Basics of Investing

Question 1

calculate gross return from net return

Answer 1

net return * 1+ inflation rate + inflation rate

Question 2

GIC Taxation

Answer 2

Taxable at end of gic year.
Market linked taxed in year of maturity
Corporate GICs taxed on accrual basis (principal * int rate * days in year).
Need to account for compounding on GIC (ex difference in fv between year 4 and 5 will determine interest payable in year 5)

Question 3

Underwriting

Answer 3

Bought deal - buys all securities and tries to sell with clients
best efforts - act as middle man for issuer

Question 4

Red herring prospectus

Answer 4

allows potential buyers to express interest in offering.

Question 5

Bond calculation c/y and p/y

Answer 5

always default to 2 for each setting

Question 6

Investment grade bond

Answer 6

bbb or baa

Question 7

explain how duration affects a bonds price and calculation

Answer 7

duration of 5 means has its price change by 5% if interest rates change by 1%. 100 - duration/100 * price of bond

Question 8

Immunization

Answer 8

diversification of bond durations, use a mix of high and low durations. steady stream of bonds maturing along the way

Question 9

Strip bond calc

Answer 9

can use p/y as 1 or 2. both acceptable

Question 10

Bond Types
(retractable, extendible)

Answer 10

retractable - can be taken back by investor
extendiblle - pay more interest during extended period (at the investors option)

Question 11

Ex-dividend and date of record

Answer 11

ex-dividend is 1 day before date of record. shares purchased on the ex-dividend date not eligible for dividend, must be day before.

Question 12

preferred shares taxation and yield and value chages

Answer 12

taxed as dividend, owed before common shareholders, can be fixed for a period but adjusted for a floating rate afterwards. Share price goes up when dividend yields fall and down when dividend yields rise. move more like bonds. preferred share price = quarterly dividend * 4/dividend yield

Question 13

Commercial paper

Answer 13

short term, highly liquid, corporate debt

Question 14

t-bill yield calculation

Answer 14

either maturity value - purchase price/purchase price * 365/days until maturity) or financial calculator (90 day t-bill would have c/y and p/y set as 4 and xp/y as days / 365

Question 15

Changes in rates calculation

Answer 15

calculate pv of t-bill is worth with days remaining and then calculate with new interest rate to determine capital gain or loss.

Question 16

spread or straddle optins

Answer 16

straddle is 2 opposing positions, call and option
spread is purchasing similar contracts with different expiries

Question 17

Sharpe Ratio

Answer 17

return - risk free return/ std. dev.

Question 18

CAPM

Answer 18

risk free rate + (beta *(market return - risk free rate)

Question 18

treynor

Answer 18

return - risk free return/beta

Question 19

Jensen’s measure (or alpha)

Answer 19

portfolio return - capm (essentially alpha)

Question 20

Cap Sizes

Answer 20

o Mega Cap: In excess of $200 billion.
o Large Cap: Between $10bn and $200bn.
o Mid Cap: Between $2bn and $10bn.
o Small Cap: Between $300M and $2bn.
o Micro Cap: Between $50M and $300M

Question 21

Cash Includes

Answer 21

fixed income/gics with one yeaer to maturity, or t-bills, savings

Question 22

Investor behaviour (loss aversion example)

Answer 22

investors will take a 100% of a small gain or a smaller chance of a large gain but would risk losing more money to avoid a loss at all in other scenario

Question 23

Biases

Answer 23

availability - only base decisions on what you know and dont seek out other information

Question 24

t bill yield

Answer 24

days until maturity/365 2nd n (to account for xp/y)

Question 25

kiddie tax

Answer 25

minors taxed on ccpc dividends at highest rate with no opportunity to use basic exemption

Question 26

endowment effect

Answer 26

overvalue things we own, put work into, or thought. may be less willing to sell

Question 27

scope neglect

Answer 27

place unequal value on things. value saving money on groceries more than savings on a larger purchase, like a car

Question 28

prospect theory

Answer 28

cant stand a loss.

Question 29

overconfidence in calibration

Answer 29

believe that high projected returns will be ongoing without reviewing it.

Question 30

availability

Answer 30

believes achieving a 10% return is possible because its been done in the past.

Question 31

induction

Answer 31

picking something thats performed really well with no regard as to whether its right for you.

Question 32

conjunction

Answer 32

markets have averaged 5% over last 4 years, shocked when they drop 25%

Question 33

contamination

Answer 33

buying something because your friend works a lot there so you assume its a good business

Question 34

bystander apathy

Answer 34

buy the balanced fund because its what your coworkers said

Question 35

sunk cost

Answer 35

because ive already spent money on this, i need to continue spending money (old junker)

Question 36

gamblers fallacy

Answer 36

thinks market works in 7 year cycles, so invest for 7 years and then moves to gics