Investments Final Exam UPDATED
ACTUAL QUESTIONS AND CORRECT
ANSWERS
3 styles of investing - Correct answers✔✔passive investing, factor investing, speculative
investing
Passive Investing - Correct answers✔✔- efficient market hypothesis
- put all your money in low cost index funds
- investing in an index fund means you're not beating the market
- don't really pay fees
ex: Vanguard index fund has low fees
Speculative Investing - Correct answers✔✔- markets prone to sentiment and mispricings
- active investing
- lots of misplacing aka under or overvalued stocks because of biases
- say efficient market hypothesis is flawed
- you can find good value if you look hard enough
Factor Investing - Correct answers✔✔- Quantitative trading strategies
- "in-between view"
- some aspects of the market are weakly predictable int he long run if you look at well-defined
risk factors
- believe markets are efficient and its hard to have an edge
,why do we need financial markets - Correct answers✔✔capital allocation, price discovery, risk
transfer, mediums of exchange
Capital Allocation - Correct answers✔✔- transfer money between savers and borrowers
- find deals
Economic view of Capital Allocation - Correct answers✔✔- Savers: give up consumption now
and will consume later
--> savers can sometimes oversave
- Borrowers: want to consume now and give up consumption later... basically have an investment
project now that will generate goods and services later
Who does the transfer in capital allocation - Correct answers✔✔Financial Intermediaries: Banks,
mutual funds, hedge funds, etc
--> not actual investors, just use the LP's money
--> they find projects, screen borrowers, connect bank lenders
Price Discovery - Correct answers✔✔- aggregating wisdom/madness of crowd
- evenly distributing price
Risk Transfer (insurance) - Correct answers✔✔hedging, like derivatives
Mediums of Exchange (liquidity) - Correct answers✔✔- to facilitate trade: both across time and
among large groups of people who don't know or trust each other or who dont have all the same
information
Financial Equilibrium - Correct answers✔✔supply and demand for assets
,Supply: issuance of stocks and bonds by corporations to finance new projects creates the supply
of assets
Demand: portfolio holding choices of investors creates the demand for financial assets
Supply and demand graph - Correct answers✔✔quantity in $ on y axis and price on the x axis
- corporations and borrowers supply securities (upward sloping)
- investors and savers demand securities (downward sloping)
Primary Market - Correct answers✔✔- corporation initially issues the security (stock or bond)
- ex: IPO, SEO, Bond Offering
- where investing happens
Secondary Market - Correct answers✔✔- investors trade already existing securities amongst
themselves
EX: stock exchange
- gives liquidity and price discovery but doesn't facilitate corporate investment (this makes the
primary market more attractive)
Why does paper (stocks, Bonds, etc) have value? - Correct answers✔✔price = net present value
(NPV) of future cash flows
- this discounted present value is why it has value
- promise of future cash flow
- stocks: dividends, earnings
- bonds: coupon pmt
, bonds easier to price because you don't know future earnings of the stocks
Annualized Compounding - Correct answers✔✔Future value = (initial value)*(1+rate)^#ofyears
shows you how much your money today is worth in the future
Higher Moments - Correct answers✔✔Skewness and Kurtosis
a normal distribution has what - Correct answers✔✔skewness of 0 and kurtosis of 3
risk of total portfolio Is more or less than weighted average of its parts and why - Correct
answers✔✔less because of diversification
what kind of distribution do stock prices follow - Correct answers✔✔normal distribution
but might be a poor representation of asset returns because it does not have skewness and may
have excess kurtosis
What does markowitz model do - Correct answers✔✔put in all th easiest classes & all their stats
and then the output is the allocation
efficient frontier - Correct answers✔✔the line
minimum variance portfolio is one with least risk
market portfolio is tangent line --> highest Sharpe ratio
ACTUAL QUESTIONS AND CORRECT
ANSWERS
3 styles of investing - Correct answers✔✔passive investing, factor investing, speculative
investing
Passive Investing - Correct answers✔✔- efficient market hypothesis
- put all your money in low cost index funds
- investing in an index fund means you're not beating the market
- don't really pay fees
ex: Vanguard index fund has low fees
Speculative Investing - Correct answers✔✔- markets prone to sentiment and mispricings
- active investing
- lots of misplacing aka under or overvalued stocks because of biases
- say efficient market hypothesis is flawed
- you can find good value if you look hard enough
Factor Investing - Correct answers✔✔- Quantitative trading strategies
- "in-between view"
- some aspects of the market are weakly predictable int he long run if you look at well-defined
risk factors
- believe markets are efficient and its hard to have an edge
,why do we need financial markets - Correct answers✔✔capital allocation, price discovery, risk
transfer, mediums of exchange
Capital Allocation - Correct answers✔✔- transfer money between savers and borrowers
- find deals
Economic view of Capital Allocation - Correct answers✔✔- Savers: give up consumption now
and will consume later
--> savers can sometimes oversave
- Borrowers: want to consume now and give up consumption later... basically have an investment
project now that will generate goods and services later
Who does the transfer in capital allocation - Correct answers✔✔Financial Intermediaries: Banks,
mutual funds, hedge funds, etc
--> not actual investors, just use the LP's money
--> they find projects, screen borrowers, connect bank lenders
Price Discovery - Correct answers✔✔- aggregating wisdom/madness of crowd
- evenly distributing price
Risk Transfer (insurance) - Correct answers✔✔hedging, like derivatives
Mediums of Exchange (liquidity) - Correct answers✔✔- to facilitate trade: both across time and
among large groups of people who don't know or trust each other or who dont have all the same
information
Financial Equilibrium - Correct answers✔✔supply and demand for assets
,Supply: issuance of stocks and bonds by corporations to finance new projects creates the supply
of assets
Demand: portfolio holding choices of investors creates the demand for financial assets
Supply and demand graph - Correct answers✔✔quantity in $ on y axis and price on the x axis
- corporations and borrowers supply securities (upward sloping)
- investors and savers demand securities (downward sloping)
Primary Market - Correct answers✔✔- corporation initially issues the security (stock or bond)
- ex: IPO, SEO, Bond Offering
- where investing happens
Secondary Market - Correct answers✔✔- investors trade already existing securities amongst
themselves
EX: stock exchange
- gives liquidity and price discovery but doesn't facilitate corporate investment (this makes the
primary market more attractive)
Why does paper (stocks, Bonds, etc) have value? - Correct answers✔✔price = net present value
(NPV) of future cash flows
- this discounted present value is why it has value
- promise of future cash flow
- stocks: dividends, earnings
- bonds: coupon pmt
, bonds easier to price because you don't know future earnings of the stocks
Annualized Compounding - Correct answers✔✔Future value = (initial value)*(1+rate)^#ofyears
shows you how much your money today is worth in the future
Higher Moments - Correct answers✔✔Skewness and Kurtosis
a normal distribution has what - Correct answers✔✔skewness of 0 and kurtosis of 3
risk of total portfolio Is more or less than weighted average of its parts and why - Correct
answers✔✔less because of diversification
what kind of distribution do stock prices follow - Correct answers✔✔normal distribution
but might be a poor representation of asset returns because it does not have skewness and may
have excess kurtosis
What does markowitz model do - Correct answers✔✔put in all th easiest classes & all their stats
and then the output is the allocation
efficient frontier - Correct answers✔✔the line
minimum variance portfolio is one with least risk
market portfolio is tangent line --> highest Sharpe ratio
