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Questions and Answers
What type of risk does RBC have in comparison to the broad market?
What type of risk does RBC have in comparison to the broad market?
What is a limitation of using standard deviation as a measure of risk?
What is a limitation of using standard deviation as a measure of risk?
What does idiosyncratic risk not contribute to in terms of an investment's performance?
What does idiosyncratic risk not contribute to in terms of an investment's performance?
Why might standard deviation give an incorrect impression of risk compensation?
Why might standard deviation give an incorrect impression of risk compensation?
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What might an investor expose themselves to by staying invested in only RBC without diversification?
What might an investor expose themselves to by staying invested in only RBC without diversification?
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What type of market distortion does a minimum wage represent?
What type of market distortion does a minimum wage represent?
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What is a potential outcome of implementing a minimum wage?
What is a potential outcome of implementing a minimum wage?
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How does the elasticity of supply and demand play a role in the effects of a minimum wage?
How does the elasticity of supply and demand play a role in the effects of a minimum wage?
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What might be the impact on marginally productive laborers under a minimum wage policy?
What might be the impact on marginally productive laborers under a minimum wage policy?
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What do employers often overlook when arguing against minimum wage increases?
What do employers often overlook when arguing against minimum wage increases?
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What is the correct implied discount rate for a stock that just paid a $6 dividend and is trading at $30 with a 2% growth rate?
What is the correct implied discount rate for a stock that just paid a $6 dividend and is trading at $30 with a 2% growth rate?
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If a stock has an expected yield of 22%, a risk-free rate of 2%, and an expected market return of 12%, what is the estimated Beta?
If a stock has an expected yield of 22%, a risk-free rate of 2%, and an expected market return of 12%, what is the estimated Beta?
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If the correlation between a stock and the market is +0.8 and the market return's standard deviation is 10%, what is the standard deviation of the stock?
If the correlation between a stock and the market is +0.8 and the market return's standard deviation is 10%, what is the standard deviation of the stock?
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What payment structure does a ten-year US Treasury bond with a face value of $1M USD and an annual coupon of $30,000 USD offer?
What payment structure does a ten-year US Treasury bond with a face value of $1M USD and an annual coupon of $30,000 USD offer?
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Assuming no taxes, what total expected monetary return is calculated for a stock yielding 22% with a risk-free rate of 2%?
Assuming no taxes, what total expected monetary return is calculated for a stock yielding 22% with a risk-free rate of 2%?
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Which of the following is a material allowed during the examination for calculating financial metrics?
Which of the following is a material allowed during the examination for calculating financial metrics?
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How is the final duration of the examination stated in the cover sheet?
How is the final duration of the examination stated in the cover sheet?
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In the context of stock valuation, what does a growing dividend signify?
In the context of stock valuation, what does a growing dividend signify?
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Which fishing method should the fishery select based on the value generated over time?
Which fishing method should the fishery select based on the value generated over time?
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What type of inefficiency can lead to reduced social welfare?
What type of inefficiency can lead to reduced social welfare?
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What is the equilibrium quantity when the supply and demand functions are given as Ps = 100 + 2Q and Pd = 300 - 3.5Q?
What is the equilibrium quantity when the supply and demand functions are given as Ps = 100 + 2Q and Pd = 300 - 3.5Q?
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What is the price elasticity of demand for denim jeans if the price decreased from $120 to $105 and demand increased from 80,000 to 88,000 units?
What is the price elasticity of demand for denim jeans if the price decreased from $120 to $105 and demand increased from 80,000 to 88,000 units?
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If operational inefficiency and informational inefficiency are present, what is likely to result in the market?
If operational inefficiency and informational inefficiency are present, what is likely to result in the market?
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What is the total consumer surplus when the equilibrium price is found to be $45.45 and quantity is 72.72?
What is the total consumer surplus when the equilibrium price is found to be $45.45 and quantity is 72.72?
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What effect does a progressive tax system have on mid-life income compared to retirement income?
What effect does a progressive tax system have on mid-life income compared to retirement income?
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If the fishery uses industrial fishing methods, what will the expected profit trend be over the next few years?
If the fishery uses industrial fishing methods, what will the expected profit trend be over the next few years?
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Which of the following statements about the bond trading at $983,112.41 is true?
Which of the following statements about the bond trading at $983,112.41 is true?
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What is the correct method to convert an APR compounded monthly to an effective monthly rate (EMR)?
What is the correct method to convert an APR compounded monthly to an effective monthly rate (EMR)?
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Which method is most likely to provide a decent estimation when valuing a corporate project?
Which method is most likely to provide a decent estimation when valuing a corporate project?
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An investment account that reduces taxable income but incurs taxes upon withdrawal is known as what in Canada?
An investment account that reduces taxable income but incurs taxes upon withdrawal is known as what in Canada?
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Which statement is the least accurate regarding the risk-free rate when interpreting bond pricing?
Which statement is the least accurate regarding the risk-free rate when interpreting bond pricing?
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What must be done to find the effective annual rate (EAR) if you know the APR compounded monthly?
What must be done to find the effective annual rate (EAR) if you know the APR compounded monthly?
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When evaluating a project, which step is necessary for a positive investment decision?
When evaluating a project, which step is necessary for a positive investment decision?
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What fundamental principle underlies the attractiveness of RRSP accounts in Canada?
What fundamental principle underlies the attractiveness of RRSP accounts in Canada?
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Study Notes
Finance Concepts
- Dividend Discount Model (DDM): This model values a stock based on the present value of its future dividends. Assuming a constant growth rate in dividends, we can use the formula: Stock Price = Dividend/(Discount Rate - Growth Rate)
- Capital Asset Pricing Model (CAPM): This model calculates the expected return on an asset (like a stock) by considering the risk-free rate, the beta of the asset (a measure of its volatility compared to the market), and the expected market return. Formula: Expected Return = Risk-free Rate + Beta * (Expected Market Return - Risk-free Rate)
- Risk-free Rate: This is the return on an investment with no risk of default. It is often proxied by the yield on government bonds.
- Beta: A measure of a security's volatility relative to the overall market. A beta of 1 means the security's price moves in line with the market. A beta greater than 1 suggests higher volatility, while a beta less than 1 suggests lower volatility.
- Correlation: A statistical measure of the relationship between two variables. A positive correlation indicates that the variables tend to move in the same direction, while a negative correlation indicates they tend to move in opposite directions.
- Standard Deviation: A measure of the dispersion of data points around the mean. In finance, it's used to measure the volatility or risk of an investment.
- EAR (Effective Annual Rate): This accounts for compounding interest, giving a clearer picture of the actual annual return on an investment. APR does not account for compounding and can be deceiving.
- Investment Valuation: To evaluate a corporate project, you can use a discounted cash flow (DCF) analysis. This involves adding benefits and deducting costs, discounting each by a specified rate. If the net present value (NPV) is positive, the project may be financially viable.
- RRSPs (Registered Retirement Savings Plans): Tax-deferred investment accounts in Canada where contributions are tax-deductible, but withdrawals are taxed. They encourage saving for retirement by deferring tax liability.
- TFSAs (Tax-Free Savings Accounts): Tax-free investment accounts where both contributions and withdrawals are tax-free. They are attractive to those who want to grow their savings tax-free, especially during retirement when income might be taxed at a lower rate.
- Market Efficiency: An efficient market is where prices reflect all available information. Three types of inefficiency include informational (information not fully reflected in prices), operational (inefficient trading mechanisms), and allocational (misallocation of resources)
- Consumer Surplus: The difference between the price consumers are willing to pay for a good and the actual price they pay. It represents the total gain to consumers from participating in a market.
- Price Elasticity of Demand: Measures the responsiveness of quantity demanded to changes in price. A price elasticity of demand greater than 1 indicates that demand is relatively elastic (demand is sensitive to price changes). A price elasticity of demand less than 1 indicates that demand is relatively inelastic (demand is insensitive to price changes).
- Idiosyncratic Risk: The risk specific to a particular asset or company, which can be diversified away by holding a portfolio of assets.
- Systematic Risk: The risk that affects the overall market, also known as undiversifiable risk. Investors expect to be compensated for bearing systematic risk.
- Minimum Wage: A price floor on labor that can create a deadweight loss, as it can discourage employers from hiring additional workers whose value is below the minimum wage. The impact of a minimum wage depends on the relative elasticities of labor supply and demand.
Other Finance Concepts -
- Present Value: The value today of a future cash flow. It's calculated by discounting the future cash flow at a specified rate.
- Future Value: The value of an investment at a future point in time. It’s calculated by compounding the initial investment at a specified rate.
- Perpetuity: A stream of constant cash flows that continues forever.
Investment and Risk
- Diversification: Spreading your investments across various assets to reduce your exposure to idiosyncratic risk. This helps to minimize overall portfolio risk.
- Risk Tolerance: An individual’s willingness to accept risk in pursuit of higher returns.
Labour Market
- Deadweight Loss: A reduction in economic efficiency that occurs when a market is not operating at its equilibrium due to price distortions such as a minimum wage.
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Description
Test your knowledge on key finance concepts including the Dividend Discount Model (DDM), Capital Asset Pricing Model (CAPM), the definition of risk-free rate, and beta. Enhance your understanding of stock valuation and investment risk assessment through this quiz. Perfect for finance students and professionals alike!
