FINA 363 Study Guide – Chapters 4, 5 & 6

These flashcards cover key concepts from Chapters 4, 5, and 6 of the FINA 363 study guide, focusing on investment companies, risk and return, and portfolio management.

Investment Companies

Organizations that pool money from multiple investors to invest in a diversified portfolio of assets.

Net Asset Value (NAV)

The value of a mutual fund or investment company's assets minus its liabilities, divided by the number of shares outstanding.

Equity Funds

Mutual funds that invest primarily in stocks.

Expected Return

The weighted average of all possible returns, calculated based on their probabilities.

Holding Period Return (HPR)

Measures the total return earned during a specific holding period.

Sharpe Ratio

A measure of risk-adjusted return, calculated as (Portfolio Return - Risk-Free Rate) / Standard Deviation.

Standard Deviation

A measure of the dispersion or volatility of a set of data points, representing investment risk.

Geometric Average Return

The average return that compounds over multiple periods, used for evaluating long-term investment performance.

Capital Market Line (CML)

A line in risk-return space representing the risk-return tradeoff for a portfolio of assets that optimally combine risk and return.

Real Return

The return on an investment after adjusting for inflation.

Diversification

A risk management strategy that mixes a wide variety of investments within a portfolio.

Variance

A measure of how far each number in a data set is from the mean and thus from every other number in the set.

Covariance

A measure of how two assets move in relation to each other.

Mutual Fund Classification

Categories of mutual funds based on their investment focus, such as equity funds, bond funds, and money market funds.

Risk Premium

The additional return an investor requires to hold a risky asset over a risk-free asset.

Exchange-Traded Funds (ETFs)

Funds that are traded on stock exchanges, similar to stocks, which may sell at a premium or discount to their NAV.

Balanced/Hybrid Funds

Funds that invest in a mix of stocks and bonds to balance risk and return.

A mutual fund had year-end assets of $457,000,000 and liabilities of $17,000,000. There were 24,300,000 shares in the fund. What is the NAV? A) $7.00 B) $181.07 C) $69.96 D) $18.11 E) $18.81

NAV = (Assets − Liabilities) / Shares = (457,000,000 − 17,000,000) / 24,300,000 = $18.11 → Correct answer: D

Diversified Portfolios had assets of $279,000,000 and liabilities of $43,000,000. If NAV = $42.13, how many shares are outstanding? A) 5,601,709 B) 43,000,000 C) 1,182,203 D) 6,488,372

Shares = (Assets − Liabilities) / NAV = (279,000,000 − 43,000,000) / 42.13 = 5,601,709 → Correct answer: A

Most actively-managed mutual funds compared to a market index like the Wilshire 5000: A) exceed the return on index funds B) beat the market return in all years C) do not outperform the market D) beat the market return in most years

Most research shows actively managed funds fail to beat the market after fees → Correct answer: C

NAV Jan 1 = $17.50, NAV Dec 31 = $19.47, Income distributions = $0.75, Capital gains = $1.00. What was the return? A) 11.26% B) 9.83% C) 21.26% D) 16.97% E) 15.54%

Return = (Ending NAV − Beginning NAV + Distributions) / Beginning NAV = (19.47 − 17.50 + 0.75 + 1.00) / 17.50 = 21.26% → Correct answer: C

Purchase NAV = $12.50, End NAV = $13.87, Dividends = $0.78, Capital gains = $1.67. What is the return? A) 32.44% B) 30.56% C) 29.43% D) 31.19% E) 29.18%

Return = (13.87 − 12.50 + 0.78 + 1.67) / 12.50 = 30.56% → Correct answer: B

Assets = $250,000,000, Liabilities = $4,000,000, Shares = 3,750,000. What is the NAV? A) $17.46 B) $92.53 C) $67.39 D) $63.24 E) $65.60

NAV = (250,000,000 − 4,000,000) / 3,750,000 = $65.60 → Correct answer: E

Assets = $465,000,000, Liabilities = $37,000,000, NAV = $56.12. How many shares are outstanding? A) 7,626,515 B) 8,601,709 C) 6,488,372 D) 4,300,000 E) None of these

Shares = (465,000,000 − 37,000,000) / 56.12 = 7,626,515 → Correct answer: A

Beginning NAV = $16.75, Return = 26.6%, Income = $1.79, Capital gains = $2.80. Ending NAV? A) $16.62 B) $17.25 C) $14.96 D) $17.44 E) $13.28

Ending NAV = (1 + Return)(Beginning NAV) − Distributions = (1.266 × 16.75) − (1.79 + 2.80) = $16.62 → Correct answer: A

Beginning NAV = $37.12, Return = 11%, Income = $2.26, Capital gains = $1.64. Ending NAV? A) $37.93 B) $47.25 C) $37.30 D) $34.52 E) $36.28

Ending NAV = (1.11 × 37.12) − (2.26 + 1.64) = $37.30 → Correct answer: C

Which fund invests in foreign stocks excluding the U.S.? A) international funds B) global funds C) regional funds D) emerging market funds

International funds invest outside the U.S. only (global funds include the U.S.) → Correct answer: A

Which ETF tracks the S&P 500? A) QQQ B) IWM C) SPY D) DIA E) VTI

SPY (SPDR S&P 500 ETF) tracks the S&P 500 → Correct answer: C

Average assets = $4.0B, Purchases = $1.6B, Sales = $1.5B. What is the turnover ratio? A) 15% B) 45% C) 22% D) 20% E) 37.5%

Turnover = min(Purchases, Sales) / Average Assets = 1.5 / 4.0 = 37.5% → Correct answer: E

Fund price = $17, Front-end load = 5%, Fund return = 12%, Expense ratio = 1%. Investor return? A) 4.75% B) 5.34% C) 4.39% D) 5.65%

Only 95% invested because of load. Net fund return = 12% − 1% = 11%. Return = (0.95 × 1.11) − 1 = 5.34% → Correct answer: B

Holding Period Return: Beginning price = $50, Ending price = $57, Dividend received = $2. What is the holding period return? A) 14% B) 16% C) 18% D) 20%

HPR = (Ending Price − Beginning Price + Income) / Beginning Price = (57 − 50 + 2) / 50 = 9 / 50 = 18% → Correct answer: C

Holding Period Return: Beginning price = $40, Ending price = $46, Dividend = $1. What is the return? A) 12.5% B) 15% C) 17.5% D) 18%

HPR = (46 − 40 + 1) / 40 = 7 / 40 = 17.5% → Correct answer: C

Expected Return using Scenario Analysis: Boom (30%) return = 20%, Normal (50%) return = 10%, Recession (20%) return = −5%. What is expected return? A) 9.5% B) 10% C) 11% D) 12%

E(R) = Σ (Probability × Return) = (.30×20) + (.50×10) + (.20×−5) = 6 + 5 − 1 = 10% → Correct answer: B

Historical Returns: 8%, 12%, 10%, 6%, 14%. What is the arithmetic average return? A) 9% B) 10% C) 10.5% D) 11%

Arithmetic Average = (8 + 12 + 10 + 6 + 14) / 5 = 50 / 5 = 10% → Correct answer: B

Returns over 3 years: 10%, −5%, 15%. Which average should be used to measure long-term investment performance? A) Arithmetic average B) Geometric average C) Median return D) Expected return

Geometric average measures compounded long-term growth → Correct answer: B

When should arithmetic average return be used? A) Long-term growth rate B) Multi-year investment analysis C) Expected return for a single future period D) Inflation adjustments

Arithmetic average is used to estimate expected return for one future period → Correct answer: C

Sharpe Ratio: Portfolio return = 14%, Risk-free rate = 4%, Standard deviation = 20%. What is the Sharpe ratio? A) 0.30 B) 0.40 C) 0.50 D) 0.60

Sharpe = (Rp − Rf) / σ = (14 − 4) / 20 = 10 / 20 = 0.50 → Correct answer: C

Sharpe Ratio: Portfolio return = 12%, Risk-free rate = 3%, Standard deviation = 15%. What is the Sharpe ratio? A) 0.45 B) 0.60 C) 0.75 D) 0.90

Sharpe = (12 − 3) / 15 = 9 / 15 = 0.60 → Correct answer: B

Which investment has the better risk-adjusted performance? Portfolio A Sharpe = 0.60, Portfolio B Sharpe = 0.45. A) Portfolio A B) Portfolio B C) Equal performance D) Cannot determine

Higher Sharpe ratio = better risk-adjusted return → Correct answer: A

Nominal return = 10%, Inflation = 3%. Approximate real return? A) 5% B) 6% C) 7% D) 8%

Approximate real return = Nominal − Inflation = 10 − 3 = 7% → Correct answer: C

Nominal return = 8%, Inflation = 2%. What is the exact real return? A) 5.88% B) 6.00% C) 6.12% D) 6.25%

Real return = (1 + Nominal) / (1 + Inflation) − 1 = 1.08 / 1.02 − 1 = 5.88% → Correct answer: A

Why does inflation matter for investors? A) It increases nominal returns B) It reduces purchasing power C) It eliminates risk D) It increases Sharpe ratio

Inflation reduces the real purchasing power of returns → Correct answer: B

Risk in finance is typically measured by: A) Beta B) Variance C) Standard deviation D) Sharpe ratio

Total risk of returns is measured by standard deviation → Correct answer: C

Multiple Mutual Funds had year-end assets of $457,000,000 and liabilities of $17,000,000. There were 24,300,000 shares in the fund at year end. What was Multiple Mutual's net asset value? A)$7.00 B)$181.07 C)$69.96 D)$18.11 E)$18.81

$18.11

Diversified Portfolios had year-end assets of $279,000,000 and liabilities of $43,000,000. If Diversified's NAV was $42.13, how many shares must have been held in the fund? A)5,601,709 B)43,000,000 C)1,182,203 D)6,488,372

5,601,709

Most actively-managed mutual funds, when compared to a market index such as the Wilshire 5000, A)exceed the return on index funds B)beat the market return in all years C)do not outperform the market D)beat the market return in most years

do not outperform the market

The Profitability Fund had NAV per share of $17.50 on January 1, 2016. On December 31 of the same year, the fund's NAV was $19.47. Income distributions were $0.75 and capital gain distributions were $1.00. What rate of return did an investor receive? A)11.26% B)9.83% C)21.26% D)16.97% E)15.54%

21.26%

Assume you purchased shares of High Flying mutual fund at $12.50. During the year you received dividend income of $0.78 and capital gains of $1.67. Ending NAV was $13.87. What was your rate of return? A)32.44% B)30.56% C)29.43% D)31.19% E)29.18%

30.56%

A mutual fund had year-end assets of $250,000,000 and liabilities of $4,000,000. There were 3,750,000 shares. What was the mutual fund's NAV? A)$17.46 B)$92.53 C)$67.39 D)$63.24 E)$65.60

$65.60

A mutual fund had year-end assets of $465,000,000 and liabilities of $37,000,000. If the fund NAV was $56.12, how many shares must have been held? A)7,626,515 B)8,601,709 C)6,488,372 D)4,300,000 E)None of these

7,626,515

A mutual fund had NAV per share of $16.75 on January 1, 2016. The fund's return for the year was 26.6%. Income distributions were $1.79 and capital gain distributions were $2.80. What ending NAV would you calculate? A)$16.62 B)$17.25 C)$14.96 D)$17.44 E)$13.28

$16.62

A mutual fund had NAV per share of $37.12 on January 1, 2016. The fund's return for the year was 11.0%. Income distributions were $2.26 and capital gain distributions were $1.64. What ending NAV would you calculate? A)$37.93 B)$47.25 C)$37.30 D)$34.52 E)$36.28

$37.30

Of the following types of mutual funds, an investor who wishes to invest in a diversified portfolio of foreign stocks (excluding the U.S.) should choose A)international funds B)global funds C)regional funds D)emerging-market funds

international funds

Of the following ETFs, an investor who wishes to track the S&P 500 should choose A)QQQ B)IWM C)SPY D)DIA E)VTI

SPY

A mutual fund had average daily assets of $4.0 billion. The fund sold $1.5 billion of stock and purchased $1.6 billion. What is the turnover ratio? A)15% B)45% C)22% D)20% E)37.5%

37.5%

You purchased shares of a mutual fund at $17 with a 5% front-end load. The securities increased 12% and the expense ratio was 1%. What was your return if sold at the end of the year? A)4.75% B)5.34% C)4.39% D)5.65%

5.34%