Finance and Investment Strategies

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Questions and Answers

What type of security promises to make periodic payments to the firm's residual claimants?

Mutual Fund

Bond (correct)

Dividend

Stock

What is the term of a debt instrument with a maturity of less than one year?

Medium-term

Intermediate-term

Short-term (correct)

Long-term

What is the term of a debt instrument with a maturity of five years or longer?

Medium-term

Intermediate-term

Long-term (correct)

Short-term

What is the Net Operating Income (NOI) of the office building?

$3,596,250 Signup and view all the answers

What is an example of a financial intermediary in Cambodia?

Bank Signup and view all the answers

What is the primary function of a financial intermediary?

To facilitate transactions between savers and borrowers Signup and view all the answers

What is the term for the process of evaluating and selecting securities for investment?

Investment Analysis Signup and view all the answers

What is the market value of a security determined by?

Supply and demand Signup and view all the answers

Which standard is violated when an action is inconsistent with industry norms?

Standard II (B) Signup and view all the answers

What type of bonds are denominated in a currency other than that of the country in which they are sold?

Eurobonds Signup and view all the answers

What is the first step in a top-down security analysis?

Examining economic conditions Signup and view all the answers

What is the primary focus of a top-down security analysis?

Economic conditions Signup and view all the answers

Which of the following statements about correlation is accurate?

Correlation is a measure of the strength of a linear relationship between two variables Signup and view all the answers

Which type of bond is issued in a country's domestic market and denominated in the local currency?

Domestic bond Signup and view all the answers

What is the correlation coefficient required to be for diversification to reduce risk?

Less than +1 Signup and view all the answers

What is a characteristic of both buyout funds and venture capital funds?

Expecting that only a small percentage of investments will pay off Signup and view all the answers

What is a characteristic of common equity?

It represents an ownership interest in the company Signup and view all the answers

What is a characteristic of a company that is sensitive to the business cycle?

It sells products that the customer can purchase at a later date if necessary Signup and view all the answers

What is an example of an activity that may be legal but that CFA Institute considers unethical?

Aggressive marketing Signup and view all the answers

What is the benefit of diversification when the correlation coefficient is 0?

A zero variance portfolio can be constructed Signup and view all the answers

What is a characteristic of venture capital funds?

They participate in the decision-making process of companies Signup and view all the answers

What is the relationship between the correlation coefficient and the potential benefits from diversification?

The lower the correlation coefficient, the greater the potential benefits from diversification Signup and view all the answers

What is the primary use of a company's cost of equity?

To estimate the firm's weighted average cost of capital Signup and view all the answers

In the calculation of a firm's value, what is the relationship between capital expenditures and depreciation?

Capital expenditures are subtracted from depreciation Signup and view all the answers

What is the primary consequence of violating a financial standard?

Loss of investor confidence Signup and view all the answers

What is the market value of a security determined by?

Supply and demand forces Signup and view all the answers

What is the primary focus of investment analysis?

Analyzing the firm's financial statements Signup and view all the answers

What is the primary benefit of diversification?

Reduced risk Signup and view all the answers

What is the primary characteristic of a company that is sensitive to the business cycle?

Highly volatile earnings Signup and view all the answers

What is the primary characteristic of venture capital funds?

They invest in early-stage companies Signup and view all the answers

Which type of bond is most likely to be affected by changes in foreign exchange rates?

Foreign bonds Signup and view all the answers

What is the primary focus of a top-down security analysis in investment analysis?

Examining economic conditions Signup and view all the answers

Which of the following statements about correlation is most accurate?

A correlation coefficient of 0 indicates no correlation between two securities Signup and view all the answers

Which standard is most likely to be violated when an investment manager fails to disclose a conflict of interest?

Standard II (B) Signup and view all the answers

What is the primary benefit of diversification when the correlation coefficient between two securities is 0?

Reduced risk Signup and view all the answers

Which of the following is a characteristic of a company that is sensitive to the business cycle?

Variable profit margins Signup and view all the answers

What is the market value of a security determined by?

Supply and demand in the market Signup and view all the answers

Which of the following is a characteristic of asset-based valuation?

Emphasis on a company's asset value Signup and view all the answers

What is the Sharpe ratio of a portfolio with an expected return of 8.9%, a risk-free rate of 3.5%, and a standard deviation of 12%?

0.45 Signup and view all the answers

Which industry sector is an automotive manufacturer most likely classified in?

Consumer discretionary Signup and view all the answers

What type of investor has a low-risk tolerance and high liquidity requirements?

Defined-benefit pension plan Signup and view all the answers

What standard is violated when an individual spreads false rumors about a company's prospects?

Market integrity Signup and view all the answers

What is the primary objective of a financial intermediary?

To facilitate the flow of capital between savers and investors Signup and view all the answers

What is the market value of a security determined by?

The supply and demand for the security Signup and view all the answers

What is the primary focus of a top-down security analysis?

Analyzing the macroeconomic environment and its impact on the market Signup and view all the answers

What is the correlation coefficient required to be for diversification to reduce risk?

Less than or equal to 0 Signup and view all the answers

Which valuation model is based on the idea that the value of a company is equal to the sum of its underlying assets?

Asset-based valuation model Signup and view all the answers

Which of the following statements is true about the relative valuation model?

It is used to compare the value of a company to that of its peers. Signup and view all the answers

What is the primary focus of the General Department of Taxation (GDT) in Cambodia?

Collecting taxes and enforcing tax laws Signup and view all the answers

Which of the following statements is true about market value?

It reflects the collective and differing expectations of investors Signup and view all the answers

Which of the following is an example of exchanging a non-monetary asset for a monetary asset?

Selling software to Microsoft in exchange for 1,000 shares of Microsoft common stock Signup and view all the answers

Which of the following is a characteristic of an asset-based valuation model?

It is used to estimate the value of a company based on the value of its underlying assets Signup and view all the answers

Which of the following is a limitation of using the discounted cash flow model?

It is sensitive to the discount rate used Signup and view all the answers

Which of the following is a characteristic of the market value of a company?

It reflects the collective and differing expectations of investors Signup and view all the answers

What is the implication of local securities laws being minimal in form and content in Cambodia?

It increases the risk of insider trading. Signup and view all the answers

What is the impact of a correlation coefficient of -0.50 between returns on investment A and B?

It reduces the overall risk of the portfolio. Signup and view all the answers

What is the expected return on investment A?

20% Signup and view all the answers

What is the standard deviation of return on investment B?

4% Signup and view all the answers

What is the consequence of Rithy acting on material nonpublic information in Cambodia?

He will not be violating any standard. Signup and view all the answers

What is the relationship between the correlation coefficient and the potential benefits from diversification?

A lower correlation coefficient leads to higher potential benefits from diversification. Signup and view all the answers

What is the primary focus of a top-down security analysis?

Evaluating the overall economy and market conditions. Signup and view all the answers

What is the market value of a security determined by?

Supply and demand in the market. Signup and view all the answers

Study Notes

Risk Management

Diversification reduces risk when correlation is less than +1
If the correlation coefficient is 0, a zero variance portfolio can be constructed
The lower the correlation coefficient, the greater the potential benefits from diversification

Private Equity

Both buyout funds and venture capital funds expect that only a small percentage of investments will pay off
They play an active role in the management of companies
They restructure companies to increase cash flow

Common Equity

Represents an ownership interest in the company
Shareholders participate in the decision-making process
The company is not obligated to make periodic dividend payments

Business Cycle

A company that is sensitive to the business cycle would likely experience above-average fluctuation in demand
Their products are necessary and cannot be postponed

Ethics

Examples of activities that may be considered unethical, but are legal, would violate Standard II (B) of the CFA Institute

International Finance

Bonds sold in a foreign country and denominated in a currency other than that of the country in which they are sold are known as foreign bonds
They are also known as Eurobonds

Security Analysis

Top-down security analysis begins by examining economic conditions
It then involves identifying the most attractive industries and finally, analyzing a firm's business prospects and quality of management

Correlation

The lower the correlation coefficient, the greater the potential benefits from diversification
A correlation coefficient of 0 means that a zero variance portfolio can be constructed
A correlation coefficient of less than +1 reduces risk through diversification

Financial Markets and Securities

A bond is a debt instrument that promises to make periodic payments to the lender
A debt instrument is intermediate term if its maturity is between one and five years
A debt instrument is long term if its maturity is five years or longer

Real Estate Investment

Net Operating Income (NOI) is calculated by subtracting operating expenses, vacancy, and collection loss from potential gross income
NOI is used to evaluate the profitability of a property

Financial Intermediaries

Examples of financial intermediaries in Cambodia are commercial banks, thrifts, and credit unions

Financial Markets and Regulations

Rithy, an investment analyst in Cambodia, is not violating any standard if he acts on material nonpublic information, as there are no prohibitions against insider trading in local securities laws.

Portfolio Management

The standard deviation of return on investment A is 10% and expected return is 20%, while the standard deviation of return on investment B is 4% and expected return is 15%.
The covariance of returns on A and B is -0.015 if the correlation coefficient between the returns is -0.50.

Cost of Equity and Capital Structure

A company's cost of equity is often used as a proxy for investors' average required rate of return.
The Anderson Door Co.'s value of equity is closest to $64 million, considering its earnings, revenues, capital expenditures, depreciation, and additions to working capital.

Ethics and Professional Standards

Chanramy has not violated any standard by issuing a new recommendation to clients via email and then discussing it with institutional clients.
Thanin has violated a standard by spreading false rumors about a company to pump up its stock price.

International Investments and Bonds

Bonds sold in a foreign country and denominated in a currency other than that of the country in which they are sold are known as foreign bonds.

Security Analysis

A top-down security analysis begins by examining economic conditions.
The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%, with a portfolio standard deviation of 12%.

Industry Classification and Investor Needs

An automotive manufacturer is most likely classified in the Industrial durables sector.
Low-risk tolerance and high liquidity requirements best describe the typical investment needs of an endowment.

Valuation Models

A relative valuation model is most likely to be preferable when comparing similar companies.
Management's decisions do influence the company's market value, and increases in book value may not be reflected in the company's market value.

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Description

This quiz covers risk management and private equity concepts, including diversification, correlation, and investment strategies.