What items are typically classified as current assets on the statement of financial position?
Answer(s): C
Current assets on a statement of financial position include items that are expected to be converted to cash or used within one year, such as cash, accounts receivable, and inventories. The feedback from the document states:"Typical current asset accounts include cash, representing the total amount in all of the company's deposit accounts; inventories, representing the finished and unfinished products which have not yet been sold; and accounts receivable."
Chapter 9 Understanding Financial StatementsLearning Domain: Understanding Investment Products and Portfolios
You wish to sell a perpetual preferred share with a par value of $25.00, which pays a quarterly dividend of $0.25. If other preferred shares of similar quality are currently yielding 3.5%, what price should you expect to receive for your share?
The market value of a perpetual preferred share is calculated by dividing the annual dividend by the yield of similar shares. Annual dividend = $0.25 × 4 = $1.00. Price = $1.00 / 0.035 = $28.57. The feedback from the document states:"The current market value of a perpetual preferred share is calculated by dividing the annual dividend in dollars by the annual yield currently offered on preferred shares of a similar level of risk. In this case, the share would be valued as: ($0.25 × 4) / 0.035 = $28.57."
Chapter 7 Types of Investment Products and How They Are TradedLearning Domain:Understanding Investment Products and Portfolios
Which statement best describes one of the main differences between short and long transactions?
Answer(s): D
Long transactions involve buying a security with the expectation that its price will increase, while short transactions involve borrowing and selling a security with the hope of buying it back at a lower price. The feedback from the document states:"Short transactions are a common feature of the capital markets, although not as common as long transactions the transactions taken by investors who anticipate a price increase in the security. Investors who short sell stocks must first borrow the shares. They must also declare their short transactions."
Sonya, a mutual fund manager for Drake Financial, has had a stellar year in managing their Canadian equity portfolio and has outperformed the benchmark by over 200 basis points. She is now concerned that within the last couple of months of this calendar year, the Canadian equity market is due for a 10 to 15% pullback. Which investment strategy would be most appropriate for her to implement for the last couple of months of the year to offset the market correction?
Answer(s): A
To protect against a market decline, purchasing put options on an index fund like the iShares S&P/TSX 60 allows the portfolio to offset losses by gaining value if the market falls. The feedback from the document states:"A fund manager may have experienced a rapid growth in the value of her portfolio, but is concerned that the market may fall. To protect herself against a fall in value, she purchases put options on the iShares S&P/TSX 60 Index Fund (i60s). If the market declines, the fall in value of the portfolio is offset by an increase in the value of the put options."
Which statement about market risk is true?
Market risk, or systematic risk, arises from factors affecting the entire market, such as changes in inflation or interest rates, and cannot be fully eliminated through diversification. The feedback from the document states:"Once a portfolio becomes well diversified, the only remaining risk to be concerned about is market risk. Market risk is defined as the variability of a stock or a portfolio in relation to the market as a whole. The process of diversification cancels out much firm-specific risk, so market risk is less than the total risk you would calculate if you looked at each stock separately. Market risk is also referred to as systematic risk and arises from such things as inflation, the business cycle, and interest rates."
Chapter 8 Constructing Investment PortfoliosLearning Domain: Understanding Investment Products and Portfolios
The Optima Equity Fund has a beta of 1.4. What is the most accurate way to describe the Optima Equity Fund's relationship to the market as a whole?
A beta of 1.4 indicates that the Optima Equity Fund is 1.4 times more volatile than the market. If the market rises by 5%, the fund is expected to rise by 5% × 1.4 = 7%. The feedback from the document states:"One way to measure market risk is by calculating a portfolio's beta. Beta shows how much a portfolio fluctuates when the market as a whole fluctuates. A higher beta means that the portfolio is exposed to more risk. The market has a beta of 1.0. In this example: The Optima Equity Fund has a beta of 1.4, which means the Fund is expected to be 1.4 times more volatile than the market as a whole. If the S&P/TSX Composite Index is used to measure the performance of the Optima Fund, then if the Index rose by 10% you would expect to see the Optima Fund rise by 14% (1.4 × 10%)."
Chapter 8 Constructing Investment PortfoliosLearning Domain: UnderstandingInvestment Products and Portfolios
A portfolio manager first analyzes a variety of asset mixes to determine an optimal portfolio and then adjusts the mix by monitoring and rebalancing. What is the name for the process the portfolio manager is following?
Strategic asset allocation involves selecting a long-term asset mix, monitoring it, and rebalancing as needed to maintain the desired allocation. The feedback from the document states:"When a portfolio manager develops a strategy to maximize portfolio returns, he or she does so with a particular asset mix or allocation in mind... This base policy mix is called the strategic asset allocation. This is the long-term mix that will be adhered to by monitoring and, when necessary, rebalancing."
Rank the decisions made by a portfolio manager in order of importance for the success of the portfolio.
Asset allocation is the most critical decision for portfolio success, followed by sector weighting and then security selection. The feedback from the document states:"The single most important decision, one that accounts for most of the success or failure of a portfolio, is the asset allocation decision, which is the selection of the classes of securities to be held and in what proportion to hold them. The next most important decision is the selection of the specific industries from which stocks will be selected: the portfolio's sector weighting. The final decision is the security selection: the choice of which individual companies within the industry or sector to invest in."
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