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Question 1 of 10
1. Question
Which of the following statements is true regarding systematic risk?
I. Systematic, or un-diversifiable, risk is intrinsic to the whole market or market subdivision and may not be negated through diversification
II. It is also called market risk as it is risk that any investor in the market takes on
III. Market risk describes the chance that an investor may suffer losses because of dynamics that affect the general performance of the market
IV. Inflation risk describes the risk that an investor’s investments’ return will keep pace with inflation and that he will ultimately lose purchasing power because of itCorrect
Systematic risk
Systematic, or un-diversifiable, risk is intrinsic to the whole market or market subdivision and may not be negated through diversification. It is also called market risk as it is risk that any investor in the market takes on. Examples of systematic risk range from wars to volatile interest rates. Market risk describes the chance that an investor may suffer losses because of dynamics that affect the general performance of the market. An example might be a terrorist attack that results in overall market decline. Interest rate risk describes the possibility that an investment may lose value due to changes in the overall interest rates. A large increase in interest rates can adversely affect bond portfolios. Inflation risk describes the risk that an investor’s investments’ return will not keep pace with inflation and that he will ultimately lose purchasing power because of it.Incorrect
Systematic risk
Systematic, or un-diversifiable, risk is intrinsic to the whole market or market subdivision and may not be negated through diversification. It is also called market risk as it is risk that any investor in the market takes on. Examples of systematic risk range from wars to volatile interest rates. Market risk describes the chance that an investor may suffer losses because of dynamics that affect the general performance of the market. An example might be a terrorist attack that results in overall market decline. Interest rate risk describes the possibility that an investment may lose value due to changes in the overall interest rates. A large increase in interest rates can adversely affect bond portfolios. Inflation risk describes the risk that an investor’s investments’ return will not keep pace with inflation and that he will ultimately lose purchasing power because of it. -
Question 2 of 10
2. Question
Which of the following statements is true regarding unsystematic risk?
I. Unsystematic risk can be defined as unspecific risk
II. It is specific to certain factors of the investment, such as the industry
III. A shipping concern off the coast of Somalia may experience piracy as a systematic risk
IV. Unsystematic risk may be described as diversifiable riskCorrect
Unsystematic risk
Unsystematic risk can be defined as specific risk, in that it is specific to certain factors of the investment, such as the industry. A shipping concern off the coast of Somalia may experience piracy as an unsystematic risk. Unsystematic risk may be described as diversifiable risk as it may be overcome through the diversification of a portfolio.Incorrect
Unsystematic risk
Unsystematic risk can be defined as specific risk, in that it is specific to certain factors of the investment, such as the industry. A shipping concern off the coast of Somalia may experience piracy as an unsystematic risk. Unsystematic risk may be described as diversifiable risk as it may be overcome through the diversification of a portfolio. -
Question 3 of 10
3. Question
Which of the following statements is true regarding Quantitative methods?
I. They are used to better understand a company’s or sector’s behavior
II. These methods consist of intricate mathematical and statistical modeling
III. It can be used to measure performance of a company based on one specific factor
IV. They are also known as technical analysisCorrect
Quantitative methods
Quantitative methods are methods used to better understand a company’s or sector’s behavior. These methods consist of intricate mathematical and statistical modeling. It can be used to measure performance of a company based on several factors or in the valuation of a firm based on those or other factors. Quantitative methods are also known as technical analysis. Technical and quantitative analysis take on many forms, from abstract mathematical formulas to seeking trends in charts and comparing them with similar charts from other securitiesIncorrect
Quantitative methods
Quantitative methods are methods used to better understand a company’s or sector’s behavior. These methods consist of intricate mathematical and statistical modeling. It can be used to measure performance of a company based on several factors or in the valuation of a firm based on those or other factors. Quantitative methods are also known as technical analysis. Technical and quantitative analysis take on many forms, from abstract mathematical formulas to seeking trends in charts and comparing them with similar charts from other securities -
Question 4 of 10
4. Question
Which of the following statements is true regarding time value of money concept?
I. The time value of money concept is the assumption that money held today is worth more than money received tomorrow
II. There are several reasons why this is a valid assumption
III. The rate of inflation makes future dollars worth less due to the loss in purchasing power
IV. The time value of money concept is a less important tool in deciding whether or not an investment is worth undertakingCorrect
Time value of money concept
The time value of money concept is the assumption that money held today is worth more than money received tomorrow. There are several reasons why this is a valid assumption. The rate of inflation makes future dollars worth less due to the loss in purchasing power. Similarly, money invested tomorrow instead of today also suffers from the loss of potential returns given up. There are several formulas to figure the time value of money dependent upon the type of calculation an investor desires. The time value of money concept is a very important tool as it helps investors decide whether or not an investment is worth undertaking.Incorrect
Time value of money concept
The time value of money concept is the assumption that money held today is worth more than money received tomorrow. There are several reasons why this is a valid assumption. The rate of inflation makes future dollars worth less due to the loss in purchasing power. Similarly, money invested tomorrow instead of today also suffers from the loss of potential returns given up. There are several formulas to figure the time value of money dependent upon the type of calculation an investor desires. The time value of money concept is a very important tool as it helps investors decide whether or not an investment is worth undertaking. -
Question 5 of 10
5. Question
Which of the following statements is true regarding IRR?
I. The internal rate of return (IRR) is the rate of unexpected growth
II. To find IRR, the investor sets the time value of money equation equal to ten
III. Many companies use IRR to determine whether or not a project is worth undertaking
IV. They will compare the IRR to general rates of return in the financial marketsCorrect
IRR
The internal rate of return (IRR) is the rate of expected growth. To find IRR, the investor sets the time value of money equation equal to zero. Generally, a higher IRR indicates a higher probability of positive returns. This helps the investor take full advantage of the time value of their money by avoiding underperforming investments. Many companies use IRR to determine whether or not a project is worth undertaking. They will compare the IRR to general rates of return in the financial markets. If none of their proposed projects offer a higher IRR than the rates offered in the market, they have the option of investing the capital in the markets that would have been invested in the project.Incorrect
IRR
The internal rate of return (IRR) is the rate of expected growth. To find IRR, the investor sets the time value of money equation equal to zero. Generally, a higher IRR indicates a higher probability of positive returns. This helps the investor take full advantage of the time value of their money by avoiding underperforming investments. Many companies use IRR to determine whether or not a project is worth undertaking. They will compare the IRR to general rates of return in the financial markets. If none of their proposed projects offer a higher IRR than the rates offered in the market, they have the option of investing the capital in the markets that would have been invested in the project. -
Question 6 of 10
6. Question
Which of the following statements is true regarding Net present value (NPV)?
I. Net present value (NPV) calculations show the value of a dollar today compared to the value of the same dollar in the future, accounting for inflation and returns
II. If the NPV is positive, the investment being analyzed in not worth being pursued
III. NPV is calculated as a function of the time value of money by applying a discount rate to expected future values within the time value of money equation
IV. This helps the investor understand if the investment is worth the opportunity cost of not purchasing another investmentCorrect
NPV
Net present value (NPV) calculations show the value of a dollar today compared to the value of the same dollar in the future, accounting for inflation and returns (subtracting inflation from returns). If the NPV is negative, the investment being analyzed in not worth being pursued. NPV is calculated as a function of the time value of money by applying a discount rate to expected future values within the time value of money equation. This helps the investor understand if the investment is worth the opportunity cost of not purchasing another investment.Incorrect
NPV
Net present value (NPV) calculations show the value of a dollar today compared to the value of the same dollar in the future, accounting for inflation and returns (subtracting inflation from returns). If the NPV is negative, the investment being analyzed in not worth being pursued. NPV is calculated as a function of the time value of money by applying a discount rate to expected future values within the time value of money equation. This helps the investor understand if the investment is worth the opportunity cost of not purchasing another investment. -
Question 7 of 10
7. Question
Which of the following statements is true regarding descriptive statistics?
I. Descriptive statistics are a set of calculated numbers that are used to generalize a set of data
II. In relation to the securities industry, descriptive statistics tend to measure risk, reward (returns), and the ranges pertaining thereto
III. These measurements are useful to depositors, allowing them to determine if a security matches their returns tolerance
IV. The most useful descriptive statistics pertaining to the securities industries are the measures of central tendency, range, standard deviation, and betaCorrect
Descriptive statistics
Descriptive statistics are a set of calculated numbers that are used to generalize a set of data. In relation to the securities industry, descriptive statistics tend to measure risk, reward (returns), and the ranges pertaining thereto. These measurements are useful to investors, allowing them to determine if a security matches their risk tolerance and return needs. The most useful descriptive statistics pertaining to the securities industries are the measures of central tendency (mean, median, and mode), range, standard deviation, and beta (and its derivatives).Incorrect
Descriptive statistics
Descriptive statistics are a set of calculated numbers that are used to generalize a set of data. In relation to the securities industry, descriptive statistics tend to measure risk, reward (returns), and the ranges pertaining thereto. These measurements are useful to investors, allowing them to determine if a security matches their risk tolerance and return needs. The most useful descriptive statistics pertaining to the securities industries are the measures of central tendency (mean, median, and mode), range, standard deviation, and beta (and its derivatives). -
Question 8 of 10
8. Question
Which of the following statements is true regarding Measures of central tendency?
I. Mean is the average return of all securities in a given portfolio
II. Mean is very useful as a metric of portfolio analysis in that it provides the investor a look at how the combined portfolio has performed
III. Median is the number representing the risk that increases directly in the middle of all other returns of securities in the portfolio
IV. Mode is the most recurrent return in a portfolio. This measure of central tendency assists the investor in finding trends, positive or negative, and dealing with them appropriatelyCorrect
Measures of central tendency
The measures of central tendency are as follows:
• Mean is the average return of all securities in a given portfolio. Mean is very useful as a metric of portfolio analysis in that it provides the investor a look at how the combined portfolio has performed. While the return of one security is useful in determining its validity in a portfolio, it is not useful in gauging the general performance of the entire portfolio and its relative cohesiveness.
• Median is the number representing the return that falls directly in the middle of all other returns of securities in the portfolio. It provides another view of empirical data to be considered with the other measures of central tendency. The median metric also helps the investor understand the impact of an outlier return and act accordingly.
• Mode is the most recurrent return in a portfolio. This measure of central tendency assists the investor in finding trends, positive or negative, and dealing with them appropriately.Incorrect
Measures of central tendency
The measures of central tendency are as follows:
• Mean is the average return of all securities in a given portfolio. Mean is very useful as a metric of portfolio analysis in that it provides the investor a look at how the combined portfolio has performed. While the return of one security is useful in determining its validity in a portfolio, it is not useful in gauging the general performance of the entire portfolio and its relative cohesiveness.
• Median is the number representing the return that falls directly in the middle of all other returns of securities in the portfolio. It provides another view of empirical data to be considered with the other measures of central tendency. The median metric also helps the investor understand the impact of an outlier return and act accordingly.
• Mode is the most recurrent return in a portfolio. This measure of central tendency assists the investor in finding trends, positive or negative, and dealing with them appropriately. -
Question 9 of 10
9. Question
Which of the following statements is true regarding Range?
I. Range is the difference in the highest return of the portfolio and the lowest return of the portfolio
II. If there is a large range, there may or may not be a problem with the portfolio that needs to be addressed, depending on the investors’ time horizon and risk appetite
III. A large range may also be a sign of positive correlation in the portfolio, whereas a smaller range tends to indicate positive correlation
IV. Both of the scenarios can be problematic or show that an investor’s strategy is working, again dependent upon time horizon and risk appetiteCorrect
Range
Range is the difference in the highest return of the portfolio and the lowest return of the portfolio. It covers all numbers in between. This look at a portfolio’s performance allows the investor or adviser to statistically evaluate the range of the included securities. If there is a large range, there may or may not be a problem with the portfolio that needs to be addressed, depending on the investors’ time horizon and risk appetite. A large range may also be a sign of negative correlation in the portfolio, whereas a smaller range tends to indicate positive correlation. Both of the scenarios can be problematic or show that an investor’s strategy is working, again dependent upon time horizon and risk appetite.Incorrect
Range
Range is the difference in the highest return of the portfolio and the lowest return of the portfolio. It covers all numbers in between. This look at a portfolio’s performance allows the investor or adviser to statistically evaluate the range of the included securities. If there is a large range, there may or may not be a problem with the portfolio that needs to be addressed, depending on the investors’ time horizon and risk appetite. A large range may also be a sign of negative correlation in the portfolio, whereas a smaller range tends to indicate positive correlation. Both of the scenarios can be problematic or show that an investor’s strategy is working, again dependent upon time horizon and risk appetite. -
Question 10 of 10
10. Question
Which of the following statements is true regarding standard deviation?
I. Standard deviation measures the distance each of the returns in the portfolio falls from the mean
II. The further spread the data is, the lower the measure of standard deviation
III. A higher standard deviation then indicates a high degree of volatility and thus risk
IV. It is a useless metric in determining the suitability of an investment for a client, risk averse or otherwiseCorrect
Standard deviation
Standard deviation measures the distance each of the returns in the portfolio falls from the mean. The further spread the data is, the higher the measure of standard deviation. A higher standard deviation then indicates a high degree of volatility and thus risk. It is a very useful metric in determining the suitability of an investment for a client, risk averse or otherwise. Standard deviation may also apply to an individual security by measuring its historical mean performance against the historical returns making up the mean. In this case, too, a higher standard deviation represents a higher amount of volatility and risk.Incorrect
Standard deviation
Standard deviation measures the distance each of the returns in the portfolio falls from the mean. The further spread the data is, the higher the measure of standard deviation. A higher standard deviation then indicates a high degree of volatility and thus risk. It is a very useful metric in determining the suitability of an investment for a client, risk averse or otherwise. Standard deviation may also apply to an individual security by measuring its historical mean performance against the historical returns making up the mean. In this case, too, a higher standard deviation represents a higher amount of volatility and risk.