Question

What is a “basis point”?

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Can you easily find asset classes that possess positive returns, above that of inflation, which also possess negative correlation? (Yes or No.)

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Explain the concept of “multi-asset class investing” in your own words.

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The author states that both “U.S. stocks and U.S. bonds have real positive returns over time.” What is “real return”? What is “nominal return”?

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The author states: “There is no known way to design a portfolio that is fully hedged against market downturns while fully participating in market upturns.” In your own words, what does he mean by this?

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What are the three important characteristics you should look for, when deciding which asset classes to include in your investment portfolio? (You may quote directly from the book, for this answer.)

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U.S. stocks are those stocks of companies that have their headquarters in the United States. But many corporations, especially of larger U.S. companies, possess substantial overseas operations – and hence generate revenue, and profits, from “foreign” operations. Undertake a Google search for “foreign revenues S&P 500 2014.” For U.S. large corporations – defined for this purpose as those corporations in the S&P 500 Index, what percentage of sales occurred to customers in foreign countries in any recent year?

(Note: For comparison purposes, U.S. small-cap stocks, as measured by the Russell 2000 Index, only derive about 20% of their revenues from sales to non-U.S. customers.)

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Explain, in your own words, the difference between a “large cap” and “mid-cap” and “small-cap” stock.

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Explain, in your own words, the difference between a “value” and “growth” stock.

ANSWER:

Answer 1

1) Basis point is one hundredth of a percent. That is 1 bp = 0.01 %

It is usually used to indicate change in interest rate.

2) No

If two returns are negatively correlated, as one asset price increase , other decrease. So both return can't be positive.

3) Multi asset class investing is investing in different asset classes like bonds, stocks, real property, cash. It helps in diversifying risk. Because the correlation between returns of the asset classes are lower than the correlation within each asset class.

4) Real return is the return after adjusting for inflation. Nominal return is the stated return without adjusting for inflation.

Real return =[ (1+nominal rate)/(1+Inflation rate) ] - 1