Fin 410 Exam 1 Review Updated Questions And Correct Answers

FIN 410 EXAM 1 REVIEW UPDATED QUESTIONS AND
CORRECT ANSWERS
Question:
1. Chapter 1 Learn-ing Objectives
Answer:
1. How to calculate the return on an investment using different methods
2. The historical returns on various important types of investments
3. The historical risk on various types of important investments
4. The relationship between risk and return

Question:
2. Total Dollar Re-turn on a Stock
Answer:
Dividend Income + Capital Gain (Or Loss)

Question:
3. Percent Return on Stock
Answer:
(Total Dollar Return on Stock)/(Beginning Stock Price, i.e. Beginning Investment)

Question:
4. Holding Period Percentage Re-turn
Answer:
(P(t+1)-P(t))/Pt

Question:
5. Effective Annual Return (EAR)
Answer:
The return on an investment expressed on an "annualized" basis.

Question:
6. 1+EAR
Answer:
(1+Holding Period Percentage Return)^m(i.e. number of holding periods in a year)

Question:
7. Risk Free Rate
Answer:
The rate of return on a risk less i.e. Certain investment

Question:
8. Risk Premium
Answer:
The extra return on a risky asset over the risk-free rate i.e. the extra return for bearing risk

, Question:
9. Arithmetic Aver-age
Answer:
Tells you what you earned in a typical year, generally is too high in the long run

Question:
10. Geometric Aver-age
Answer:
Tells you what you actually earned per year on average, is generally to low in the short run

Question:
11. Blume's Formula R(T)
Answer:
The Medium Between the Geometric and Arithmetic Average that gives the most accurate return

Question:
12. Chapter 2 Learn-ing Objectives
Answer:
1. The importance of an investment policy statement
2.The Various types of securities brokers and brokerage accounts 3.How to calculate initial and
maintenance margin 4.The workings of short sales.

Question:
13. The Investment Policy Statement (IPS)
Answer:
Designed to reflect your objectives and strategies -Two parts Objectives and Constraints

Question:
14. Objectives
Answer:
The balance of return objectives with risk tolerance

Question:
15. Constraints
Answer:
-Resources -Horizon -Liquidity -Taxes -Special Circumstances

Question:
16. Investment Strategies and Policies
Answer:
-Investment Management -Market Timing -Asset Allocation -Security Selection

Question:
17. Company Spon-sored Retirement Plan