Yale + UChicago Flashcards | Finance ( investments, interest
rates etc… )
Annual percentage rates (APRs) are computer using ... (what kind of interest)? ** Answer**
simple interest
the ________ is used to calculate the present value of a bond ** Answer** yield to maturity
YTM ** Answer** discount rate used in the bond valuation formula
the overall interest rate earned by an investor who buys a bond at the market price and holds it
until maturity
When a bond sells at par value, the coupon rate is equal to the _________ ** Answer** yield
to maturity
rate of interest that has not been adjusted for the impact of inflation ** Answer** nominal
rates
rate of interest (or return) that has been adjusted for inflation ** Answer** real rates
real rates ** Answer** rate of interest (or return) that has been adjusted for inflation
how to calculate nominal rates (formula) ** Answer** (1 + nominal rate) = (1 + real interest
rate) (1 + inflation rate)
example: If the annual real rate of interest is 3.5%, and the expected inflation rate is 2.5%, the
nominal rate of interest would be approximately
6%
,The ________ is defined as the present value of all cash proceeds to the investor in the stock.
** Answer** intrinsic value
If the nominal return is constant, the after-tax real rate of return ** Answer** declines as the
inflation rate increases and increases as the inflation rate decreases.
The ________ is a measure of the average rate of return an investor will earn if the investor buys
the bond now and holds until maturity. ** Answer** YTM
The dollar-weighted return on a portfolio is equivalent to ** Answer** portfolio's internal
rate of return
The dollar-weighted return on a portfolio is equivalent to finding the internal rate of return on the
cash flows to the portfolio.
The ________________________ on a portfolio is equivalent to finding the internal rate of
return on the cash flows to the portfolio. ** Answer** dollar-weighted return
standard deviation is always less than variance.... T/F? why? ** Answer** true - standard
deviation is always less than variance
(the variance will be the square of the standard deviation)
Standard Deviation must be (+/-)? ** Answer** SD must be positive
Two statistics that measures how the returns of two risky assets move together are: **
Answer** correlation and covariance
Covariance measures whether security returns move together or in opposition; however, only the
sign, not the magnitude, of covariance may be interpreted. Correlation, which is covariance
,standardized by the product of the standard deviations of the two securities, may assume values
only between +1 and -1; thus, both the sign and the magnitude may be interpreted regarding the
movement of one security's return relative to that of another security.
Difference between correlation and covariance? ** Answer** Both covariance and
correlation measure the relationship and the dependency between two variables.
Covariance indicates the direction of the linear relationship between variables. Correlation
measures both the strength and direction of the linear relationship between two variables
The maximum possible value of correlation is ___, but the minimum is ___. ** Answer**
The maximum possible value of correlation is 1, but the minimum is -1.
When an investment advisor attempts to determine an investor's risk tolerance, which factor
would they be LEAST likely to assess? ** Answer** level of return investor prefers
Investment advisors would be least likely to assess the level of return the investor prefers. The
investor's investing experience, financial security, feelings about loss, and disposition toward
risky or conservative choices will impact risk tolerance.
A two-asset portfolio with a standard deviation of zero can be formed when the assets have a
correlation coefficient equal to ..... ** Answer** -1
Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore, for the
same return, _____ tolerates higher risk than ____. ** Answer** for the same return, David
tolerates higher risk than Elias.
All rational investors select the portfolio that maximizes their expected utility; for investors who
are relatively more ___-__________, doing so means investing less in the optimal risky portfolio
and more in the risk-free asset. ** Answer** risk-averse
, More risk-averse investors will invest ______(more/less) in the optimal risky portfolio and
______(more/less) in the risk-free security than less risk-averse investors. ** Answer**
More risk-averse investors will invest LESS in the optimal risky portfolio and MORE in the risk-
free security than less risk-averse investors.
Standard deviation and beta both measure risk, but they are different in that ** Answer**
beta measures only systematic risk while standard deviation is a measure of total risk.
The market portfolio has a beta of ** Answer** 1
the covariance between the security's return and the market return divided by the variance ofthe
market's returns ..... is equal to ** Answer** The market risk, beta, of a security
According to the Capital Asset Pricing Model (CAPM), underpriced securities have ______
alphas ** Answer** have positive alphas
Empirical results regarding betas estimated from historical data indicate that ** Answer**
betas appear to regress toward one over time
According to the CAPM, the risk premium an investor expects to receive on any stock or
portfolio increases (indirectly/directly/inversely) with beta ** Answer** directly with beta
(T/F) Based on their relative degrees of risk tolerance, investors will hold varying amounts of the
risky asset in their portfolios and nvestors will hold varying amounts of the risk-free asset in their
portfolios ** Answer** true
An important difference between CAPM and APT is ** Answer** CAPM assumes many
small changes are required to bring the market back to equilibrium; APT assumes a few large
changes are required to bring the market back to equilibrium.
rates etc… )
Annual percentage rates (APRs) are computer using ... (what kind of interest)? ** Answer**
simple interest
the ________ is used to calculate the present value of a bond ** Answer** yield to maturity
YTM ** Answer** discount rate used in the bond valuation formula
the overall interest rate earned by an investor who buys a bond at the market price and holds it
until maturity
When a bond sells at par value, the coupon rate is equal to the _________ ** Answer** yield
to maturity
rate of interest that has not been adjusted for the impact of inflation ** Answer** nominal
rates
rate of interest (or return) that has been adjusted for inflation ** Answer** real rates
real rates ** Answer** rate of interest (or return) that has been adjusted for inflation
how to calculate nominal rates (formula) ** Answer** (1 + nominal rate) = (1 + real interest
rate) (1 + inflation rate)
example: If the annual real rate of interest is 3.5%, and the expected inflation rate is 2.5%, the
nominal rate of interest would be approximately
6%
,The ________ is defined as the present value of all cash proceeds to the investor in the stock.
** Answer** intrinsic value
If the nominal return is constant, the after-tax real rate of return ** Answer** declines as the
inflation rate increases and increases as the inflation rate decreases.
The ________ is a measure of the average rate of return an investor will earn if the investor buys
the bond now and holds until maturity. ** Answer** YTM
The dollar-weighted return on a portfolio is equivalent to ** Answer** portfolio's internal
rate of return
The dollar-weighted return on a portfolio is equivalent to finding the internal rate of return on the
cash flows to the portfolio.
The ________________________ on a portfolio is equivalent to finding the internal rate of
return on the cash flows to the portfolio. ** Answer** dollar-weighted return
standard deviation is always less than variance.... T/F? why? ** Answer** true - standard
deviation is always less than variance
(the variance will be the square of the standard deviation)
Standard Deviation must be (+/-)? ** Answer** SD must be positive
Two statistics that measures how the returns of two risky assets move together are: **
Answer** correlation and covariance
Covariance measures whether security returns move together or in opposition; however, only the
sign, not the magnitude, of covariance may be interpreted. Correlation, which is covariance
,standardized by the product of the standard deviations of the two securities, may assume values
only between +1 and -1; thus, both the sign and the magnitude may be interpreted regarding the
movement of one security's return relative to that of another security.
Difference between correlation and covariance? ** Answer** Both covariance and
correlation measure the relationship and the dependency between two variables.
Covariance indicates the direction of the linear relationship between variables. Correlation
measures both the strength and direction of the linear relationship between two variables
The maximum possible value of correlation is ___, but the minimum is ___. ** Answer**
The maximum possible value of correlation is 1, but the minimum is -1.
When an investment advisor attempts to determine an investor's risk tolerance, which factor
would they be LEAST likely to assess? ** Answer** level of return investor prefers
Investment advisors would be least likely to assess the level of return the investor prefers. The
investor's investing experience, financial security, feelings about loss, and disposition toward
risky or conservative choices will impact risk tolerance.
A two-asset portfolio with a standard deviation of zero can be formed when the assets have a
correlation coefficient equal to ..... ** Answer** -1
Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore, for the
same return, _____ tolerates higher risk than ____. ** Answer** for the same return, David
tolerates higher risk than Elias.
All rational investors select the portfolio that maximizes their expected utility; for investors who
are relatively more ___-__________, doing so means investing less in the optimal risky portfolio
and more in the risk-free asset. ** Answer** risk-averse
, More risk-averse investors will invest ______(more/less) in the optimal risky portfolio and
______(more/less) in the risk-free security than less risk-averse investors. ** Answer**
More risk-averse investors will invest LESS in the optimal risky portfolio and MORE in the risk-
free security than less risk-averse investors.
Standard deviation and beta both measure risk, but they are different in that ** Answer**
beta measures only systematic risk while standard deviation is a measure of total risk.
The market portfolio has a beta of ** Answer** 1
the covariance between the security's return and the market return divided by the variance ofthe
market's returns ..... is equal to ** Answer** The market risk, beta, of a security
According to the Capital Asset Pricing Model (CAPM), underpriced securities have ______
alphas ** Answer** have positive alphas
Empirical results regarding betas estimated from historical data indicate that ** Answer**
betas appear to regress toward one over time
According to the CAPM, the risk premium an investor expects to receive on any stock or
portfolio increases (indirectly/directly/inversely) with beta ** Answer** directly with beta
(T/F) Based on their relative degrees of risk tolerance, investors will hold varying amounts of the
risky asset in their portfolios and nvestors will hold varying amounts of the risk-free asset in their
portfolios ** Answer** true
An important difference between CAPM and APT is ** Answer** CAPM assumes many
small changes are required to bring the market back to equilibrium; APT assumes a few large
changes are required to bring the market back to equilibrium.
