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FINC202 > 202 > Flashcards

202 Flashcards

1
Q

Stocks are

A

Securitized ownership

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2
Q

Bonds are

A

securitized loans

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3
Q

Ownership vs loan

A

Ownership could get 100% or nothing back where as loan you could get intertest and prinicipal

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4
Q

Measurement of equity

A

Price of a stock

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5
Q

What is the point in buying a stock and never selling?

A

to collect dividends

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6
Q

What does the Gordon Growth Model assume

A

constant g growth rate

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7
Q

What is the GGM?

A

P=D/r-g

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8
Q

Why is the GGM helpful/what can it be used for?

A

To calculate the r, as you may not be sure what the equity investors r is, you can then use that for NPV calculation

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9
Q

Money in business

A

Book Equity per share

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10
Q

Profit %

A

ROE %

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11
Q

Profit

A

EPS

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12
Q

Give away %

A

DR

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13
Q

Give away $

A

Dividend

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14
Q

If paid out entirely to shareholders DR=

A

100%

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15
Q

Another note if DR=100%

A

g=0 as g=ROEx(1-DR)

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16
Q

Shares mean you have

A

small portion of ownership of the company

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17
Q

Is more EPS/r or more PVGO

A

value stock, growth stock

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18
Q

PVGO

A

PV of growth opportunities

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19
Q

What is PVGO?

A

how much in a share you are paying for the fact that the price/div will grow

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20
Q

log return and log of return

A

NOT the same thing

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21
Q

weights rule

A

add up to equal 1

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22
Q

The return of a portfolio only depends on 2 things

A

stock weights and returns

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23
Q

Why can’t you just P1+P2/N to measure the performance of the whole stock market? (2)

A

1) companies sometimes have much bigger
2) stock splits

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24
Q

Weight is also known as

A

market capitilisation

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25
Q

Why is the market index helpful?

A

It means you can find the change over longer periods of time rather than from one day to the nxt

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26
Q

Std of a stock is the

A

risk

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27
Q

Correlation rule

A

-1 <= p <= 1

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28
Q

Risk of a stock is the

A

std

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29
Q

Higher std means

A

more risky, more spread of returns

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30
Q

diversification ___ apart from __

A

lowers std/risk
p=1

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31
Q

p=-1 you could obtain

A

std=0

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32
Q

when does it mean there is a higher chance of a loss?

A

std=4mean

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33
Q

S v S given r* and std*

A

one r* point
one, two, none std* point

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34
Q

weights rule

A

w1+w2=1

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35
Q

Short Selling

A

borrow shares to sell, hoping price will fall, so that they can buy them back cheaper

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36
Q

Short-selling does though…

A

extends possibilities on a risk return graph

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37
Q

S v Bank

A

model bank as stock with std=0 as 0 risk you are guaranteed to get the money back

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38
Q

S v Bank with one negative weight?

A

you can’t short sell a bank but you could borrow money, leveraging

39
Q

S v Bank risk return graph is ..

A

linear

40
Q

Leveraging does what to the possibilities between S v B

A

extends

41
Q

B v B is

A

Arbitrage
both have std=0

42
Q

Arbitrage is only legal..

A

only legal in the US

43
Q

If you are treating portfolios like stocks you use what maths technique…

A

vectors

44
Q

S v S, S v B, B v B summaries

A

S v S
- without selling can only get pts on curve (stocks lie on curve)
- given r* 1 pt
-given sigma* 1, 2 or none
- short seling extends curve
- curved line
S v B
- banks risk/sigma=0 it has guaranteed return
- bank is like a risk free asset
- straight line
- short selling (borrowing) extends line
- S/sell is borrowing to invest in stock (leverage)
B v B
- impossible
-maths is all good, not financially feasible

45
Q

With 3 or N socks what is the curve called on returns/sigma graph?

A

minimum variance set

46
Q

What is the upper half of MVS?

A

efficient frontier

47
Q

What is possible on or in MVS?

A

everything inside

48
Q

Do stocks lie on MVS?

A

not necessarily like the 2 stocks do

49
Q

given an r* on a N stocks graph

A

infinite possibilities for portfolios

50
Q

MVS gives portfolio with lowest

A

risk

51
Q

N stock optimization uses what maths?

A

Lagrangian

52
Q

The two fund theorem means that P1, P2 are any Ps that lie on ___ and if they are optimal that means

A

MVS
every other optimal P comes from distributing money between P1, P2

53
Q

How to find if P(x,y,z) lie on MVS?

A

3 equations for a
if all of the a’s are equal

54
Q

How to find if stock 1 on MVS?

A

sub P(1,0,0) into P

55
Q

If you have N stocks and 1 bank the efficient frontier is called

A

capital market line

56
Q

Risk free portfolio

A

P(1,0,0)

57
Q

Tangent portfolio

A

Pt(0,w1,w2)

58
Q

what is CAPM?

A

is a financial model that calculates the expected rate of return for an asset or investment

59
Q

2 assumptions of CAPM

A

every investor has same values for r*, std , p for all stocks
everybody does mean variance optimizationC

60
Q

CAPM means that what are equal

A

Pm=Pt

61
Q

Why can’t you just do rt/stda for sharpe ratio?

A

as banks std is 0 so would go to inf

62
Q

CAPM tell us that

A

you can’t beat the sharpe ratio for Pm as it has the highest sr

63
Q

for CAPM everything on off frontier has same SR

A

as PM

64
Q

Find P on eff frontier with return x%

A

sub in return risk free then calculate return t then solve for a

65
Q

if financed by the bank the discount rate comes from

A

banks IR

66
Q

if financed by shareholders comes from

A

CAPM (re)

67
Q

risk and return key message

A

for correlation (-) increased risk does not mean increased return

68
Q

2 takeaways of finance

A

p too high diversification does not help
p(-) increased risk does not mean increase return

69
Q

IRR is r* that bank offers to be

A

exactly the same as business

70
Q

For continuous compounding what is the formula for PV?

A

FV/e^rt

71
Q

A bond contract always has the following 4

A

face value
maturity
coupon rate
coupon schedule

72
Q

Coupon payments end when the bond

A

matures

73
Q

on the maturity date for a bond, what is the payment you receive?

A

C+fV

74
Q

bond price is not a part of the contract but defined

A

by the market

75
Q

how could you compare if putting money in a bank is better or worse than purchasing a bond?

A

compare int payments and coupon payments

76
Q

When using y as int rate gives you an NPV of ____ or a ____ of

A

0
bond price

77
Q

yield price relationship

A

yield increases, price decreases
yield decreases, price increases

78
Q

YTM is essentially the ___ of a bond

A

IRR

79
Q

What is the price of a bond if yield=0?

A

Price= (Cxt) + fV

80
Q

If CR=y then

A

P=fV

81
Q

An example of bond default risk

A

if you buy a gov bond and they go bust

82
Q

Prob of annual default risk

A

P=y-y
y being the yield of the ‘shady’ company
y is the yield of a ‘safe’ company

83
Q

where does the compensation for bond default risk come from?

A

yield

84
Q

if you were to default in year 1 what is the prob of default year 2

A

0

85
Q

2 steps for prob of default

A

P(survive each year)=1-apd
P(survive N years) Psey^N
P(default within N years= 1-PsNy

86
Q

compare bond and bank

A

consider IRR, bank should at least offer that if not more

87
Q

priced at par

A

Cr= yeild, P=fV

88
Q

ZCb duration, Cr

A

duration=maturity
CR=0

89
Q

what is appropriate discount rate in bond replication?

A

yield of ZCM of that maturity

90
Q

OCR

A

official cash rate
rate at which govt lends to banks (minimum lending rate, cheapest money bank can get)
govt changes
changes in OCR has changes on other interest rates

91
Q

Duration is like

A

centre of gravity

92
Q

higher coupons means what for duration

A

lower

93
Q

duration should never

A

be higher than maturity

94
Q

sensitivity analysis formula means __ and only works for

A

if y changes by a small amount price changes by that amount but only works for small changes in y

FINC202 (5 decks)

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