FNCE 2820 Final Exam Questions
And Answers
Risk tolerance - Answer a measure of an investor's
willingness to hold a higher level of risk, given
the expectation of a higher rate of return.
Asset Allocation - Answer Positioning investment dollars in different
asset categories
(e.g., stocks, bonds, real
estate and cash equivalents)
Security Diversification - Answer Diversifying securities held within each of
the asset categories
Five Principles of Investing - Answer 1. Invest for value
2. Invest with a professional
3. Diversify
4. Continually invest
5. Have patience
How we can apply five principles - Answer 1. Seek knowledge (become the professional)
2. Value is linked to risk-adjusted return
3. Focus on long-term portfolio performance
(not short-term volatility)
4. Commit to systematic savings plan
5. Apply two key concepts:
asset allocation
diversification
Long term wealth accumulation - Answer asset allocation decision
Equities - Answer • Large companies (>$10 billion)
,• Mid-cap ($2-10 billion)
• Small-cap (below $2 billion)
• Domestic or foreign shares
Fixed Income (maturities over one year) - Answer • U.S. Government Notes and Bonds
• Municipal debt (state and local)
• Corporate coupon bonds (investment grade, below
investment grade, "junk" bonds)
• Corporate zero-coupon bonds
• Mortgage-backed bonds
• Treasury Inflation Protected Securities (TIPS)
• Foreign bonds
Cash Equivalents (maturities one year and less) - Answer • U.S. Treasury Bills
• Savings bonds
• Certificates of deposit (CDs)
• Money market accounts
Real Estate - Answer • Individual residential property
• Real estate investment trust (REITs)
• Commercial real estate
Life Cycle Investment Strategy - Answer Wealth = financial wealth + human capital
wealth
Initial: low financial wealth, high human capital wealth = greater focus on income
investments
later: high financial wealth, low human capital wealth = more focus on income producing
investments
Age strategy - Answer 110 - age
• Individual, age 20
90% invested in equities and alternatives*
10% invested in bonds and cash equivalents*
,• Individual, age 40
70% invested in equities and alternatives
30% invested in bonds and cash equivalents
• Individual, age 60
50% invested in equities and alternatives
50% invested in bonds and cash equivalents
60/40 approach - Answer Start from 60% growth versus 40% income mix
Adjust to 70/30 or 80/20, if individual factors warrant
Adjust to 50/50 or 40/60, if individual factors warrant
Mutual Funds - Answer • Professional management
• Diversification with only a small $ investment
• Wide range of asset categories
• High liquidity
• Easy to buy (typically low minimum investment)
Types of investors - Answer Conservative investor (50/50, 40/60 or 30/70)
Moderate investor (60/40)
Assertive investor (70/30)
Aggressive investor (80/20)
Open-ended mutual fund - Answer • Unlimited shares
• Investors buy and sell shares directly from the
investment advisor company
• Transactions clear at end of day, based on net asset value (NAV)
• NAV = total value of securities owed (less liabilities)
divided by the number of mutual fund shares
Money market funds - Answer • U.S. Treasury Bills
• U.S. Government
• Corporate
, • Tax exempt
Bond mutual funds - Answer • Government bond funds
• Municipal bond funds
• Mortgage-backed securities funds
• Intermediate- and long-term bond funds
• Investment-grade or high-yield bond funds
• Bond index funds
• Foreign bond funds
Equity (stock) mutual funds - Answer • Large-, mid- or small-cap funds
• Growth- or value-oriented funds
• Growth - invest in stocks with expected above-average
growth
• Value - invest in stocks which appear cheap by traditional
fundamental measures
Capital appreciation funds - Answer Invest in stocks that offer no or low dividends;
expectation
that gain will be in share price appreciation
Sector funds - Answer • Energy sector, capital goods, etc.
• Stock indexes or index-plus funds
Foreign and Regional Funds - Answer • Country funds (e.g., China fund)
• Regional fund (e.g., European fund)
• Emerging markets funds
• Developing markets funds
• International index (e.g., MSCI)
• International growth or value funds
• International large- or small-cap funds
Alternative Funds - Answer • Real estate funds (REITs)
And Answers
Risk tolerance - Answer a measure of an investor's
willingness to hold a higher level of risk, given
the expectation of a higher rate of return.
Asset Allocation - Answer Positioning investment dollars in different
asset categories
(e.g., stocks, bonds, real
estate and cash equivalents)
Security Diversification - Answer Diversifying securities held within each of
the asset categories
Five Principles of Investing - Answer 1. Invest for value
2. Invest with a professional
3. Diversify
4. Continually invest
5. Have patience
How we can apply five principles - Answer 1. Seek knowledge (become the professional)
2. Value is linked to risk-adjusted return
3. Focus on long-term portfolio performance
(not short-term volatility)
4. Commit to systematic savings plan
5. Apply two key concepts:
asset allocation
diversification
Long term wealth accumulation - Answer asset allocation decision
Equities - Answer • Large companies (>$10 billion)
,• Mid-cap ($2-10 billion)
• Small-cap (below $2 billion)
• Domestic or foreign shares
Fixed Income (maturities over one year) - Answer • U.S. Government Notes and Bonds
• Municipal debt (state and local)
• Corporate coupon bonds (investment grade, below
investment grade, "junk" bonds)
• Corporate zero-coupon bonds
• Mortgage-backed bonds
• Treasury Inflation Protected Securities (TIPS)
• Foreign bonds
Cash Equivalents (maturities one year and less) - Answer • U.S. Treasury Bills
• Savings bonds
• Certificates of deposit (CDs)
• Money market accounts
Real Estate - Answer • Individual residential property
• Real estate investment trust (REITs)
• Commercial real estate
Life Cycle Investment Strategy - Answer Wealth = financial wealth + human capital
wealth
Initial: low financial wealth, high human capital wealth = greater focus on income
investments
later: high financial wealth, low human capital wealth = more focus on income producing
investments
Age strategy - Answer 110 - age
• Individual, age 20
90% invested in equities and alternatives*
10% invested in bonds and cash equivalents*
,• Individual, age 40
70% invested in equities and alternatives
30% invested in bonds and cash equivalents
• Individual, age 60
50% invested in equities and alternatives
50% invested in bonds and cash equivalents
60/40 approach - Answer Start from 60% growth versus 40% income mix
Adjust to 70/30 or 80/20, if individual factors warrant
Adjust to 50/50 or 40/60, if individual factors warrant
Mutual Funds - Answer • Professional management
• Diversification with only a small $ investment
• Wide range of asset categories
• High liquidity
• Easy to buy (typically low minimum investment)
Types of investors - Answer Conservative investor (50/50, 40/60 or 30/70)
Moderate investor (60/40)
Assertive investor (70/30)
Aggressive investor (80/20)
Open-ended mutual fund - Answer • Unlimited shares
• Investors buy and sell shares directly from the
investment advisor company
• Transactions clear at end of day, based on net asset value (NAV)
• NAV = total value of securities owed (less liabilities)
divided by the number of mutual fund shares
Money market funds - Answer • U.S. Treasury Bills
• U.S. Government
• Corporate
, • Tax exempt
Bond mutual funds - Answer • Government bond funds
• Municipal bond funds
• Mortgage-backed securities funds
• Intermediate- and long-term bond funds
• Investment-grade or high-yield bond funds
• Bond index funds
• Foreign bond funds
Equity (stock) mutual funds - Answer • Large-, mid- or small-cap funds
• Growth- or value-oriented funds
• Growth - invest in stocks with expected above-average
growth
• Value - invest in stocks which appear cheap by traditional
fundamental measures
Capital appreciation funds - Answer Invest in stocks that offer no or low dividends;
expectation
that gain will be in share price appreciation
Sector funds - Answer • Energy sector, capital goods, etc.
• Stock indexes or index-plus funds
Foreign and Regional Funds - Answer • Country funds (e.g., China fund)
• Regional fund (e.g., European fund)
• Emerging markets funds
• Developing markets funds
• International index (e.g., MSCI)
• International growth or value funds
• International large- or small-cap funds
Alternative Funds - Answer • Real estate funds (REITs)
