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305 test 1 Flashcards

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1
Q

agency problems

A

conflicts of interest between managers and

stockholders

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2
Q

proxy

A

right to vote the shares of other shareholders

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3
Q

sarbanes-oxley act

A

requires corporations to have more independent directors who are not themselves mangers…requires cfo to be in chargeif accting satements

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4
Q

portfolio

A

collection of investment assets

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5
Q

passive management

A

buying and holding a diversified portfolio without attempting to identify mispriced securities

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6
Q

primary market

A

a market in which new issues of securities are offered to the public

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7
Q

secondary market

A

previously issued securities are traded among investors

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8
Q

American Depository Receipts (ADR)

A

domestically traded securities that represent claims to shares of foreign stocks…still expose investors to exchange rate risk

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9
Q

world Equity benchmark shares (webs)

A

allow investors to exchange portfolios of foreign stocks in a country

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10
Q

pass through securities

A

pools of loans sold in one package…owners of the passthrus receive all of principal and interest payment

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11
Q

securitization

A

pooling loans into standardized securities backed by those loans, making them tradeable

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12
Q

Treasury Bills (T-Bills)

A

• gov raises money by selling them to public,• investors buy the bills at a discount from the stated maturity value

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13
Q

BANK DISCOUNT METHOD

A

the bill’s discount from par value is annualized based on a 360-day year, and reported as a percentage of par-value

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14
Q

Certificates of deposit (CD)

A

Time deposit with a bank,• Bank pays interest and principal to the depositor ONLY at the end of the fixed term,• CDs larger than 100,000 can be sold to another investor if the owner needs to cash the certificate before maturity

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15
Q

Commercial Paper (CP)

A

when large, well-known companies issue their own short-term unsecured debt notes directly to the public, rather than borrowing from banks,• Fairly safe asset, trades in secondary market, very liquid

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16
Q

Eurodollar

A

• Dollar-denominated deposits at foreign banks or foreign branches of American banks

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17
Q

Repurchase agreements

A

short term, usually overnight, borrowing

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18
Q

LIBOR Market

A

• London Interbank Offer Rate- rate at which large banks in London are willing to lend money among themselves,• Serves as reference rate for European market,• Cannot be tied to US $

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19
Q

• T-NOTES

A

issued with maturities of up to 10 years,increments of $100, semi-annual interest payments

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20
Q

• T-BONDS

A

range from 10-30 years,increments of $100, semi-annual interest payments,prices quoted as a % of par value

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21
Q

• TIPS(treasury inflation protected securities

A

principal amount is adjusted in proportion to increases in the Consumer Price Index,• Provide constant stream of real income, and interest earned is risk free if you hold them til maturity

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22
Q

Municipal Bonds (munis)

A

• Issued by state and local govs,their interest income is exempt from fed income taxation, state and local taxes,• Only tax is capital gains taxes if bonds mature or are sold for more than original purchase price

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23
Q

capital gain

A

diff between the basis of an investment asset and its sales price

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24
Q

value stock

A

stock of a company whose market price is low compared to its net earnings, net worth, sales and other fundamental characteristics

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25
Q

• REVENUE BOND

A

issued to finance particular projects and are backed by either revenues from that project or by the municipal agency operating the project

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26
Q

Corporate bonds

A

• Means by which private firms borrow money directly from the public, • Pay semi-annual coupons over their lives and return the face value to the bondholder at maturity

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27
Q

• Secured bonds

A

have specific collateral backing them in the event of firm bankruptcy

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28
Q

• Unsecured bonds, debentures

A

have no collateral

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29
Q

• Fixed rate mortgages can create considerable difficulties for banks in years of high interest rates

A

because of adjustable rate mortgage, which require borrower to pay an interest rate that varies with some measure of the current market interest rate

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30
Q

Common Stock

A

• Equities

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31
Q

• Residual claim-

A

stockholders are last in line of all those who have a claim on the assets and income of the corporation

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32
Q

• P/E ratio

A

how much stock purchasers must pay per dollar of earnings the firm generates for each share

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33
Q

Preferred Stock

A
  • Pays a fixed stream of dividends for the life of a firm  perpetuity
  • Unpaid dividends cumulate
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34
Q

Dow Jones (DJIA

A

measures the return (excluding dividends) on a portfolio tha holds one share of each stock  called price weighted avg

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35
Q

Standard and Poors (s&P 500)-

A

based on 500 firms. Is a market value-weighted index reflect the returns to straightforward portfolio strategies

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36
Q

Net asset value (NAV)

A

= market value of assets – liabilities

Shares outstanding

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37
Q

Unit Investment trusts

A

pools of money invested in a portfolio that is fixed for the life of the fund.• Make money by selling shares

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38
Q

• Open-end fund

A

issues or redeems its shares at net asset value

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39
Q

• Closed-end fund

A

shares may not be redeemed but instead are traded at prices that can differ from net asset value

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40
Q

Hedge funds

A
  • Allow private investors to pool assets to be invested by a fund manage
  • Commonly structured as private partnerships and thus are not subject to many SEC regulations
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41
Q

• Lock-ups

A

periods as long as several years in which investments cannot be withdrawn

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42
Q

Mutual Funds

A

• Open end investment company
managers buy and sell assets in the same portfolio
gains and losses accrue to owners

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43
Q

• Money market funds

A

invest in money market securities such as commercial paper, repurchase agreements, CDS

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44
Q

• Equity Funds

A
  • invest primarily in stock, but sometimes hold fixed-income or other types of secruities
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45
Q

• Index Funds

A

tries to match the performance of a broad market index. Buys shares in securities included in a particular index in proportion to the securities representation in that index

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46
Q

How funds are Sold

A
  • Generally marketed to the public by fund underwriter or through brokers
  • Distributed through sales force
  • Revenue-sharing – fund companies pay a brokerage firm for the preferential treatment when making investment recommendations
  • Funds are also sold through financial supermarkets (Charles schwab)
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47
Q

• 12b-1 charges

A
  • annual fees charged by a mutual fund to pay for marketing and distribution costs
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48
Q

• Front (back) end load

A

commission or sales charge before you pruchase (front) or after you sell (back)

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49
Q

Late Trading

A
  • Practice of accepting buy or sell orders after the market closes and NAV is determined
  • Closes at 4 pm
  • Violates securities laws
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50
Q

Unique risk

A

you invest in dell and Exxon, when oil prices fall, it hurts exxon, but is good for dell, so the risk is low

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51
Q

• Market risk

A

affects every firm, such as the stock crash

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52
Q

The key determinant of portfolio risk

A

the extent to which the returns on the two assets tend to vary in tandem or in opposition

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53
Q

Declines of more than 25% in the S&P 500 Index have occurred

A

5 times in the past 83 years (1930, 1931, 1937, 1974, 2008)

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54
Q

The low risk of a portfolio

A

due to the inverse relationship between the performance of the stock and bond funds
• For example, in a mild recession, stocks fare poorly, but this is offset by a large positive return of the bond fund…opposite for boom

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55
Q

Opportunity set

A

all attainable combinations of risk and return offered by portfolios formed when using the available assets in differing proportions

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56
Q

indicators of US expansion

A

average workweek, housing market on the rise(record low interest rates), higher stock prices, 0.5% INCREASE, fewer jobless claims

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57
Q

Topdown

A

broad environment in which investment operates - state of economy and and financial markets.

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58
Q

worlds largest economy grew

A

1.2% in 4th qtr

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59
Q

tax boost will reduce what % income after taxes

A

1.3%

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60
Q

tax boost will effect who the most

A

low income workers

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61
Q

sequester-

A

group of cuts to federal spending set to take effect March 1, barring further congressional action.
1.2 trillion cut, defense, social.
both sides are far apart and will not come to deal

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62
Q

only bank to survive financial meltdown

A

jp morgan chase

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63
Q

London whale (2007)

A

JPM tried to buy bonds and hedge transfers…got London banks to hedge them (if something went wrong, would benefit hedges)…market saw JPM had good position so people doubled down twice for larger position…deal got too big, hedge funds dropped out…JPM lost 6millions

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64
Q

London whale transcripts

A

people had no clue what was about to happen

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65
Q

high frequency trading

A

buy and sell to make make small profits on large amount of trades. enhance market liquidity but withdrawals cause volatility

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66
Q

High frequency trading regulation fight

A

to fend off regulations. benefits of hft: tech innovations, foster competition, efficient trading. No hft: makes market less stable and less fair-> caused flash crash, facebook public offering

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67
Q

Insider trading rules

A

focus on hedge funds…problematic for ceos…using information that that is relevant and not public to take advantage of market. ceos selling stocks when smell trouble

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68
Q

10B5-1 Plan

A

put plan into place to sell w/out insider info, then you get info it is okay to sell…subject to abuse b/c people wait to sell when not supposed to

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69
Q

Doug Whitman

A

portfolio manager charged, convicted for insider trading, biz failed, 2 yrs prison

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70
Q

citi pulling money out of sac capital

A

k

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71
Q

chicago mayor want to pull funding of gun companies

A

k

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72
Q

growth stock

A

companies that are expected to achieve rapid growth. above average risk and pe ratios

73
Q

why apple value stock?

A

growth slow down, rise of samsung, smaller earnings

74
Q

Pensions and private equity

A

pensions underfunded and ROR not good enough for obligation, private equity may be a better option

75
Q

private equity

A

takes over whole company and sells at higher price, buys through debt, fixes existing companies

76
Q

venture capitaliss

A

take new company and bring to market

77
Q

stock index

A

artificial constructs designed to capture whats happening in broad or segment of the market

78
Q

S&P 500 be

A

better than dow, has some smaller companies, valuated by every company own stock

79
Q

keep bond-buying?

A

fed is divided, could cause inflation, only cause moderate growth

80
Q

banks have too much cash b/c of deposits

A

k

81
Q

Great rotation

A

shift of investors from bonds to stocks

82
Q

junk bond

A

high risk high potential return, risk of default

83
Q

looks like hedge fund but isn’t

A

58% stocks, 30 bonds, 12 alternative

84
Q

S&P 500 in 2012

A

9/10 sectors end the year in positive, due to fed stimulus, only utilities di bad

85
Q

S&P return 2012

A

14%

86
Q

Hedge funds did not do good 2012

A

5.5% gain, too cautious approach by managers. volatile markets

87
Q

NIM

A

the sum between what banks collect by pocketing the difference between the interests they pay to depositors and the rate they charge borrowers.

88
Q

3 indicators whether the “rotation” will continue

A

1) A rallying unemployment rate
2) A continued drop in returns from fixed-income investments
3) A growing belief among investors that the Fed by end QE (bond buying)

89
Q

portfolio pumping

A

bidding up the value of a fund’s holdings right before the end of a quarter, when the fund’s performance is measured. This is done by placing a large number of orders on existing holdings, which drives up the value of the fund.

Read more: http://www.investopedia.com/terms/p/portfoliopumping.asp#ixzz2LsbJICb4

90
Q

Herballife

A

fight between Ackman and loeb about whether to invest or sell short

91
Q

loeb herbalife

A

hedge fund owns 8.2% stake, wants people to invest, will survive and thrive

92
Q

Ackman herbalife

A

betting against, thinks its a pyramid scheme and will drop, selling short, army of indy resellers recruit members to sell for them

93
Q

• Unemployment is about 8%, healthy economy is usually around 5%

A

1

94
Q

• The economy has 3 streets

A

o Main Street: The factories, where people go to work, retailers, “consumers”
o Wall Street: Financial Center, Stocks & Bonds “businesses” (although businesses are all over
o Kay Street: The government and lobbyists in DC “government”
 The big issue right now in gov’t policy is the budget

95
Q

• The government could stimulate the economy by spending more and taxing less to try and aid the economy

A

1

96
Q

BRICs (Brazil Russia India China) have come out of the recession quite well, particularly China
o China buys a lot of raw materials from the rest of the world

A

1

97
Q

• GDP in countries in Europe has suffered since 2007 for the most part

A

1

98
Q

Verizon and AT&T

A

got charges for changing discount rate for calculating pension obligations

99
Q

Defined Contribution Plan

A

Risk is now on the employee, companies have not been successful at covering costs causing the switch. Employers use a formula to calculate what the employer deposit will be for the plans

100
Q

• Why have stock prices done better than the economy

A

o Stock prices look ahead, and thought the economy in the future
o Businesses have also been cutting costs, earnings are better, profit margins are wider

101
Q

Buybacks

A

they can go the other way and perform stock buybacks to increase their earnings amongst other things…announce share buybacks, typically the stock price appreciates

102
Q

SAC capital

A
  • The most valuable asset you have after graduation is your good name
  • SAC capital is being investigated for insider trading
  • SAC has averaged 30% annualized returns since inception, • SAC capital only allows you to take a quarter of your money out every quarter
103
Q

black edge

A

knowing news before the market

104
Q

current FED policy does not focus on…

A

inflation

105
Q

euro zone doing better

A

1

106
Q

• Socially Responsible Investing

A

people only invest in what they believe in

107
Q

• Selling short

A

selling a stock you don’t own using a brokerage account because you believe the stock is going lower

108
Q

Icahn herbalife

A

activist, backs herbalife

109
Q

against 60-40 portfolio

A

its one size fits all, interest rates are too low

110
Q

maximum capital gains tax rate

A

39.6%

111
Q

• Q4 increased

A

1.2%

112
Q

• 2013 GDP forecast

A

2% (also too low)

113
Q

o FOMC (Federal Open Market Committee) believes economy and employment are

A

getting better, as opposed to pausing
o Business fixed investment has slowed since last release
due to fiscal cliff

114
Q

fed dual mandate

A

Price stability, Low unemployment

115
Q

• Auto sales, housing

A

rising demand

116
Q

• Improving housing sector is helping other industries

A

power tools, air conditioners, carpet fibers and cement mixers, for example

117
Q

• Better bet to invest in

A

housing itself than housing stocks

118
Q

who is fueling rises in stock market

A

small individual investors

119
Q

bears vs. bulls

A

bears= pessimists, only temporary improvement, corporate earnings are peaking when many think it is a rise
Bulls=optimists, good signs from central bank efforts, improve of leading economic indicators, price to earnings ratio is low

120
Q

FED CONtinues to buy debt and hold down borrow costs

A

could lead to high inflation, and unstable market

121
Q

if interest rates rise (bonds)

A

bond holders will face huge losses….right now all types of bonds have low yields, great for borrowers, terrible for lenders

122
Q

retirees are at risk b/c…

A

low interest rates causing bad yield, and retirees depend on low risk communities

123
Q

ladder

A

series of bonds that mature in succesion

124
Q

• “Short Squeeze

A

a sharp rise in the price of the stock forces those who have short positions to post margin calls (buy the stock), thus further driving up the price of the stock

125
Q

, the economy grew what %

A

2.2%

126
Q

The median duration of unemployment fell in Jan

A

to 16 weeks from 18 weeks a month early

127
Q

underemployment rate, which includes part time workers that would rather be working full time is

A

14.4%.

128
Q

consumer confidence levels fell to 58.6 b/c of

A

argument over fiscal cliff

129
Q

fed is making lots of money from bonds returns

A

sends money to treasury

130
Q

when economy is stronger fed sells

A

bonds

131
Q

fed earned 91 bn last year`

A

sent 89 bn to treasury

132
Q

europes generation negative equity

A

homeowners in their 30s, 40s, and 50s who bought houses during a property bubble that burst.

133
Q

• UNDER SPANISH BANKRUPCY – unpaid debt

A

never goes away

134
Q

REIT

A

real estate inv. trust….a security that sells directly in real estate

135
Q

master limited partnership (MLP)

A

a limited partnership that is publically traded…general partner has most of liablility, ownership is traded in mktplace

136
Q

why renewable energy companies use MLPS REIT

A

can reach broader range of investments b/c both do not pay coporate income taxes, passing most of their income to their investors who must pay their own personal taxes.

137
Q

The london whale is Brune Iksiil

A

Said bets were getting scary…warned people

138
Q

JPMorgan had some people bet agains it in London whale, why?

A

was it too big to manage

139
Q

secular bull markets stocks have averaged annual returns of 18%

A

secular bear markets yield returns of about 1%.

140
Q

• The cost of insurance (put options) has come down b/c

A

the volatility of the market has declined.

141
Q

• Investors can find insider buying and selling activity for specific companies by searching for

A

Form 4

142
Q

• Stocks with high dividends

A

perfect balance for investors seeks a middle ground between bonds and stocks.

143
Q

ETF (exchange traded fund)

A

A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange (example spider)

144
Q

Total Return on Stocks

A

Dividend/Price+Change in Price/Price

145
Q

• The most important asset in your portfolio

A

human capital, you have conrol over human capital.

146
Q

Borrowing from the Future

A

• Early withdrawals from 401(k) and 403(b) can have significant effects on a nest egg. 1 out of 4 household’s dips into such accounts
. People should not participate in their company’s 401k plans until they have a sufficient amount of emergency savings.
emergency fund = 3 months pay saving
HelloWallet as “a technology-based financial guidance software application.”

147
Q

• 4th Quarter GDP (originally stated at 0.1%) expected to be favorably revised

A

to about 0.6%

148
Q

US lost how much from 2007-2009

A

16 trillion…regained 13.5 trill tho

149
Q

labor force expected to rise how much %

A

1.2%

150
Q

• Fed will not try to raise interest rates until

A

unemployment is under 6.5%

151
Q

• “Goldilocks” economy

A

not too hot for fed to be worried about inflation and not too cold to have investors worry about relapse into recession

152
Q

eurozone contracted 3rd straight quarter…including

A

germany

153
Q

eurozone shrank what percent

A

2.3

154
Q

• VIX Index:

A

Measures expected price swings in the S&P 500 by tracking option prices
o Higher the VIX, higher the expected volatility of markets
o With volatility comes uncertainty
 VIX also known as “Fear Index”

155
Q

• Value stocks have outperformed growth stocks, on average, by

A

4%

156
Q

• Stock buybacks

A

companies buy back its own stock from shareholders

157
Q

Target Date Fund

A

retirement vehicle programmed to select a mix of stocks, bonds, and other assets based on the owner’s age.
• As you get older, the fund automatically shifts from risky to less risky assets (commonly from stocks to bonds)

158
Q

• Current problems with peoples’ retirement plans

A

o Too little % of pay is being directed into retirement accounts
o People are taking money out of their accounts before retirement
 Penalties for early withdrawal

159
Q

“Pump and Dump”

A

an investor takes a large position in a company, talks up the stock price with misleading or false information and then sells their position before the price falls

160
Q

Icahn holds 12.98% of herbalife

A

stocks jumped 21%

161
Q

dark pool

A

order is entered but is not visible…large investors do not want to show market their doings

162
Q

Stop order

A

once price drops below what you specify, it automatically sells at that point

163
Q

Lessons from MF global

A

1) know where you stand continuous, MF global lost track
2) must be right in direction and time
3) never bet the bank

164
Q

LBO leverage buyout

A

take over of a company financed largely through the use of debt that is secured by the acquired firms own assets

165
Q

sharpe ratio

A

compares how much risk is needed for high return

166
Q

rating agencies in trouble

A

gave okay to bad debt portfolios

167
Q

LIBOR

A

used as index for other rates..generated by large intnl banks and what they have to pay to borrow from each other

168
Q

agency theory

A

managers of a company have interests that are not the same as shareholders when they should

169
Q

real asset

A

assets used to produce goods and services (determine wealth of economy)

170
Q

topdown portfolio construction

A

start with allocation, use big picture, and eventually pick individual securities

171
Q

red herring

A

preliminary prospectus w/ a statement in red saying the company is not attempting to sell the security b4 the registration is approved

172
Q

4 types of markets

A

1) direct- buyers/sellers seek each other
2) brokered
3) dealer
4) auction (NYSE)

173
Q

packaging mortgages and junk bonds

A

great way to leverage both and make less risky portfolio

174
Q

book got wrong

A

liklihood mkt has bad year is equal each year

175
Q

passive investment strategy

A

buying well diversified portfolio without attempting to search for mispriced securities

176
Q

Efficient Market hypothesis

A

Weak- stock price history has no bearing on future price
semistrong- stock prices include all price history and public info
Strong- stock prices represent all relevant and inside info

177
Q

Arithmetic average v. Geometric Average

A

the sum of the returns in each period divided by the number of periods v.the single per-period return that gives the same cumulative performances as the sequence of actual returns.

178
Q

CAPM

A

relationship between time value of money and risk

Finance 305 (2 decks)

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