CTFA - Comprehensive Review Terms Questions with well explained answers

top-down approach - Answer-A method of analyzing securities that starts with the overall market and narrows down to the specific company Treynor measure - Answer-A measure of reward to nondiversifiable volatility (systematic rISK) Unemployment Rate - Answer-A measurement of the percentage of the U.S. labor force that currently is not working but is willing and able to work and is actively seeking employment Value Investing - Answer-Investing in stocks that are considered underpriced given their earnings or book value Weak-form Efficiency - Answer-All historical information is factored into the stock's price. Thus the investor cannot obtain abnormally high returns using historical information Capital Asset Pricing Model (CAPM) - Answer-A model used to calculate expected return based on systematic (nondiversifiable) risk under the assumption that unsystematic risk is diversified away. Bottom-up Approach - Answer-A method of analyzing securities starting with the specific company and expanding outward to more general factors. Beta - Answer-A statistical measure indicating the degree to which a stock is related to the overall stock market, representing risk that cannot be diversified away. Beta is a statistical measure of relative risk bearish position - Answer-An option position that makes a profit when the stock price falls alpha (Jensen measure) - Answer-This measure represents the degree to which the portfolio return exceeds the return predicted by the capital asset pricing model—the risk-adjusted, excess returnconstant proportions portfolio insurance (CPPI) - Answer-Rebalancing strategy where portfolio manager monitors the market and purchases more assets in winning asset classes while selling assets in losing asset classes. This strategy is essentially the opposite of the constant-mix strategy constant-mix strategy - Answer-Rebalancing strategy where portfolio manager buys/sells in accordance with investment objective Closed-end Fund - Answer-A fund that sells a fixed number of shares of stock and does not continue to accept investments. These funds trade like a stock on a stock exchange Defined Contribution Plan - Answer-A retirement plan where the employer makes contributions as a percentage of current pay or profits. Typically, each employee makes a contribution of a certain percentage of his or her pay, and the employer matches that contribution to some extent. Now more common than Defined Benefit Plan - typically a 401k. Defined Benefit Plan - Answer-A pension plan where the employer contributes a set amount each pay period on behalf of the employee during his or her working years. On retirement, the employee receives either an annuity or lump sum benefit. Frictional Unemployment - Answer-A statistic that counts people new to the labor force or temporarily between jobs Fisher effect - Answer-The expectation that nominal interest rates rise proportionally with increases in anticipated inflation Fiscal Policy - Answer-The government's use of tax and spending policies to achieve economic and social goals Efficient Market - Answer-A market that responds immediately to new factors affecting stock price Interest Rate Risk - Answer-The risk that the value of the bond will fall as market interest rates riseGross Domestic Product (GDP) - Answer-The total market value of all final goods and services produced by the factors of production located in the country, regardless of who owns the factors of production Monetary Policy - Answer-Alterations in the money supply and interest rates by the Federal Reserve System (the Fed) in an attempt to affect the economy. Liquidity Preference/Preferred Habitat Theory - Answer-Investors prefer not to tie their money up long term, which leads long-term securities to offer a higher rate as an incentive to investors Leading Economic Indicators - Answer-Economic variables that are used to forecast future moves in GDP. Most commonly, stock prices. Sharpe measure - Answer-The reward-to-volatility tradeoff calculated by dividing the average portfolio excess return by the standard deviation of returns Soft Dollars - Answer-Value of research services brokerage house provides "free of charge" in exchange for business Structural Unemployment - Answer-A statistic that counts the workers who lack the proper skills to fill existing job openings Preferred Stock - Answer-Stock paying a fixed dividend that is paid before common dividends are distributed. It often does not mature and usually does not give the holder voting rights in the company Producer Price Index (PPI) - Answer-Similar to the consumer price index, the producer price index is a measure of the average cost of a basket of intermediate goods used by producers Put Option - Answer-The right to sell a given number of shares of a particular stock at a specified price on or before a given date Real GDP - Answer-GDP adjusted for inflation. Will only rise if actual production increase in current yearNominal GDP - Answer-A GDP-based measure of the goods produced and valued at current market prices, and not adjusted for inflation Alternate Valuation Date - Answer-Gross estate can either be valued as of DOD or 6 months from DOD. Alternate valuation date can only be used if it results in lower Federal Estate Tax. Federal Estate and Gift Tax Exclusion - Answer-Amount of decedent's estate not subject to estate/gift tax at death. In 2023, exclusion amount is $12.92 million per person. Charitable Lead Annuity Trust (CLAT) - Answer-A charitable trust in which an annuity is paid to one or more charities for a set term with the remainder passing at the termination of the trust to the noncharitable beneficiaries