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Dalton Review > Calculation - Investment > Flashcards

Calculation - Investment Flashcards

1
Q

Joe bought stock @ 50, on 75% initial margin. Price fell to 40. What’s new margin position?

A

68.75

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2
Q

Bob bought stock at $50 per share, on initial margin 75% and maintenance margin 25%. What price is the margin call?

A

16.6667

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3
Q

B bought stock @ 50, on 75% initial margin and maintenance margin 35%. Price fell to $15. How much equity B must contribute?

A

2.75 per share

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4
Q

Assume SP mean return is 10%, SD 17%. What’s the probability of return less than -7%, -24% and -41% ?

A

16%, 2.5% and 0.5%

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5
Q

Calculate SD of stock A and B.
A return: 10%, 13%, 8%, -2%, 14%
B return: 6%, -3%, 4%, -5%, 7%
Which one is more risky?

A

A: 6.3875%
B: 5.4498%
A

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6
Q

Stock A: SD = 12%, Average Return = 10%
Stock B: SD = 8%, Average Return = 5%
Which one is more risky?
What formula to use?

A

Coefficient of Variation: SD / Average Return
Higher CV more risk

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7
Q

How does Covariance measures the interactive risk of 2 securities?

A

How price moves from 1 security in relation to the other.
Cov 1-2= SD1 * SD2 * Cor 1-2

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8
Q

Correlation Cor/ Correlation Efficiency
Measures what and how it’s measured?

A

Cor = (Cov 1-2) / ((SD1)(SD2))
+1 means 2 assets perfectly correlated, No diversification
0 means there is no relation between 2 assets
-1 means they are perfectly correlated
Diversification starts when Cor < 1

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9
Q

Beta measures what and how it’s measured?

A

It measures 1 security risk relative to the market.
Beta of bench market risk is: 1
If security Beta > 1, it means it’s more riskier than the market.
If its Beta < 1, it’s less riskier than the market.

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10
Q

Beta vs. SD, what’s the difference in measurements?

A

Beta measures Systematic, market risk
SD measures total risk
Beta1= Cov 1-m / (SD m ^2)
Or
Beta1= (Cor 1-m * SD1)/ SD m
Beta = R 1 / R m

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11
Q

CML Capital Market Line
How is it relate to CAPM? What does it measure?

A

It’s the macro aspect of CAPM
It’s the relationship between risk and return of ALL possible portfolios.
It’s NOT used to evaluate 1 security
It uses SD in calculation

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12
Q

SML Security Market Line
What does it measure and how is it different from CML?

A

It measures the risk and return as defined in CAPM formula.
If Rp > SML, it’s under valued, buy signal
If Return of portfolio < SML, over valued, do not buy
SML uses Beta, CML uses SD

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13
Q

SML calculation

A

Same as CAPM because it uses the same variables
Re = Rf + Beta(Rm-Rf)

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14
Q

If Rf is 3%, Beta is 1.5, market premium is 9%, what’s the Re (Expected Rate of Return)

A

16.5%

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15
Q

What’s Information Ratio measuring?

A

It measures Portfolio performance
Relative risk adjusted performance
It measures the excess return provided by a fund manager, relative to a benchmark. Higher IR the better.
IR = ( Rp- Rm)/ SD a
SD a is annualized SD

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16
Q

Large cap fund increased 12% while SP 500 increased 9.5%. Annualized SD is 15%
What’s the Information Ratio?

A

0.1667

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17
Q

Treynor Index
What does it measure?

A

It measures how much return was achieved per unit of risk defined by Beta.
Tp=(Rp - Rf) / Beta p

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18
Q

Which fund would you recommend? Use Treynor Index
Growth Fund: Beta 1.2, Rf 3%, actual return 12%
Index Fund: all same except actual return is 9%

A

0.075 vs 0.06

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19
Q

Sharpe Index
What does it measure?

A

It measures return per total risk, thus SD.
Sharpe = (Rp-Rf)/SD
Higher Sharpe the better

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20
Q

Jensen ‘s Alpha
What does it measure? How it measures it?

A

It measures Portfolio Managers performance.
Alpha = Rp - SML/CAPM
Rp - ((Rf+Beta p (Rm-Rf))
+Alpha means manager did better than market
-Alpha means manager did worse than market

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21
Q

D’s mutual fund returned 19% last year with Beta 2. Risk free 3%, market return 8%. SD 18%. What would you tell D about the performance? What ratio would you use and why or why not.

A

Can not use Treynor, Sharpe because there is not enough data for comparison assets. Jensen but Jensen is more straight forward.

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22
Q

R^2
When a portfolio is considered diversified
What ratio to use to judge performance

A

> 0.7 means more diversified, Beta, Treynor, Jensen should be used to measure recommendations
If it’s < 0.7, not diversified, SD, Sharpe should be used

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23
Q

Which fund would you recommend?
A: SD 12%, R^2 0.92, Alpha 2, Shape 1.2
B: SD 13%, R^2 0.90, Alpha 1.8, Sharpe 1.5

A

Since R^2 > 0.7, use Jensen or Treynor

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24
Q

Mutual fund r^2 0.64, which ratio is appropriate to measure the performance?

A

Sharpe because r^2 < 0.7

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25
Q

Holding Period of Return based on Cash Flow
Formula

A

(Ps - Pp +/- Cashflows) Pp

26
Q

BJ bought a stock $20 on initial 60% margin, paid 10% interest annually, sold 1 year later. What’s his HPR?

A

77%

27
Q

HPR Based on Rates of Return

A

HPR = ((1+r1)(1+r2)…(1+rn))-1

28
Q

Calculate HPR
Jan 1.9%
Feb 2.3%
Mar -1.5%
Apr 1.7%
May 2.75%
Jun 3.6%

A

0.1116

29
Q

What’s the arithmetic mean for the following returns: 6%, 11%, -3%, 13%, 4%

A

6.2%

30
Q

What’s average stock price of X, Y, Z
$12,$15,$27

A

18

31
Q

Geometric Mean
What does it measure

A

Time weighted compounded rate of return
((1+r1)(1+r2)…(1+rn)^(1/n)-1)* 100

32
Q

What’s the Geometric Mean of the following return?
12%
5%
-2%

A

4.8442%

33
Q

Bob purchased 1 share of DIS @$50. One year later, stock paid dividend $4 and he bought additional share @$65. He sold the stock for $75. What’s the time weighted return on DIS?

A

26.5398

34
Q

Dividend Discount Model
Aka
Intrinsic Value model

What does it measure

A

Value a company stock by discounting the future stream of cash flow

V = D1/(r-g)

D1=D(1+g)

r=D1/P +g

35
Q

What’s the intrinsic value of the stock that pays $3.25 Div. Market price $45, growth 6%. Your investor requires 11% return on all investment.

If he buys at market price, what’s Re?

Is the value over or under valued?

A

68.9
0.1366

36
Q

Current div is $2. Five years ago div was$1.36. Expect same growth. Required return is 12%. Expected return on market is 14%. What’s the value of the stock?

A

54.28

37
Q

PE Ratio
What does it measure

A

Price per Earning
How much investor is willing to pay for each dollar of earning
It’s useful to evaluate stock with no dividend

P/E = P per share / EPS

38
Q

Corp A has EPS of $3, stock price at $40, what’s P/E?

A

13.3333

39
Q

Stock trades at $50, P/E is 20. What EPS?

A

2.5

40
Q

EPS $3, P/E is 20. What’s the price?

A

60

41
Q

PEG Ratio
What does it measure

A

P/E compares to past 3-5 year performance

PEG=p/E / 3-5 growth rate in earnings

PEG =1, fairly valued
PEG >1, fully or over valued
PEG<1, under valued

42
Q

Book Value
What does it measure?

A

How much would shareholders receive if company liquidated
If stock > book value, it’s over valued

43
Q

Div Payout Ratio
What does it measures

A

Amount of Earnings paid to shareholders in dividends relative to EPS

DPR = Div / EPS

44
Q

What’s Div Payout Ratio? What’s ROE?
EPS $2
CS div $1
PS div $0.5
Sales $5,000,000
Shares outstanding 1,000,000
Total equity $7,000,000

A

50%

28.5714% ( EPS / Stock price per share)

45
Q

Dividend Yield Formula

A

Div/stock price
Compare to EPS, if less there’s room to increase div

46
Q

Which company has room to improve div?
A Div yield 10%, stock $20, EPS, $2
B 12%,$40, $5

A

B

47
Q

TEY
2 formula

A

TEY = Tax exempt yield / (1-margin rate)

TEY = Corp rate x (1-margin rate)

48
Q

Which one to recommend:
Corporate 8.5%
Municipal 5.25%

A

Corp

49
Q

Coupon Rate calculation

A

Coupon pmt / par

50
Q

Current Yield

A

Coupon payment/ price of bond

51
Q

Bond pays $100 per year, what’s the coupon rate?

A

10

52
Q

What’s the current yield?
Bond pays $100 a year current price $876

A

11.4155%

53
Q

Coupon Rate calculation
CY 8%
Price $900

A

7.2

54
Q

What’s YTM?
Bond pays 10% annual, market price $876, 5 years to maturity, pay at par.

A

13.4894

55
Q

What’s YTM?
Bond sells at 5% discount to par, paying 11.25% interest, mature in 7 years

A

12.3371

56
Q

What’s YTC?
Bond price $1200
Interest 12%
Mature in 10 years
Callable in 5 at $1050

A

7.9135

57
Q

Formula to use to estimate Bond Price

A

D duration
Y YTM
^y Change in Interest Rate
^P/P % Price change

58
Q

Bond 5 year to maturity, 6% coupon, YTM 8%, selling at $920.15. Duration is 4.4. What’s the new price if rate increase by 0.5%?

A

938.9211

59
Q

Convertible Bond Formula

A

Conversion Value = 1000/Conversion price * Pstock

60
Q

What’s the conversion value of this bond, bought $1050, conversion price $40, market price $35?

A

875

61
Q

Property Valuation
Value = NOI / Cap Rate
Cap Rate = Required Rate of Return

A

NOI= NI + DEP + MORTGAGE INTEREST
NI = EFF GROSS INCOME - OPERATION EXP
EFF GROSS INCOME = GROSS INCMOM * (1- Vacancy)
GROSS INCOME = RentsUnitsLength

62
Q

Tripped owns 20 condo, tents for $9167, with 20% vacancy rate. Total expense is $1500000, debt servicing $250k a year, $200k for principal and $50k interest expense. 10% required rate of return. How much would an investor be willing to pay for the property?

A

5,300,720

Dalton Review (3 decks)

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