Financial Terms and Concepts: AAMS Module 2 Solved, Exams of Advanced Education

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AAMS Module 2 Solved 100% Correct

68% of returns - ANSWER-1 standard deviation 95% of returns - ANSWER-2 standard deviations 99% of returns - ANSWER-3 standard deviations Beta - ANSWER-Measures volatility, systematic risk, and relative risk Beta formula - ANSWER-standard deviation of security/standard deviation of market X correlation coefficient Capital market line - ANSWER-Graphical representation of the relationship between risk and return, where risk is measured by standard deviation; the CML includes the concept of a risk free rate of return CAPM - ANSWER-Capital Asset pricing model. Calculates the required return for an individual stock or portfolio Common misinterpretation of the investment pyramid - ANSWER-The idea that the larger base indicates that a larger proportion of the client's funds should be invested in the lower tier financial instruments and that other investment instruments should be funded in increasingly smaller proportions correlation coefficient - ANSWER-measures the degree to which an investment's return varies from (or moves in concert with) another investment's return Dollar cost averaging - ANSWER-person invests a set dollar amount on a regular, ongoing basis Excess return - ANSWER-measure of the portfolio's return over and above what the client could have earned had he or she simply invested in risk free assets Exchange rate risk - ANSWER-Risk of having both their principal and return diminished by changes in the relative values of US and foreign currencies. Market Risk - ANSWER-Stems from factors independent of any particular security. Includes political events, broad economic and social changes, and the mood of the investing public. Purchasing power (inflation) risk - ANSWER-Risk of one's purchasing power decreasing as a result of inflation

Reinvestment risk - ANSWER-Risk that market interest rates have decreased at the time payments from an investment received. Investor is forced to reinvest his or her payment amount at a time when rates are not as favorable as they may have been previously. Standard deviation - ANSWER-Variability of an investment's returns around its average, or mean, return. Measures total risk (both systematic and unsystematic risk) Systematic Risk - ANSWER-Also called non diversifiable risk. Includes purchasing power risk, reinvestment risk, interest rate risk, market risk, and exchange rate risk Total Risk - ANSWER-Comprised of Systematic Risk & Unsystematic Risk Unsystematic Risk - ANSWER-Risk directly associated with particular securities and risk involved can be reduced through diversification. Value averaging - ANSWER-a person invests regularly and periodically an amount that will increase the account value by a set amount