Unit 8

Question 1

Future value of a dollar depends on

Answer 1

1) How much you’re investing now
2) The expected annual return
3) How many years is the “future” (the length the money will be invested)

Question 2

Present value of a dollar depends on

Answer 2

1) What is the future value
2) What is the interest rate (discount rate)
3) How long will the money be invested

Question 3

To find present value, you need to know

Answer 3

The future value, and vice versa

Question 4

Rule of 72

Answer 4

Divide 72 by the interest rate of the investment

Question 5

Net present value measures

Answer 5

The difference between an investment’s present value and its current market value

Question 6

You want to recommend a security whose present value is

Answer 6

Higher than its market value (A positive NPV)

Question 7

If the market value is above the present value,

Answer 7

It is a negative NPV and it may not be a favorable recommendation

Question 8

NPV is expressed as a

Answer 8

Dollar amount

Question 9

When the bond’s PV and market price are equal, the NPV is

Answer 9

Zero, which means the bond is properly priced

Question 10

Internal Rate of Return is the

Answer 10

Discount rate that makes the future value of an investment equal to its present value

Question 11

IRR is mostly used for investments with predictable cash flows and set maturity dates such as

Answer 11

Bonds

Question 12

Calculates long-term returns, factoring in the time value of money

Answer 12

Internal rate of return

Question 13

In an efficient market, bonds should be priced so

Answer 13

That their NPV is zero

Question 14

Always shown as a percentage %

Answer 14

IRR

Question 15

Beta measures the variability between

Answer 15

A particular stock or portfolio’s movement and that of the market in general

Question 16

A beta of 1.00 means the stock has market risk

Answer 16

Similar to the market as a whole

Question 17

The risk that beta measures

Answer 17

Systematic risk

Question 18

Safest pick for a conservative investor would be one with

Answer 18

The lowest beta

Question 19

To calculate expected return with beta

Answer 19

Market return x beta = expected return

Question 20

When positive alpha is achieved, investment performance has

Answer 20

Exceeded what was expected based on the risk level or volatility

Question 21

Formula for calculating alpha

Answer 21

(Actual portfolio return - risk-free rate) - (portfolio beta) x (market return - risk-free rate)

Question 22

Example of calculating alpha

Answer 22

Portfolio return: 10%, risk-free rate: 2%, market return rate: 8%, beta: 1.2%
(10 -2) = 8%
(1.2 x (8-2) = 1/2 x 6 = 7.2
8 - 7.2 = 0.8%

Question 23

Measures how much an investment’s returns vary from its average returns

Answer 23

Standard deviation

Question 24

The greater the variation from the average (mean)

Answer 24

Returns the higher the volatility

Question 25

Standard deviation is shown as a

Answer 25

Percentage

Question 26

Lower standard deviation implies similar returns

Answer 26

With less risk

Question 27

Sharpe ratio measures

Answer 27

Risk in a portfolio

Question 28

Sharpe ratio calculation

Answer 28

Actual return - risk-free rate = # # / standard deviation

Question 29

Sharpe ratio shows how much return you get for each unit of risk taken, a higher ratio

Answer 29

Indicates better returns for the level of risk

Question 30

Current assets - current liabilities

Answer 30

Working capital

Question 31

Current assets - inventory / current liabilities

Answer 31

Quick asset ratio

Question 32

Earnings per share

Answer 32

Earnings available to common / # of common shares outstanding

Question 33

Current yield

Answer 33

Annual dividends / current market value

Question 34

Dividend payout ratio

Answer 34

Annual dividends / EPS

Question 35

Price-to-Earnings Ratio

Answer 35

Current market price / EPS

Question 36

The company's theoretical liquidation value per share of common stock

Answer 36

Book value

Question 37

Generally have higher price-to-earnings ratios than cyclical or defensive companies

Answer 37

Growth companies

Question 38

Price-to-book value ratio

Answer 38

Calculated by dividing the price per share by the stockholders' equity per share

Question 39

Gross margin/margin of profit

Answer 39

Revenues - cost of goods sold = # /revenues

Question 40

Shareholders equity or net worth is only affected by the sale of

Answer 40

New equity securities or by any profit or loss generated by the corporation

Question 41

Anytime an investment's IRR is more than the required rate of return

Answer 41

The NPV is positive

Question 42

If the net present value of the bond is negative, it is correct to state that

Answer 42

The bond is overpriced

Question 43

It would be correct to state that the quick ratio will always be

Answer 43

Lower than the current ratio

Question 44

A correlation coefficient of zero means that the two stocks will move

Answer 44

Independently, the zero correlation coefficient indicates that there is no pattern to the relationship between their price movements

Question 45

Non-inventory current assets are

Answer 45

Cash on hand and accounts receivable

Question 46

Current liabilities are

Answer 46

Accounts payable and wages payable

Question 47

A portfolio that has a negative correlation coefficient relative to the market will

Answer 47

Increase in value as the market declines and decrease in value as the market goes up

Question 48

Not considered a current asset

Answer 48

Accounts payable