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8/30/2021 Class Agenda a Day 1 Series 65 Day 2 Registered Investment Adviser Representative Day 3 Chapter 1 Chapters 2 & 3 Chapter 4 1 Series 65 Exam 2 Series 65 Exam Breakdown Passing Score: 72% or higher (94 out of 130 questions) Economic Factors and Business Information – 20 questions Chapter 1 Number of questions: 130, plus 10 “experimental” questions Time Allowed: Client Investment Recommendations and Strategies – 39 questions Chapter 3 180 minutes Format: Investment Vehicle Characteristics – 32 questions Chapter 2 Laws, Regulations, and Guidelines Including Prohibition on Unethical Business Practices – 39 questions Chapter 4 Multiple choice Including Roman Numeral and Except Questions Prometric will provide you with Dry erase board and markers Calculator 3 4 Equity Analysis FUNDAMENTAL Use of public info about the company to make investment decisions TECHNICAL Use of past price patterns in the market to make investment decision Portfolio Basics EQUITY VALUATIONS 1. Balance sheet assets – liabilities net worth (snapshot right now) 2. Income statement sales(rev) – expenses net income (based on past timeframe) 3. Cash flow statement how cash balance changes due to change in balance sheet and income statement 5 6 1

8/30/2021 Net Worth Total Assets – Total Liabilities 877 994 - 117 Liquidity Measure’s BALANCE SHEET C U R R E N T A S S E T S L O A N S G S E T T E S R M Cash Mkt Sec Acct Rec Inventory 20,000 10,000 30,000 10,000 Acct Payable Wages Dividends payable Note Payable Interest Payable Current Liabilities Total: Current Assets Total: 70,000 Fixed Assets Vehicles Real Estate Depreciation Intangible Assets / Goodwill Logos Long Term Liabilities 4,000 400,000 Mortgage Payable ‐300,000 Stockholder’s Equity 800,000 20,000 1 Common at Par 2 Paid in Surplus Retained Earnings 3 924,000 Stockholder’s Equity Total: Fixed Assets Total: Total How Quickly The Company Can Turn Assets In Cash To Pay Bills Coming Due Current Liabilities Current Assets 994,000 Total 4,000 2,000 4,000 5,000 2,000 17,000 C U R R E N T L I A B I L I T I E S L I A B I L 500,000 337,000 T I E T 877,000 R I 994,000 M E S 100,000 L O N 40,000 G Portfolio / Fixed Income Basics Formula S T O C K H O L D E R S 1) Net Working Capital Current assets – current liabilities 2) Current Ratio Current assets / current liabilities 3) Quick Ratio (Acid Test) ‐ best measure Current assets ‐ (inventory and prepaid) / current liabilities Current Assets –convert into cash 1yr E Q U I T Y Current Liabilities ‐ payable within 1 year C ‐ Cash W – wages payable M – marketable securities (stocks/bonds) A – accounts payable A ‐ accounts receivable I – interest payable I ‐ inventory N – notes payable P – pre‐paid expenses T – taxes payable 7 Which of the following would be evaluated to measure a company’s liquidity? A. B. C. D. Which item is used when computing a corporation's Current Ratio? A. Net Working Capital B. Long Term Debt C. Inventory D. Sales Portfolio / Fixed Income Basics Accounts receivable Income statement Cash and inventory Balance sheet 9 Portfolio / Fixed Income Basics 10 Debt/Equity Ratio Sources of long‐term capital Common stockholders (Common at Par Capital in Excess of Par Retained Earnings) Preferred stockholders Bondholders A. B. C. D. Stockholder’s Equity consists of capital contributed by both common stockholders and preferred stockholders Debt/Equity Ratio What ratio would be used to evaluate a company’s ability to pay off its short term debt? Debt Stockholder’s Equity Debt / Equity Ratio Current Ratio Price / Earnings Ratio Dividend Payout Ratio Shows how highly “leveraged” a corporation is, and thus, how susceptible it is to defaulting 11 Portfolio / Fixed Income Basics 12 2

8/30/2021 The Statement of Financial Condition for ABC Corporation shows the following: Current Assets Cash: Accounts Receivable: Inventory: Prepaid Expenses: Current Liabilities 1,000,000 2,000,000 2,000,000 1,000,000 Wages Payable: Accounts Payable: Taxes Payable: Long Term Assets 2,000,000 1,000,000 1,000,000 What is "financial leverage?" Long Term Liabilities Furniture / Fixtures: Real Estate: Goodwill: 1,000,000 2,000,000 1,000,000 Total Assets: 10,000,000 Notes Payable: A. Assets minus liabilities B. Debt as a percentage of equity C. Operating income as a percentage of bond interest D. Current assets - current liabilities 2,000,000 Stockholder's Equity Common Equity: 4,000,000 Total Liabilities and Stockholders' Equity: 10,000,000 The Current Ratio for ABC Corporation is: A. 1:1 B. 2:1 C. 3:2 D. 5:2 Portfolio / Fixed Income Basics 13 ABC Corporation Income Statement For the year ending 12-31-XX ( 000) Gross Sales Expenses Operating Income Bond Interest Net Income Before Tax Taxes Net Income After Tax Preferred Dividend Earnings for Common Common Dividend Retained Earnings Portfolio / Fixed Income Basics 14 Dividend Measures 4,000 Dividend Payout Ratio 2,000 2,000 Common Dividend Paid Earnings For Common Measures how much of a company’s earnings are paid to the common 200 shareholders as a dividend 1,800 800 1,000 100 Dividend Yield 900 500 Annual Dividend Market Price Shows a common stock’s return on money invested looking at dividends only 400 "GONNER" "EBTPC" Every Body Trades Puts and Calls Portfolio / Fixed Income Basics 16 17 Question Which of the following is (are) included in the computation of stockholder's equity? I. II. III. IV. A company has net income after tax of 4MM. The company pays a 1MM preferred dividend; and a 1MM common dividend. What is the dividend payout ratio? Cash Treasury Stock Retained Earnings Additional Paid‐In Capital A. I only B. II and III C. II, III, IV D. I, II, III, IV A. B. C. D. 18 25% 33% 50% 75% 1MM 3MM Portfolio / Fixed Income Basics 20 3

8/30/2021 Dividend Discount Model Find The “Present Value” Of The Future Dividend Payments Dividend discount model – if you want to buy a stock that’s paying a current .50 quarterly dividend. You require an 11% Rate of return on your money and the dividend is expected to grow by 5% each year(based on history of the company). The dividend discount model can be used to value: The “theoretical” price of the stock next years dividend / (1 discount rate – 1 growth rate) 2 / (1.11 – 1.05) 2 / .06 33.33 A. start-up companies B. growth companies C. mature companies D. all companies Portfolio / Fixed Income Basics Discounted Cash Flows Financial Statements Find out how attractive the stock (investment) price is compared to the present 10K 22 Annual corporate audited financial statements filed with the SEC value of future cash flow Use the estimated future cash flows of the company and discount them to todays value (present value) The “discount rate” used will be your required rate of return (stable investments use a smaller discount rate and growth co. use a higher rate) 10Q Quarterly corporate unaudited financial statements Once filed with the SEC, these are public documents for investor scrutiny Footnotes Assumption 1) Growth rate – guesstimate of how much growth in the cash flows Present Value future cash flow / 1 discount rate T Revenue recognition Inventory valuation method (LIFO or FIFO) Long term debt maturities Lease obligations Pension obligations Pending litigation 24 25 Details of the dollar amount of a corporation’s estimated future legal liability would be found in the: Economics A. footnotes of the company’s financial statements B. company’s FOCUS report C. Blue Sheets filed by the company D. income statement of the company Portfolio / Fixed Income Basics 26 27 4

8/30/2021 Basic Economics Gross Domestic Product – sum of all goods and services produced IN the U.S. Real GDP has the inflation factor stripped out GDP Consumer Spending Government Spending Business Investments GDP consists of all of the following EXCEPT: A. Consumer spending B. Government spending C. Foreign Government spending D. Fixed investment 28 Series #65 Economics / Analysis 29 Gross Domestic Product measures the: What economic indicator shows, on a national basis, buying and investment? A. price of goods and services in the United States B. level of output of goods and services in the United States C. level of consumption of goods and services in the United States D. inflation rate of prices of goods and services in the United States Series #65 Economics / Analysis A. GNP B. GDP C. CPI D. BOP 30 Series #65 Economics / Analysis 31 Recession / Depression Inflation / Deflation Recession is a mild downturn in business over 2 quarters (6 month period) Inflation –prices go up/ Interest rates go up more dollars chasing the same goods – Depression is a downturn in business over 6 quarters (18 month period) & Public fear Disinflation – reduction in inflation over a specific period of time Deflation – prices go down/Interest rates go down fewer dollars chasing the same goods 32 33 5

8/30/2021 Inflation Question Real Interest Rate A bond has an interest rate of 12% and the inflation rate is 4%. The Real Interest Rate is: This is the rate of interest being paid minus the inflation rate. The Treasury likes to keep the RIR on their products at around 3% but the Interest rate fluctuates due to inflation, so: 1992 A. 3% B. 4% C. 8% D. 12% 2012 RIR 3% 3% Inflation 7% 1% Interest Rate 10% 4% 34 Question 35 Economics: Business Cycle A customer buys a business in 2020 for 100,000. In 2021 they sell the business for 120,000, for a profit of 20,000. The interest rate for Treasury Bonds over that same period was 7% and the risk free rate of return was 5%. The inflation rate over this period was 4%. What was the customer’s real rate of return? Expansion Business Grows Prosperity A. 3% B. 12% C. 16% D. 20% Peak Recession Contraction Recovery Beginning of a new expansion 36 Series #65 37 Which of the following occurs between a recession and a recovery? The usual order of the economic cycle is: A. expansion B. depression C. trough D. prosperity A. expansion, recession, recovery, peak B. recession, recovery, peak, expansion C. expansion, peak, recession, recovery D. peak, recession, expansion, recovery Economics / Analysis 38 Series #65 Economics / Analysis 39 6

8/30/2021 During which phase of the economic cycle would one most likely find monetary "inflation" starting to occur? A six month mild decline in economic activity is a(n): A. recession B. depression C. correction D. expansion A. Expansion B. Prosperity C. Recession D. Recovery Series #65 Economics / Analysis 40 Series #65 Economics / Analysis 41 Economics: Fiscal and Monetary Policy Fiscal Policy Used by the President and Congress Monetary Policy Used by the Federal Reserve Government Spending o Money Supply Taxes o Interest Rates Fiscal Policy is set by: A. Supreme Court decisions B. Congressional action C. Presidential edict D. Federal Reserve action o D.O.R.M. Discount Rate Open Market Operations Reserve Requirement Margin Requirement 42 A. B. C. D. Series #65 43 Sets the Discount Rate (window rate) Federal Open Market Operations Sets the Reserve Requirement for Banks Sets the Margin Rate ( Reg T ) Money Rates set by BANKS Prime Rate ‐ to best corporate client Broker’s Loan Call Rate ‐ to broker’s for customer margin securities Federal ( Fed ) Funds Rate – to another bank Fed uses moral suasion Dovish tone to talk rates down / hawkish tone to talk rates up Tax rates could be reduced Tax rates could be increased Government spending could be reduced Government spending could be increased I and III I and IV II and III II and IV Economics / Analysis Economics / Analysis Role of the Federal Reserve - DORM To stimulate the economy using Fiscal Policy which of the following actions could be taken? I II III IV Series #65 44 45 7

8/30/2021 Open Market Operations – Monetary Policy Ease Money Tighten Money Fed reserve board buys back treasuries from banks Bank receives money The more money a bank has the less it costs to borrow Interest rates go down repo Fed reserve board sells treasuries to bank Bank pays out money to the fed The less money a bank has the more it will cost for consumers to borrow Interest rates go up Reverse repo Which of the following rates is the highest? A. Prime Rate B. Broker Rate C. Federal Funds Rate D. Discount Rate 46 Which of the following rates is the lowest? Economics / Analysis Economics / Analysis 47 All of the following rates are set by banks EXCEPT: A. Prime Rate B. Broker Rate C. Federal Funds Rate D. Discount Rate Series #65 Series #65 bank TO best corporate client A. Prime Rate bank TO broker B. Broker Rate C. Federal Funds Rate bank TO bank D. Discount Rate 48 Volatility/ Beta Series #65 Economics / Analysis 49 Portfolio Construction Beta measures a security’s volatility when compared to the market as a whole (S&P 500) Security with a beta 1 directly correlated to the market or in sync with the market Security with a beta more than 1 more volatile than the overall market Security with a negative beta inverse relationship with the market as a whole Defensive (Low Beta – below 1) Growth Younger companies that don’t have a proven track record, have low or no dividend payout but have above average growth rates Blue Chip High quality companies with a long track record of increasing earnings and dividend payments, thus increasing the stock price over time Emerging Growth Speculative (High Beta – above 1) 50 No track record, no dividend record, but high potential growth Income Mature companies that have little growth potential but which pay a very high dividend rate, like utilities Cyclical Tracks the business cycle “Big ticket” items such as cars, houses, major appliances, etc. 51 8

8/30/2021 Portfolio Construction Counter-cyclical Defensive Speculative Special Situations Question Growth stocks would have all of the following characteristics EXCEPT: Does well in a down economy Credit collection companies, gold stocks, pawn shops A. B. C. D. Unaffected by the business cycle, including pharmaceuticals, food, tobacco, etc. High price‐earnings ratios High price to book value ratios High dividend payout ratios High retained earnings ratios Extremely susceptible to the business cycle or to changes in consumer sentiment High flying company one day and a crashing company the next day Takeover or bankruptcy that is likely to “turn around” producing large capital gains 52 53 Investing Decisions Question Top-Down Investing An analyst evaluates a company’s market prospects, sales growth, product line, profitability, cash flow, capital structure, price/earnings ratio and dividend yield and then compares these to other companies that are in the same economic sector to decide which company is the superior investment. This is an example of: Pick the industry, then the stocks First looks at the market sectors that are likely to outperform the overall market; then focuses on the specific sector; and then finally picks the companies in that sector as an investment A. B. C. D. Bottom-Up Investing Pick the specific companies, regardless of industry sector Evaluates individual companies within an industry focusing on the company's business model, management, product lines, growth prospects, and historical performance After this, a decision is made for the best investment capital rationing bottom up investment approach top down investment approach strategic asset allocation 54 55 Performance Measurements An investment adviser that uses a "top down" approach to portfolio management will: A. select the key index that he or she believes will outperform other sectors B. analyze the entire economic outlook to sort out the areas for higher growth potential C. look for emerging markets that are likely to outperform mature markets D. select investments based on the size of each issue's market capitalization from largest to smallest Portfolio / Fixed Income Basics 56 How? Why? ROI (Sum of cash flows / Years) / initial investment If the ROI RRR invest Total return Income Growth / Initial investment Compare returns on all investments Holding period Return Same as above Calculates your total return based on the time investment was held Annualized return (1 holding period return)1/time ‐ 1 Annualizes the total return Equities are more volatile in short term After tax yield (tax free equivalent) Taxable yield * (100% ‐ bracket) How well your investment did considering taxes paid 57 9

8/30/2021 AFTER‐TAX YIELD A customer invests 1,000 on an investment that is expected to generate 100 in the first year, 150 in the second year, and 350 in the third year at which time, the original 1,000 original investment will be returned. What is the Return on Investment (ROI)? Computes the rate of return after taxes are paid and is dependent on each individual’s tax bracket When we talk about muni bond interest, we look at the interest as being exempt from Fed. tax – if you're in the 20% tax bracket and you purchase an 10% corporate, what is the equivalent tax‐ free (municipal) yield? 10% X 1,000 100 annual interest tax is 20% or ‐ 20 tax – After tax return 80; thus 8% Muni 10% Corp. given a 20% T.B. A. 10% B. 20% C. 30% D. 60% After‐Tax Yield Taxable Yield x (100% ‐ Tax Bracket%) Portfolio / Fixed Income Basics 58 (100 150 350) / 3 1,000 20% Portfolio / Fixed Income Basics 59 Question Total Return is an appropriate measure of performance for: I. II. III. Common stocks Preferred stocks Bonds A. B. C. D. I only I and II II and III I, II, III A customer has made an investment that pays 20 of interest during its first year and that has appreciated by 250, for a year-end value of 1,300. The customer’s total return is: A. B. C. D. Portfolio / Fixed Income Basics 60 A trader would buy a security if the expected rate of return was greater than the: A. B. C. D. 61 The “hurdle rate” is the same thing as the: A. expected rate of return B. required rate of return C. risk free rate of return D. real rate of return required rate of return average rate of return risk-free rate of return total rate of return Portfolio / Fixed Income Basics 1.91% 2.38% 20 250 25.71% 23.80% 1,050 25.71% 63 Portfolio / Fixed Income Basics 64 10

8/30/2021 Risk-Free Rate Of Return This is the average return on the safest security – short term Treasuries Which of the following alternate investment choices is most suitable for a customer in a 30% tax bracket who desires the highest rate of return? The average return over the last 50 years has been 3% The last 12 years of near zero interest rates is atypical (NOT NORMAL!!) A. 6%; 20 year; AAA corporate bond B. 6%; 20 year; Treasury bond C. 6%; 20 year; Municipal bond D. 6%; 20 year; Agency bond Portfolio / Fixed Income Basics 66 67 The risk free rate of return is the return provided by which of the following investments? An investment in Treasury Bills has: A. Municipals B. Agencies C. Common stocks D. Treasuries A. interest rate risk B. purchasing power risk C. credit risk D. no risk Portfolio / Fixed Income Basics 68 Portfolio / Fixed Income Basics 69 Comparison Returns How? Why? Risk adjusted return (risk premium) Total return – risk free rate Where the risk‐free rate is a t‐bill How much excess (incremental) return did you get for taking on more risk Real rate of return (inflation adjusted return) Total return – inflation Where inflation is measured via CPI How much excess return are you getting over inflation Active rate of return Passive rate of return Total return – benchmark Where the benchmark is an equivalent index Benchmark index (beware of tracking error on the index fund) The risk premium is the rate of return on an investment over the: A. holding period return B. stock dividend rate C. current yield D. money market return How much excess return are you getting for using an active portfolio manager (are they worth the added fees) Use index funds to generate market returns for lower annual fees 70 Portfolio / Fixed Income Basics 71 11

8/30/2021 A portfolio manager generates a 10% rate of return on a "small cap" portfolio, compared to an 8% rate of return on the benchmark portfolio and a 6% rate of return on the Standard and Poor's 500 index over the same period. The passive rate of return on the portfolio is: A portfolio manager generates a 10% rate of return on a "small cap" portfolio, compared to an 8% rate of return on the benchmark portfolio and a 6% rate of return on the Standard and Poor's 500 index over the same period. The active rate of return on the portfolio is: A. 2% B. 6% C. 8% D. 10% A. 2% B. 4% C. 6% D. 10% Portfolio / Fixed Income Basics 72 Portfolio / Fixed Income Basics 73 Statistical Measures A U.S. based customer has purchased a Treasury Bond at par with a 6.50% coupon. Inflation is 2.25%. If the U.S. dollar declines by 10% against the Euro, the investor's real rate of return is: A. 2.25% B. 3.60% C. 4.25% D. 6.50% Mean Average return Median Center return Mode Return occurring most often Range Difference between highest and lowest number 6.50% nominal rate ‐ 2.25% inflation rate Portfolio / Fixed Income Basics 75 76 STATISTICAL MEASURES Consider the following returns: Year 1: Year 2: Year 3: Year 4: Year 5: Year 6: Year 7: 4% 6% 12% 8% 10% 13% 10% Mean: Average Return 4% 6% 12% 8% 7 10% 13% 10% All of the following are measures of central tendency EXCEPT: 9% average Median: Center return A. B. C. D. 4% 6% 8% 10% 10% 12% 13% Mode: Most frequent return Range: Difference between the highest and lowest number mean median mode range 4% 6% 8% 10% 10% 12% 13% 13 and 4 9 Portfolio / Fixed Income Basics 77 Portfolio / Fixed Income Basics 78 12

8/30/2021 An investment generates the following annual returns: Year 1: Year 2: Year 3: Year 4: Year 5: 6% 4% 2% 6% 8% Given the set of the following numbers - 5, 4, 11, 6, 8, 5, 12, 13 - what is the range? A. 8 B. 9 C. 10 D. 13 The mode return is: A. 2% B. 4% C. 6% D. 8% Portfolio / Fixed Income Basics 79 Portfolio / Fixed Income Basics 80 ARITHMETIC vs GEOMETRIC MEAN Arithmetic mean return is the average annual return; geometric mean return is the compounded annual return The rate of return that considers compounding of returns of the time horizon of an investment is: A 100 investment generates the following returns: – Year 1: – Year 2: – Year 3: 20% ‐10% 20% A. B. C. D. – Arithmetic mean return calculation: ( 20% ‐ 10% 20%) / 3 10% – Geometric mean return calculation: Gaining 20% in Year 1 100 x 1.2 120 Losing 10% in Year 2 120 x .9 108 Gaining 20% in Year 3 108 x 1.2 129.60 Geometric mean return 9% (100 x 1.09 x 1.09 x 1.09 129.50) arithmetic rate of return geometric rate of return expected rate of return annualized rate of return Arithmetic mean return of 10% slightly overstates the actual compound (geometric) return of 9% Portfolio / Fixed Income Basics 81 82 Volatility Measures The essential difference between the arithmetic mean return and the geometric mean return is: A. arithmetic mean return considers compounding while geometric mean return does not B. geometric mean return considers compounding while arithmetic mean return does not C. arithmetic mean return considers probability while geometric mean return does not D. geometric mean return considers probability while arithmetic mean return does not Portfolio / Fixed Income Basics Portfolio / Fixed Income Basics 83 How? Why? Standard Deviation Something about the sum of the square root of the variance of the individual numbers from the mean (never ask you to calculate it!!!!!) Volatility of portfolio returns vs the average return(the mean) Higher SD more risk (more volatility) Sharpe Ratio Risk adjusted return / standard deviation Higher Sharpe more incremental reward for risk (vol) taken Beta Portfolio beta of 2 Mkt index return is 10% Portfolio anticipated return 20% Volatile of the investment in relation to the overall market Higher Beta more volatile than the market Duration Present value of a bond’s future cash flows (cpn and princ), weighted by the length of time to receipt / current market value Measures bond price volatility due to a change in interest rates ‐‐long term‐low coupon bonds are most volatile Higher DURATION more volatility in bond price Delta Volatility of options premium due to change in mkt price of the underlying Why we call options Derivatives 84 13

8/30/2021 Question An investment adviser representative has been reviewing the likelihood that an equity investment will produce the desired return. He has determined that the mean return on the investment is 20%, with a 15% standard deviation, and a 95% probability of occurrence. This means that he would expect the range of returns to be approximately: A. B. C. D. The Sharpe Ratio is a measure of: A. B. C. D. Volatility Risk‐adjusted return Risk‐free return Required return 5.00% - 35.00% 17.00% - 21.10% 4.75% - 33.25% 16.15% - 20.05% Portfolio / Fixed Income Basics 85 86 Planning Tools Expected Return EXPECTED RATE OF RETURN How? Why? Sum of (expected return * probability of occurrence) The weighted average of expected returns based on probabilities of occurrence Assigns a probability percentage to each of a variety of investment outcomes and adds them up Probability of Occurrence The expected return including the risk free rate CAPM – capital asset pricing Risk free rate Risk premium Where risk premium beta * (expected return ‐risk free and the risk premium (find most “Efficient model rate) Assumes investors are risk averse Future value T FV PV * (1 expected rate) Projected Return Expected Return 50% X 4% 50% X 8% Expected Return investments”) Value of asset at a later date assuming a constant rate of compounding Probability of Occurrence Projected Return 2% 4% 6% Expected Return 20% X -5% 30% X 10% 50% X 8% -1% 3% 4% Expected Return 6% Portfolio / Fixed Income Basics 88 89 Question The portfolio return measure that calculates a mean rate of return from a probability distribution of all potential rates of return is: A. B. C. D. A trader would buy a security if the expected rate of return was greater than the: Total return Expected return Internal rate of return Holding period return A. B. C. D. 90 required rate of return average rate of return risk-free rate of return total rate of return Portfolio / Fixed Income Basics 91 14

8/30/2021 COMPOUND VALUE OF A SUM (a.k.a. FUTURE VALUE) Question How much an investment today will be worth at a future date, assuming it compounds at a stated rate of return – For example, 1,000 today will be worth 1,331 in 3 years if it compounds at a 10% annual interest rate 1,000 x 1.1 (Year 1) x 1.1 (Year 2) x 1.1 (Year 3) 1,331 To find the future value of an investment, the annual investment returns must be: A. B. C. D. Discounted Compounded Amortized Accreted Year 1: 110% X 1000 – the value is 1100 Year 2: 110% X 1100 – the value is 1210 Year 3: 110% X 1210 – the value is 1331 Portfolio / Fixed Income Basics 92 93 What does "X" refer to in the following formula: The “hurdle rate” is the same thing as the: X P ( 1 i)n A. expected rate of return B. required rate of return C. risk free rate of return D. real rate of return A. Net Present Value B. Internal Rate of Return C. Yield to Maturity D. Compound Value of an Amount Portfolio / Fixed Income Basics 94 Portfolio / Fixed Income Basics Capital Asset Pricing Model Question The most efficient investments are found using CAPM – the Capital Asset Pricing Model ABCD stock has a Beta 2 Expected Market Return 7% Risk‐Free Rate of Return 1% Question: What is ABCD’s Expected Return using CAPM? Answer: Risk Premium is 2 x (7% – 1%) 12% Expected Return 1% Risk Free Return 12% Risk Premium 13% CAPM is used to calculate the: A. B. C. D. 96 95 Risk‐free rate of return Expected rate of return Geometric rate of return Total rate of return 97 15

8/30/2021 PORTFOLIO RISKS Systematic Risk – Risk of the market as a whole and the risk that cannot be diversified away All of the following are components of the Capital Asset Pricing Model EXCEPT: Non‐Systematic Risk A. B. C. D. Timing Risk – Risk of a specific security. As more and more securities are added to a portfolio, the non‐systematic risk is diversified away, leaving the portfolio only with systematic risk Risk-Free Rate of Return Alpha Beta Expected Market Rate of Return – Risk of buying high or selling low because the trades were done at the wrong time Capital Risk – Risk of not recovering invested capital due to a poor investment choice Value at Risk (VAR) – Measure of how much portfolio value could be lost based on historical reference – If a portfolio has a 90% value at risk of 1MM, then it is expected that the portfolio cannot lose more than 1MM, 90% of the time – Determined by Monte Carlo simulations ‐ computer simulations that predict returns based on a broad array of economic variables, with thousands of potential outcomes Portfolio / Fixed Income Basics 99 Portfolio / Fixed Income Basics 100 Monte Carlo simulation analyzes potential portfolio returns achieved based upon which of the following varying factors? Monte Carlo simulation: A. is used to determine the expected value of an investment's return based on the probability of a specific result occurring B. establishes a frequency distribution of investment returns over a range of different conditions C. predicts the variability of return that can occur relative to the mean or median return D. establishes the asset allocation percentages applied to each asset class based upon an investor's objectives, risk tolerance, and time horizon I interest rates II inflation rates III equity returns A. I only B. III only C. I and II D

Dividend Discount Model Find The "Present Value" Of The Future Dividend Payments Dividend discount model- if you want to buy a stock that's paying a current .50 quarterly dividend. You require an 11% Rate of return on your money and the dividend is expected to grow

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