Investments and Security Analysis Midterm

What are the main steps in the investment process?

Set objectives and constraints, allpocate among asset classes, select securities, then monitor and rebalance.

Examples of money market instruments

Treasury bills, commercial paper, and negotiable certificates of deposit

How do Treasury bills generate investment returns?

Generally purchased t a discount and redeemed at face value.

Examples of capital market instruments

common stock and long-term corporate or government bonds.w

what does a security market index measure

Tracks performance of a specified basket of securities

What is a derivative and what is it used for?

A contract linked to an underlying asset or variable, used for hedging or speculation

Firm commitment vs. best efforts underwriting?

Firm commitment: underwriter buys the issue and assumes the resale risk; best efforts: attempts to sell it.

Open end vs. Closed end mutual fund?

Open-end funds issue and redeem at NAV-based prices, closed-end shares generally trade on exchange

Hedge fund vs. Private equity?

Hedge funds use flexible strategies; private equity invests in companies for longer periods

what is a short sale

selling borrowed securities, hoping to repurchase them at a lower price

what are the major risks and costs of short selling?

rising share prices, dividend compensation payments, and stock borrowing costs

How do ETFs differ from traditional open-end mutual funds?

ETFs trade intraday at market pricesl open end funds generally transact at end of day NAV based prices

Systematic vs. unsystematic risk

Systematic risk affects broad markets; unsystematic risk is company speific and can be diversified away

what does the sharpe ratio measure

Excess expected return per unit of standard deviation

what does the capital allocation line show

risk return combination of a risk free asset and risky portfolio; slopw slope is the sharpe ratio

how do risk aversion and leverage affect capital allocation

more risk aversion generally reduces risky allocation, borrowing can create leverage

what is the coeffecient of variation?

standard deviation divided by expected return; measures risk relative to expected return.

what is dollar weighted return?

An internal rate of return reflecting the size and timing of money invested and withdrawn

what is time weighted return

Geometrically links subperiod returns while removing external cash flow effects

Arithmetic vs geometric average return?

Arithmetic averages periodic returns; geometric measures compounded average growth

What is a risk premium?

expected return above a benchmark usually the risk free rate, as compensation for risk.

How do you interpret correlation coefficients?

correlation ranges from -1 to +1l +1 perfectly positive, -1 perfectly negative, 0 no linear ocrrelation.

What does portfolio stnadard deviation measure?

volatility or dispersion of portfolio returns around expected return

nominal vs real return

nominal return is stated return; real return adjusts for inflation

risk free vs risky asset

a risk free asset has a known return over the relevant horizon; a risky asset’s return is uncertain.

what is a bond’s coupon rate?

the stated annual coupon payment divided by the bond’s face value.

How do bond prices respond to interest-rate changes?

For ordinary fixed-rate bonds, prices generally fall when marrket yields risk and rise when yields fall.

price index vs total return index?

A price index measures price changes; a total return index includes the effect of distributions, typically assuming reinvestment

Initial margin vs maintenance margin?

Initial margin is required equity at purchase; maintenance margin is minimum equity afterward

what types of distributions can mutual funds make?

dividend income and realized capital gains; distributions generally reduce NAV when paid.

Growth fund vs income fund?

Growth funds emphasize capital appreciation; income funds emphasize current invetment income.

what is an investmnet horizon?

the expected length of time before invested funds are needed.

what is a liquidfity risk?

risk of being unable to trade promptly at a fair price/

what is a repurchase agreement(repo)?

A short term financing arrangement involving the sale of securities with an agreement to reurcase them later, usually at a higher price

Banker’s acceptance vs. commericial paper?

A banker’s acceptance is a time draft accepted by a bank, often used in trade financel commercial paper is a short term unsecured corporate debt

how do TIPS protect against inflation?

TIPS principal adjusts with inflation, and coupon payments are calculated on adjusted principal; market prices can still fluctuate.

Zero-coupon bond vs. coupon bond

a zero coupon bond has no periodic coupon payments and generaly pays faace value at maturity; a coupon bond pays periodic interest

Investment grade vs. high yield bonds?

Investment grade bonds have stronger credit ratings; high yield bonds have lower ratings and generally greater default risk

call option vs put option

A call grants the right to buy and a put grants the right to sell. The buyer generally pays a premium and is not obligated to exercise

What is market capitalization?

Share price multiplied by shares outstanding is the market value of a company’s equity.

WHat is prospectus?

A disclosure document describing a securities offering, the issuer, financial information, and important investment risks.

weak form vs. semi strong vs. strong form EMH

weakform: past market data reflected in prices. Semi-strong: all public information reflected. Strong form: all public and private information reflected

What is an investment policy statement

a document outlining investment objectives risk tolerance, time horizon, liquidty needs, constraints, and portfolio guidelines.

what makes an appropriate investment benchmark?

A benchmark reflecting the portfolio’s asset class, style and risk exposures for meaningful performance evaluation.