2024 AFM 121 Final Exam New Latest Exam
Best Studying Material Updated Recent Version
with Questions and Answers
What is an ideal portfolio correlation?
- ans --1 because if they move in opposite directions it diversifies risk
What is beta?
- ans -Measures the volatility of a security's return relative to the overall market
The higher the beta the riskier the security
If company A's beta = 2.0, if the market goes up by 10%; company A's shares will
increase by 20%
Primary investor objectives?
- ans -Safety
Income
Capital Growth
Secondary investment objectives
- ans -Marketability / liquidity
Tax minimization
What is investor policy statement?
- ans -Outlines the investment strategy:
- Target return/dollar amount
- Age of the investor (time left to retirement/goal)
- Dependants (children, parents)
Investor's money can be split across:
- ans -Cash, fixed income, equities
Markets alternate between which sections?
- ans -Expansion: economic and profit growth
Peak: maximum economic activity/profit in cycle
Contraction: economic and profit decline
Trough: minimum economic activity/profit in a cycle
Code of ethics for mutual fund managers?
- ans -Use proper care
Act in best interest of client
Display integrity and trustworthiness
Maintain client confidentiality
Difference between mutual fund and a hedge fund?
,- ans -Compensation - hedge funds will be paid on a combination of funds administered
and performance; MF paid strictly on funds administered
Restrictions - Hedge funds don't have to adhere to a lot of the restrictions above
What is closet indexing? - ans -As a fund manager, being someone who picks stocks or
bonds that were very similar to those in an index fund
What does a mutual fund performance highlight?
- ans -NAVPS
Rates of return for different periods
Volatility
Compound rates of return
Expense ratios
How should mutual funds be compared?
- ans -Vs. others with similar objectives
Standard deviation of a fund's return
Beta
Sharpe
Some difficulties about comparing mutual funds?
- ans -All the data is about the past, and in finance we are focussed on the future
Fund objectives / managers may change
Only the strong survive
Short term performance without peer group / market benchmarks
What can hedge funds do?
- ans -Form concentrated portfolios (no diversification)
Use leverage
Go long and short
Invest in derivatives
Avoid pesky disclosure requirements
Eligible investors for a hedge fund?
- ans -People who can afford to lose their investment
People who understand the risks they are getting into (IIROC/OSC registrants,
institutions, governments)
What is the offering memorandum?
- ans -A marketing document outlining important details of a hedge fund (manager, risk,
fee structure, investment strategy)
Why are hedge funds so sexy?
- ans -To an investor: Leverage and shorting allow hedge funds to create a greater
range of return-risk tradeoffs
To a portfolio manager: Money
,What are the three types of hedge funds?
- ans -Long-short
Directional (big levered betes on asset price rising or falling)
Esoteric (provides access to assets an investor could not buy on their own)
What is arbitrage? - ans -Subset of long-short strategies where the outcome is "known"
What is high frequency trading? - ans -Computers execute long-short and directional
straegies (trades may occur every milli- or micro -second
How do hedge funds compensation work?
- ans -Collect a performance fee and a fee on assets (performance fee is only applied to
profits so the hedge fund manager does not pay if you lose money)
What are ETFs? - ans -Exchange traded funds:
- Trade on exchanges
- Lower MERs
- Have a lower portfolio turnover reducing taxes payable
- Permit short selling and can be purchased on margin
What is interest income?
- ans -The amount that has been "accrued", which means earned
Full amount is added to taxable income
What is the tax efficiency?
- ans -The source of income that produces the lowest effective tax rate depends on the
marginal tax rate (but never interest income)
How does tax work with an RRSP?
- ans -Provide a tax deduction for contributions (reduce current taxable income)
Do not tax investment income (tax-free investment returns)
Withdrawals are taxed
How does tax work with TFSAs?
- ans -Deposits into a TFSA are not tax deductable
Investment income inside a TFSA is not taxed
Withdrawals are not taxed
What are closed end funds? - ans -The units are listed on an exchange (# of units is
fixed)
T or F: Market values for closed-end funds typically trade at a discount to their "break up
value" and open-ended trusts trade close to their NAV - ans -T
What are preferred shares - ans -Provides cash payments/dividends
, These payments/dividends are fixed; hence, preferred shares are often viewed as fixed
income not equity
Most attractive to investor who wants a steady income
What is a stock split? - ans -A company splits its shares thereby doubling (or tripling) its
shares outstanding (in a 2 for 1 stock split, the share price is halved)
Note****A stock split does not increase a company's market capitlization
What happens on ex. dividend date? - ans -You must purchase a stock BEFORE the
ex. dividend date to receive the next dividend payment. On this date, the stock price
declines by the amount the dividend is being paid is.
What happens on the record date? - ans -Shareholders will receive the dividend
amount.
What is a stock dividend? - ans -The company decides to issue a stock, rather than
cash
What is a DRIP? - ans -Divident Reinvestment Plan
The investor decides to receive stock, rather than a cash dividend
What is multi-voting shares? - ans -Each share they own comes with it 10 votes instead
of 1 share for 1 vote for restricted voting shares
Do dividends receive a tax credit? - ans -Yes
How much do capital gains get taxed? - ans -50%
What is a stock's 'close'? - ans -Last trading price of the day
What is a stock's 'change'? - ans -Change from previous day's close
What is a stock's 'volume'? - ans -# of shares traded during the period
Which type of dividends are paid first? - ans -Preferred then common
Are dividend payments obligatory? (like interest payments) - ans -No
How are preferreds valued? - ans -PV of future cash flows
Do preferreds have maturity date? - ans -No
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