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?

    <p>$3,596,250</p> Signup and view all the answers

    What is an example of a financial intermediary in Cambodia?

    <p>Bank</p> Signup and view all the answers

    What is the primary function of a financial intermediary?

    <p>To facilitate transactions between savers and borrowers</p> Signup and view all the answers

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

    <p>Investment Analysis</p> Signup and view all the answers

    What is the market value of a security determined by?

    <p>Supply and demand</p> Signup and view all the answers

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

    <p>Standard II (B)</p> 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?

    <p>Eurobonds</p> Signup and view all the answers

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

    <p>Examining economic conditions</p> Signup and view all the answers

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

    <p>Economic conditions</p> Signup and view all the answers

    Which of the following statements about correlation is accurate?

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

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

    <p>Domestic bond</p> Signup and view all the answers

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

    <p>Less than +1</p> Signup and view all the answers

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

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

    What is a characteristic of common equity?

    <p>It represents an ownership interest in the company</p> Signup and view all the answers

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

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

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

    <p>Aggressive marketing</p> Signup and view all the answers

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

    <p>A zero variance portfolio can be constructed</p> Signup and view all the answers

    What is a characteristic of venture capital funds?

    <p>They participate in the decision-making process of companies</p> Signup and view all the answers

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

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

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

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

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

    <p>Capital expenditures are subtracted from depreciation</p> Signup and view all the answers

    What is the primary consequence of violating a financial standard?

    <p>Loss of investor confidence</p> Signup and view all the answers

    What is the market value of a security determined by?

    <p>Supply and demand forces</p> Signup and view all the answers

    What is the primary focus of investment analysis?

    <p>Analyzing the firm's financial statements</p> Signup and view all the answers

    What is the primary benefit of diversification?

    <p>Reduced risk</p> Signup and view all the answers

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

    <p>Highly volatile earnings</p> Signup and view all the answers

    What is the primary characteristic of venture capital funds?

    <p>They invest in early-stage companies</p> Signup and view all the answers

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

    <p>Foreign bonds</p> Signup and view all the answers

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

    <p>Examining economic conditions</p> Signup and view all the answers

    Which of the following statements about correlation is most accurate?

    <p>A correlation coefficient of 0 indicates no correlation between two securities</p> 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?

    <p>Standard II (B)</p> Signup and view all the answers

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

    <p>Reduced risk</p> Signup and view all the answers

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

    <p>Variable profit margins</p> Signup and view all the answers

    What is the market value of a security determined by?

    <p>Supply and demand in the market</p> Signup and view all the answers

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

    <p>Emphasis on a company's asset value</p> 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%?

    <p>0.45</p> Signup and view all the answers

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

    <p>Consumer discretionary</p> Signup and view all the answers

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

    <p>Defined-benefit pension plan</p> Signup and view all the answers

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

    <p>Market integrity</p> Signup and view all the answers

    What is the primary objective of a financial intermediary?

    <p>To facilitate the flow of capital between savers and investors</p> Signup and view all the answers

    What is the market value of a security determined by?

    <p>The supply and demand for the security</p> Signup and view all the answers

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

    <p>Analyzing the macroeconomic environment and its impact on the market</p> Signup and view all the answers

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

    <p>Less than or equal to 0</p> 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?

    <p>Asset-based valuation model</p> Signup and view all the answers

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

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

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

    <p>Collecting taxes and enforcing tax laws</p> Signup and view all the answers

    Which of the following statements is true about market value?

    <p>It reflects the collective and differing expectations of investors</p> Signup and view all the answers

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

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

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

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

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

    <p>It is sensitive to the discount rate used</p> Signup and view all the answers

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

    <p>It reflects the collective and differing expectations of investors</p> Signup and view all the answers

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

    <p>It increases the risk of insider trading.</p> Signup and view all the answers

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

    <p>It reduces the overall risk of the portfolio.</p> Signup and view all the answers

    What is the expected return on investment A?

    <p>20%</p> Signup and view all the answers

    What is the standard deviation of return on investment B?

    <p>4%</p> Signup and view all the answers

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

    <p>He will not be violating any standard.</p> Signup and view all the answers

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

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

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

    <p>Evaluating the overall economy and market conditions.</p> Signup and view all the answers

    What is the market value of a security determined by?

    <p>Supply and demand in the market.</p> 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.

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