CRPC Module 2 Questions with verified answers
Alpha Ans✓✓✓ (see Jensen's alpha).
Annuity (fixed). Ans✓✓✓ An insurance product that provides a series of equal
dollar periodic payments.
Annuity (insurance product). Ans✓✓✓ A periodic payment. In insurance terms, it
is a form of policy or payout arrangement that provides a specified periodic cash
payment to the annuitant.
Asset allocation. Ans✓✓✓ The apportioning of available funds among a number
of different categories-or classes-of assets, such as stocks, bonds, cash
Barbell strategy (for bonds). Ans✓✓✓ Splits the bond portion of the portfolio
between short-term and long-term bonds. Both ends then stagger maturities
similar to the ladder approach. For example, a $1 million portfolio could allocate
$100,000 in one-, two-, three-, four-, and five-year maturities. As the one-year
bonds mature, the proceeds are reinvested in five-year bonds, thereby
maintaining that maturity structure. On the other end, $100,000 could be
invested in 16-, 17-, 18-, 19-, and 20-year maturities. (In practice, the long end of
the barbell can be 11- to 15-year bonds, 26- to 30-year bonds, or whatever bond
length the adviser believes is best for the client.) After one year, when the 16-
year bonds become 15-year bonds, they are sold and reinvested in 20-year bonds,
again maintaining that maturity structure.
Beta coefficient. Ans✓✓✓ It is a measure of a security's systematic risk-risk that
cannot be diversified. Is a measure of the volatility of an individual asset relative
to the volatility of an appropriate benchmark index. It is most often applied to
common stocks and mutual funds.
,Business risk. Ans✓✓✓ Is associated with a firm's ability to operate profitably
and therefore is a major risk with common stocks. Companies with dependable
and growing income, limited competition, healthy sales, and acceptable expense
levels have a lower level of risk. The degree of business risk is a function of factors
such as a company's management (both ability and credibility), specific products
or services, marketing strength, financial strength, accounting practices
(conservative or aggressive), and its fundamental business plan. The length of
time during which a firm has been in business can also be important; all other
things being equal, the longer a firm has been operating profitably, the lower its
level of risk.
Coefficient of variation. Ans✓✓✓ Is the standard deviation divided by the mean
return. Is a relative measure of risk (risk per unit of return) and allows risk
comparison among different investments,
Contrarian investment strategy. Ans✓✓✓ Is buying securities that are out of
favor and selling those that have become popular.
Core-satellite asset allocation. Ans✓✓✓ When employed, the 70% to 80 %
portion of the portfolio is invested in broad-based index funds or exchange-traded
funds while the remaining portion consists of actively managed mutual funds in
niches such as sector funds in energy and health care, REITS, emerging markets
funds, or international small-cap funds; and/or alternative investments such as
hedge funds, private equity funds, and managed futures/commodity funds. The
satellite portion attempts to generate above-average returns and/or to provide
additional diversification to the core portfolio.
Corporation. Ans✓✓✓ An entity of indeterminate life owned by one or more
parties. Ownership is evidenced by shares of stock, each representing a fractional
interest in the entity.
, Correlation coefficient (correlation). Ans✓✓✓ Is a relative measure of the degree
to which the returns of two assets move together. Correlations range between
+1.0 to -1.0
Credit risk. Ans✓✓✓ Is the risk that a bond (or a preferred stock) will be
downgraded due to excessive business risk and/or financial risk. When a bond is
downgraded by one or more rating agencies, its price will fall due to the higher
risk. In practice, the bond will usually fall before a credit downgrading, as financial
analysts recognize the deterioration of credit quality before the downgrading,
which will cause some selling of the bond issue. This selling often occurs when a
bond falls from investment grade (i.e., the top four bond grades of AAA, AA, A, or
BBB) to non-investment grade due to the requirement of many institutional
investors that they own only investment-grade bonds. Note that even high-grade
bonds can have credit risk because they are subject to being downgraded if
business and financial conditions deteriorate.
Default risk. Ans✓✓✓ Is a higher degree of credit risk. When a firm cannot meet
its obligations, it is in danger of defaulting. If the bond issuer has insufficient cash
flow to make the interest (and, if necessary, principal) payments on the bonds,
the bondholders incur default risk. Not only will the bondholders no longer
receive payments due them, but the prices of the bonds, of course, fall as well.
The U.S. government is considered to be immune to default risk because of its
(theoretical) unlimited ability to raise taxes and print money. State and local
governments, while they cannot print money, usually (but not always) have the
ability to raise tax revenues when needed to make payments on their general
obligation (GO) bonds. Their revenue bonds, which depend only on the project's
revenues to make their payments, generally are more likely to have credit and
default risk. However corporations depend on profitable sales for cash flow and
not all companies are able to generate sufficient cash flow. Default risk tends to
Alpha Ans✓✓✓ (see Jensen's alpha).
Annuity (fixed). Ans✓✓✓ An insurance product that provides a series of equal
dollar periodic payments.
Annuity (insurance product). Ans✓✓✓ A periodic payment. In insurance terms, it
is a form of policy or payout arrangement that provides a specified periodic cash
payment to the annuitant.
Asset allocation. Ans✓✓✓ The apportioning of available funds among a number
of different categories-or classes-of assets, such as stocks, bonds, cash
Barbell strategy (for bonds). Ans✓✓✓ Splits the bond portion of the portfolio
between short-term and long-term bonds. Both ends then stagger maturities
similar to the ladder approach. For example, a $1 million portfolio could allocate
$100,000 in one-, two-, three-, four-, and five-year maturities. As the one-year
bonds mature, the proceeds are reinvested in five-year bonds, thereby
maintaining that maturity structure. On the other end, $100,000 could be
invested in 16-, 17-, 18-, 19-, and 20-year maturities. (In practice, the long end of
the barbell can be 11- to 15-year bonds, 26- to 30-year bonds, or whatever bond
length the adviser believes is best for the client.) After one year, when the 16-
year bonds become 15-year bonds, they are sold and reinvested in 20-year bonds,
again maintaining that maturity structure.
Beta coefficient. Ans✓✓✓ It is a measure of a security's systematic risk-risk that
cannot be diversified. Is a measure of the volatility of an individual asset relative
to the volatility of an appropriate benchmark index. It is most often applied to
common stocks and mutual funds.
,Business risk. Ans✓✓✓ Is associated with a firm's ability to operate profitably
and therefore is a major risk with common stocks. Companies with dependable
and growing income, limited competition, healthy sales, and acceptable expense
levels have a lower level of risk. The degree of business risk is a function of factors
such as a company's management (both ability and credibility), specific products
or services, marketing strength, financial strength, accounting practices
(conservative or aggressive), and its fundamental business plan. The length of
time during which a firm has been in business can also be important; all other
things being equal, the longer a firm has been operating profitably, the lower its
level of risk.
Coefficient of variation. Ans✓✓✓ Is the standard deviation divided by the mean
return. Is a relative measure of risk (risk per unit of return) and allows risk
comparison among different investments,
Contrarian investment strategy. Ans✓✓✓ Is buying securities that are out of
favor and selling those that have become popular.
Core-satellite asset allocation. Ans✓✓✓ When employed, the 70% to 80 %
portion of the portfolio is invested in broad-based index funds or exchange-traded
funds while the remaining portion consists of actively managed mutual funds in
niches such as sector funds in energy and health care, REITS, emerging markets
funds, or international small-cap funds; and/or alternative investments such as
hedge funds, private equity funds, and managed futures/commodity funds. The
satellite portion attempts to generate above-average returns and/or to provide
additional diversification to the core portfolio.
Corporation. Ans✓✓✓ An entity of indeterminate life owned by one or more
parties. Ownership is evidenced by shares of stock, each representing a fractional
interest in the entity.
, Correlation coefficient (correlation). Ans✓✓✓ Is a relative measure of the degree
to which the returns of two assets move together. Correlations range between
+1.0 to -1.0
Credit risk. Ans✓✓✓ Is the risk that a bond (or a preferred stock) will be
downgraded due to excessive business risk and/or financial risk. When a bond is
downgraded by one or more rating agencies, its price will fall due to the higher
risk. In practice, the bond will usually fall before a credit downgrading, as financial
analysts recognize the deterioration of credit quality before the downgrading,
which will cause some selling of the bond issue. This selling often occurs when a
bond falls from investment grade (i.e., the top four bond grades of AAA, AA, A, or
BBB) to non-investment grade due to the requirement of many institutional
investors that they own only investment-grade bonds. Note that even high-grade
bonds can have credit risk because they are subject to being downgraded if
business and financial conditions deteriorate.
Default risk. Ans✓✓✓ Is a higher degree of credit risk. When a firm cannot meet
its obligations, it is in danger of defaulting. If the bond issuer has insufficient cash
flow to make the interest (and, if necessary, principal) payments on the bonds,
the bondholders incur default risk. Not only will the bondholders no longer
receive payments due them, but the prices of the bonds, of course, fall as well.
The U.S. government is considered to be immune to default risk because of its
(theoretical) unlimited ability to raise taxes and print money. State and local
governments, while they cannot print money, usually (but not always) have the
ability to raise tax revenues when needed to make payments on their general
obligation (GO) bonds. Their revenue bonds, which depend only on the project's
revenues to make their payments, generally are more likely to have credit and
default risk. However corporations depend on profitable sales for cash flow and
not all companies are able to generate sufficient cash flow. Default risk tends to
