Investment Analysis 22 Question Description 1)What is the Capital Allocation Line (CAL)? H …

Investment Analysis 22Question Description 1)What is the Capital Allocation Line (CAL)? How do indifference curves inform positioning along the CAL? Explain the risk aversion metric employed in utility modeling? What is the (approximate) range?2)What is the difference between systematic and unsystematic risk? Which one can be diversified away? Which one is priced? What is the efficient frontier? Link the Sharpe Ratio, the Efficient Frontier, and the CAL to the focus of portfolio theory.3)Explain the components of the single index model, linking diversifiable and systematic risk to your answer. What is the Security Characteristic Line and what information does it convey?4)In a sentence, what is the essence of CAPM (what is the intent of its simplistic elegance)? With respect to CAPM and employing The Economist Group’s “Tales from the FAR Side”, what five simple ideas can CAPM be reduced to?5)Link the economic cycle to Stephen Ross’ arbitrage pricing theory (APT) framework, explaining where the economy is positioned and where the portfolio should be positioned with respect to APT betas, respectively. Explain the foundational elements of the Fama-French (FF) Three Factor Model, linking it to the Morningstar Box framework.6)What does the Efficient Market Hypothesis (EMH) portend? What five anomalies appear difficult to reconcile with the EMH?7)Explain behavioral finance in the context of heuristics, biases, and anomalies. What is a market bubble, how do bubbles confirm or disaffirm the EMH, and who wrote Manias, Panics and Crashes? Finally, what are the five or six stages outlined in MP&Cs?8)Explain “liquidity” as a priced market factor? When is liquidity particularly valuable? What is the Equity Risk Premium Puzzle?9)What is the link between interest rates and bond prices? What is the difference between Yield-to-Maturity, Realized-Yield-to-Maturity, and Yield-to-Call? Explain how default is measured – and then depicted to investors – on the Street?10)When constructing a yield curve, what is the role of zero-coupon bonds? What is a yield curve? What is the difference between a spot rate, a short rate, and a forward rate? How is a one-year forward rate five years out easily calculated?11)What is duration? What is modified duration? What is effective duration? What is convexity? What do duration and convexity measure? If the benchmark duration is 5, what duration are you targeting in rising rate environment? Why?12)What is operating leverage? What is financial leverage? What is the industry life cycle, linking how it may relate to valuation discussions? What is sector rotation, linking it to where you would want to position yourself in today’s marketplace? Why?13)Link equity valuation to discounted cash flow models from your Intro to Finance. In theory, is it similar, different? Link the Price/Earnings Ratio to Growth Opportunities, using today’s S&P500 Index as an example. How are FCFF and FCFE defined? What does “consistency” refer to in valuation theory?14)Explain how the Dupont Decomposition can inform one’s comparative analysis of two companies? Is ROE, ROA, or ROIC the best measure to decompose? Why?15)Draw a long call, short call, long put, short put, labeling the two axes. What is the difference between a theoretical option value and an actual payoff? What does the put-call parity relationship represent? Provide an example of combining options into a strategy that is long volatility.16) What are the six determinants of call option values? Which one can be effectively discerned implicitly for trading? Explain how. What is the VIX and how is it calculated?17)Explain what links the spot and futures “financial” prices? Explain what links the spot and futures “commodity” prices? What is contango? What is backwardation?

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