CIMA Modules (All) | Comprehensive Summarie , Questions and
Answers | Study set
equity premium **** used to identify the average return of stocks minus the average return
on T-Bill
riskless rate **** "r" or fair average return is also called
present value **** price, or value, of an asset equals the sum of its discounted expected
future cash flows
a _______ dividend to price ratio signifies a ________ return on stocks **** a HIGH
dividend to price ratio signifies a HIGH return on stocks
If inflation is higher than expected, bond prices __________. **** fall
If inflation is higher than expected, stock prices do not typically react much as the discount rate
goes ___________ and expected cash flows ____________. **** the discount rate goes UP
and the expected cash flows INCREASE
Asset Pricing Models **** how we know the correct equity premium figure and what the
right risk premium or measure of risk
equation for net asset value **** (market value of assets - liabilities) / shares outstanding
common problems with discounted cash flows include: **** calculations are sensitive to
small changes in inputs and growth opportunities and rates are hard to pin down
efficient markets hypothesis assumes that all investors behave _________ **** rationally
alpha **** outperformance by one investment over another
beta **** market exposure or risk directly associated with a market
Fama and French: __________ stocks appear to earn higher returns than they 'deserve' for their
risk **** value stocks
sentiment risk **** risk that misplacing will get worse in the short run
,cap-weighted index **** computed by summing up the value of the companies in the index
and dividing the result by the number of stocks in the index. Larger stocks receive more
proportional representation in the index.
fundamentally weighted index **** weighting criteria are based on factors like revenue,
dividends, book value....
Pro/Con of fundamentally weighted index **** Since the index is not influenced by price,
it's not influenced by short-term emotions
the index does not use relative of absolute value to determine company weights in the index
3 steps to basic asset allocation problem **** 1. make forecasts about assets
2. decide on a feasible set available
3. choose optimal allocation that maximizes utility
according to traditional investment theory, at a minimum one must forecast the following inputs:
**** expected asset returns and standard deviations
the optimal portfolio is where the ________ __________ meets the _____ ______ **** the
optimal portfolio is where the efficient frontier meets the utility curve
These risks cannot be diversified away **** systematic risk and market risk
the Sharpe ratio uses ______ _____ to measure risk **** standard deviation
Criticisms of Modern Portfolio Theory **** inputs can contain errors
risk is not known and constant
What a follower of rational Finance would say about style premia **** "these strategies are
risky, but the standard measures of risk fail to capture this."
What a follower of behavioral finance would say about style premia **** "these strategies
earn more average return than they should for their risk... they must be exploiting mispricing"
Factors that make up the Fama French model **** market, size (small preferred to large),
and value
the 4th factor added to the original Fama French 3-model **** momentum
,semi-variance **** measurement of dispersion that measures data that is below the mean or
target value of a data set.... considered a better measurement of downside risk...
Sortino ratio uses ______ to measure risk **** sortino ratio measures downside volatility
(semi-standard deviation) .... only uses negative returns in the calculation to measure downside
risk
skew **** describes an asymmetry of data points from a normal distribution. If data points
are grouped to the left It is described as negative skew.
betas for hedge funds are hard to measure due to: **** illiquidity, use of derivatives, self-
reporting of results
net costs and risk, alts may give investors an opportunity to benefit from **** alpha and
alternative beta
system 1 **** intuitive, automatic, fast, and often unconscious
system 2 **** deliberative, effortful, slow, and controlled
heuristics **** people often use the following to make quick decisions which can lead to
financial mistakes
Prospect Theory **** value is segmented into gains and losses relative to a reference point
and that losses hurt more than gains bring happiness
Prospect Theory demonstrates loss aversion with a(n) __________ curve **** asymmetrical
curve
Two significant implications of Prospect Theory **** the endowment effect and mental
accounting
endowment effect **** individuals will value something more since they own it
mental accounting **** how people categorize, evaluate, and keep track of financial
activities
biases **** when people apply heuristics inappropriately which can lead to negatively
influencing the decision-making process
, anchoring **** when people make estimates or decisions starting from an initial value or
belief
availability heuristic **** readily available events in memory affecting the judgement of
frequency
representativeness **** belief that even small samples should be representative of the
population
confirmation bias **** tendency to search for, interpret, and recall information in a way that
reinforces preexisting beliefs
regret aversion **** taking action and losing feels worse than doing nothing and losing
efficient market hypothesis states that .... **** prices are equal to fundamental value
limitations of arbitrage **** a close substitute for the securities is often not available
sometimes the strategy can do very poorly
the errors causing misplacing to begin with can get worse
Conclusion of Adaptive Market Hypothesis **** competition drives adaptation and
innovation, behavior can affect markets, markets evolve as this process takes place
Value can be described in prospect theory as..... **** gain or loss compared to a reference
point
A common result of the __________ effect is for investors to hold onto losing positions too long
and sell appreciating positions too early. **** The disposition effect
Conservatism Bias **** used to identify when people tend to ignore evidence that is not
consistent with their own view of the world
Results of these two biases include: underweighting mundane information that does not fit into
one's initial view **** conservatism, self-attribution bias
Setting procedures to limit influence such as limiting trading activity and forcing time delays
(between events and trading activity) can help clients with.... **** overconfidence
Answers | Study set
equity premium **** used to identify the average return of stocks minus the average return
on T-Bill
riskless rate **** "r" or fair average return is also called
present value **** price, or value, of an asset equals the sum of its discounted expected
future cash flows
a _______ dividend to price ratio signifies a ________ return on stocks **** a HIGH
dividend to price ratio signifies a HIGH return on stocks
If inflation is higher than expected, bond prices __________. **** fall
If inflation is higher than expected, stock prices do not typically react much as the discount rate
goes ___________ and expected cash flows ____________. **** the discount rate goes UP
and the expected cash flows INCREASE
Asset Pricing Models **** how we know the correct equity premium figure and what the
right risk premium or measure of risk
equation for net asset value **** (market value of assets - liabilities) / shares outstanding
common problems with discounted cash flows include: **** calculations are sensitive to
small changes in inputs and growth opportunities and rates are hard to pin down
efficient markets hypothesis assumes that all investors behave _________ **** rationally
alpha **** outperformance by one investment over another
beta **** market exposure or risk directly associated with a market
Fama and French: __________ stocks appear to earn higher returns than they 'deserve' for their
risk **** value stocks
sentiment risk **** risk that misplacing will get worse in the short run
,cap-weighted index **** computed by summing up the value of the companies in the index
and dividing the result by the number of stocks in the index. Larger stocks receive more
proportional representation in the index.
fundamentally weighted index **** weighting criteria are based on factors like revenue,
dividends, book value....
Pro/Con of fundamentally weighted index **** Since the index is not influenced by price,
it's not influenced by short-term emotions
the index does not use relative of absolute value to determine company weights in the index
3 steps to basic asset allocation problem **** 1. make forecasts about assets
2. decide on a feasible set available
3. choose optimal allocation that maximizes utility
according to traditional investment theory, at a minimum one must forecast the following inputs:
**** expected asset returns and standard deviations
the optimal portfolio is where the ________ __________ meets the _____ ______ **** the
optimal portfolio is where the efficient frontier meets the utility curve
These risks cannot be diversified away **** systematic risk and market risk
the Sharpe ratio uses ______ _____ to measure risk **** standard deviation
Criticisms of Modern Portfolio Theory **** inputs can contain errors
risk is not known and constant
What a follower of rational Finance would say about style premia **** "these strategies are
risky, but the standard measures of risk fail to capture this."
What a follower of behavioral finance would say about style premia **** "these strategies
earn more average return than they should for their risk... they must be exploiting mispricing"
Factors that make up the Fama French model **** market, size (small preferred to large),
and value
the 4th factor added to the original Fama French 3-model **** momentum
,semi-variance **** measurement of dispersion that measures data that is below the mean or
target value of a data set.... considered a better measurement of downside risk...
Sortino ratio uses ______ to measure risk **** sortino ratio measures downside volatility
(semi-standard deviation) .... only uses negative returns in the calculation to measure downside
risk
skew **** describes an asymmetry of data points from a normal distribution. If data points
are grouped to the left It is described as negative skew.
betas for hedge funds are hard to measure due to: **** illiquidity, use of derivatives, self-
reporting of results
net costs and risk, alts may give investors an opportunity to benefit from **** alpha and
alternative beta
system 1 **** intuitive, automatic, fast, and often unconscious
system 2 **** deliberative, effortful, slow, and controlled
heuristics **** people often use the following to make quick decisions which can lead to
financial mistakes
Prospect Theory **** value is segmented into gains and losses relative to a reference point
and that losses hurt more than gains bring happiness
Prospect Theory demonstrates loss aversion with a(n) __________ curve **** asymmetrical
curve
Two significant implications of Prospect Theory **** the endowment effect and mental
accounting
endowment effect **** individuals will value something more since they own it
mental accounting **** how people categorize, evaluate, and keep track of financial
activities
biases **** when people apply heuristics inappropriately which can lead to negatively
influencing the decision-making process
, anchoring **** when people make estimates or decisions starting from an initial value or
belief
availability heuristic **** readily available events in memory affecting the judgement of
frequency
representativeness **** belief that even small samples should be representative of the
population
confirmation bias **** tendency to search for, interpret, and recall information in a way that
reinforces preexisting beliefs
regret aversion **** taking action and losing feels worse than doing nothing and losing
efficient market hypothesis states that .... **** prices are equal to fundamental value
limitations of arbitrage **** a close substitute for the securities is often not available
sometimes the strategy can do very poorly
the errors causing misplacing to begin with can get worse
Conclusion of Adaptive Market Hypothesis **** competition drives adaptation and
innovation, behavior can affect markets, markets evolve as this process takes place
Value can be described in prospect theory as..... **** gain or loss compared to a reference
point
A common result of the __________ effect is for investors to hold onto losing positions too long
and sell appreciating positions too early. **** The disposition effect
Conservatism Bias **** used to identify when people tend to ignore evidence that is not
consistent with their own view of the world
Results of these two biases include: underweighting mundane information that does not fit into
one's initial view **** conservatism, self-attribution bias
Setting procedures to limit influence such as limiting trading activity and forcing time delays
(between events and trading activity) can help clients with.... **** overconfidence
