a bond issuer's ability to repay interest and principal.

5

Dollar Return

the gain or loss in dollars on and investement owned over a period of time.

6

Income Yield

income received for holding the investment expressed as a percentage of the beginning price.

7

Liquidity

an asset that can be sold quickly without a significant price concession.

8

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.

9

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

10

Volatility

the amount and frequncy of fluctuations in the price of a security, commodity, or a market index within a specified time period.

11

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.

12

Name 3 examples of Cash Investments

90 day trasure bills
money market accounts
negotiable certificat of deposits

13

Advantages of Cash Investments

Capital Preservation & Liquid Assets

14

Disadvantages of Case Investments

Low returns resulting from low risk attributes

15

A bond is a sort of ________

Loan

16

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

17

Domestic bonds are categorized by _______ and/or ________.

Quality (AAA, AA, etc)
Maturity(1yr, 3yr, 6yr, etc)

18

Define Interest Rate Risk

Bond prices are inversely related to interest rates, so as the interest rates increase the price of bonds will decrease.

19

Define Downgrade Risk

(aka credit risk) The credit quality rating of a bond owned may decline.

20

Define Default Risk

The risk that the corporation will go bankrupt and not be able to pay back the "borrowed" money.

21

The _______ the credit quality, the ______ the interest rates the issuer will have to pay.

Lower
Higher
(can also be reversed)

22

What are two rating agencies discussed in class?

Moody's and S&P

23

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 _______.

Investment Grade
junk
default

24

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.

25

Diversification involves spreading your money within the different __________ ______ among different _____ classes.

investment
styles
asset

26

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.

27

What are two options public companies have to raise money?

Sell bonds or issue additional shares of stock

28

What are twthe two primary objectives of Money Market(MMKT) funds?

Liquidity and Capital Preservation

29

Of these ratings, which ones would not be classified as Junk Bonds?

Aaa D A AA C B CC D Ba BBB Caa

Aaa
A
AA
BBB

30

What the relationship between the interest rate and the credit rating of a bond?

Inverse

31

A short-term Bond typically matures in what time frame?

3 years

32

What are the two ways that Bonds are classified?

Quality and Maturity

33

What is the highest rating for a junk bond?

BB/Ba

34

How does Diversified(TRS) classify bonds on DDOL Investment Mix Worksheet?

Short term bonds
Intermediate/Long term bonds
Aggressive bonds

35

Default Risk

Risk that corporation goes bankrupt and cannot pay back money.
(Bonds)

36

Currency Risk

Risk that arises from the change in price of one currency agains another.
(International Securities)

37

Market Risk

Risk that an investor experience loses due to fluctuation in securities prices.
(Stocks)

38

Downgrade/Credit Risk

Risk that a company's quality rating adversely changes.
(Bonds)

39

Inflation Risk

Risk that purchasing power is lost.
(Cash)

40

Political Risk

Risk that an investment's returns suffers as a result of instability in a country.
(International Securities)

41

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

42

Define Income and Growth in relation to stocks.

Income is dividends and growth is capital gains.

43

What can stock build wealth?

The average return over a long period of time for stocks is over 10%.

44

When someone reference the market they are referring to what gauge?

Dow Jones Industrial Average
(DJIA)

45

Companies listed on the NasdqComposite Index are considered to have high _______ potential.

growth

46

Which index is most common replicated as a fund by many providers?

S&P 500

47

What two components are combined to form the Investment Behavior Box?

Market Capitalization and Investment Style

48

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

49

Developed Markets

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)

50

Growth

Companies whose stock prices are expected to increasee at a faster rate than the overall market.

51

Mid-cap

Often companies that are not as well-known as larger companies.

52

Global/World

Invests in U.S. companies and non U.S. companies.

53

Large-cap

Typically older, larger and more well-known companies.

54

Value

Companies whose stock prices are considered low relative too the underlying value of the company.

55

Small-cap

Includes young companies that are just starting out.

56

Core/Blend

A combination of companies whose stock prices are expected to increase rapidly and companies whose stock prices are considered "discounted".

57

Foreign

Invests only in non U.S. companies.

58

Emerging Markets

Nations with social or business activity in the process of rapid growth and industrialization. (i.e. Brazil, Russia, India, China)

59

Value companies typically pay ____ dividends while Growth companies typically pay ____ dividends.

some
no

60

A mutual fund is an investment vehicle that _____ money of ______ investors.

pools
many

61

Why are Mutual Funds redeemable?

The mutual fund family must purchase the mutual fund back at the same price.

62

What two types of asset classes are offered with Mutual Funds?

stocks & bonds

63

What are the advantages or benefits of Mutual funds?

Professional portfolio management
Diversification
Lower cost

64

What are the disadvantages of Mutual funds?

Additional costs
Investors do not have control
Price uncertainty

65

What are two pieces of information found in the Prospectus?

Investment objective/goal
Principal strategies
fees & expenses
Past performance
ticker symbol
etc.

66

Mutual fund's portfolio consists of many securities and becasue of this investors are guaranteed against loss.
True or False

False

67

A PPT will see the expense ratio for a Mutual fund taken out of their account on an annual basis.
True or False

False

68

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.

69

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.