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CFA > CFA Level 1 Random Deck 1 > Flashcards

CFA Level 1 Random Deck 1 Flashcards

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1
Q

those that have failed are not included in the results

A

Survivorship bias - hedge funds

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2
Q

arises if a study uses information that was not available on a test date

A

Look ahead bias

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3
Q

arises if a test is based on a certain time period

A

time -period bias

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4
Q

the formulate used to calculate a point estimate

A

Estimator

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5
Q

uses sample data to calculate the range of possible (or probable) values that an unknown paramount can take, with a given probability (1-level of significance)

A

confidence interval

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6
Q

Refers to the degree of confidence that the relevant parameter will lie in the computed interval

A

Level of significance

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7
Q

degrees of freedom

A

sample size minus 1 (n-1)

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8
Q

When the variance of a normally distributed population is not know, we use the _____ to construct confidence interval.

A

t-distribution

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9
Q

Desirable properties of an estimator

A
  1. Unbiasedness; 2. Efficiency; 3: Consistency
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10
Q

When is the t-value used?

A

Normal/non-normaul distribution with unknown variance (note if sample is small it can’t be done)

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11
Q

Rejecting the null hypothesis when it is actually true

A

Type I Error

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12
Q

Failing to reject the null hypothesis when it is actually false

A

Type II Error

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13
Q

The ____ represents the probability of making a Type II Error

A

significance level (1-level of significance)

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14
Q

The power of a test is the

A

probability of correctly rejecting the null hypothesis when it is false. Power of a test = 1 - P(Type II Error)

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15
Q

What is shortfall risk?

A

Risk that the portfolio will fall below some minimum acceptable level over some time horizon.

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16
Q

A parametric test has as least one of two characteristics:

A

Features: 1) Concerned with parameters, or defining features of a distribution 2) Definite set of assumptions

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17
Q

Test to see if the variance amongst two independent populations is equal (normally distributed population)

A

F-Test (one tail - right - rejection area)

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18
Q

test to see if the variance of a single normally distributed population is different

A

Chi-Square Test (two tail - reject null if outside interval)

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19
Q

Key Rate Duration

A

measures a bond’s sensitivity to a shift at one or more maturity segments of the yield thrive which results in a change to the yield curve shape

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20
Q

Modified and Effective duration mention a bond’s sensitivity to _______ shifts in the entire curve

A

Parallel - all rates change by the same amount in the same direction

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21
Q

What the only difference in the formulas used to calculate modified and effective duration?

A

Modified uses Change in YIELD in the Denominator; Effective uses Change in CURVE

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22
Q

What effect does a put option have on a bond’s duration?

A

reduces effective duration - most likely you’ll get your cash back sooner.

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23
Q

Money Duration is calculated as the _______ times the ______

A

annual modified duration x full price

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24
Q

Convexity measure the ______ order effect.

A

Second order effect on a bond’s percentage price change given a change in the YTM.

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25
Q

Duration measures the ______ order effect.

A

First order effect - change in the bond’s price given a change in YTM

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26
Q

Define Convexity

A

Convexity adjusts the percentage price change estimate provided by modified duration to better approximated the true relationship between a bond’s price and its yield to maturity which is a curve line (convex).

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27
Q

CFR

A

Corporate Family Rating - based on the overall creditworthiness of the issues. Typically based on the issuer’s senior unsecured debt

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28
Q

CCR

A

Corporate Credit Rating - applies to a specific financial obligation of the issuer and is based on factors such the issue’s relative seniority ranking in priority of claims and covenants.

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29
Q

Four C’s of Credit Analysis

A
  1. Capacity
  2. Collateral
  3. Covenants
  4. Character
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30
Q

Key components of credit risk

A

risk or probability of default AND loss severity in the event of default (product of the two equals the expected loss)

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31
Q

Arbitrage plays an important role in market efficiency

A
  1. Help to determine “correct” price; 2. Improve market efficiency (accurate pricing)
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32
Q

What is tenor?

A

Certain period of time over which a series of cash flows are exchanged in a SWAP

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33
Q

Swap settlement amount formula

A

settlement amount = (fixed - (LIBOR + Spread) x (portion of time) x (principal or notional amount) Note. The rates will be the clue as to which party is getting the payment. Lower rate receives settlement payment.

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34
Q

The worst possible loss for a holder of a put option is:

A

Easy - it’s just the price of the Put Option. They are not obligated to do anything else.

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35
Q

The worst possible loss for a holder of a call option is:

A

Easy - it’s just the price of the Call Option. They are not obligated to do anything else.

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36
Q

Key components of the CFA Institute Code of Ethics (6 bullets pg 6 Wiley)

A

act with integrity, competence, diligence, respect, place integrity of investment profession and clients above self, reasonable care, maintain and improve their professional competence

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37
Q

Seven Standards of Professional Conduct

A
  1. Professionalism 2. Integrity of Capital Markets 3. Duties to clients 4. Duties to Employers 5. Investment Analysis, Recommendations and Actions 6. Conflicts of interest 7. Responsibilities as a CFA Institute Member or Candidate
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38
Q

Standard 1: Professionalism

A

A. Knowledge of the Law B. Independence and Objectivity C. Misrepresentation D. Misconduct

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39
Q

What is “applicable law”?

A

law that governs the member’s or candidate’s conduct. Local Law.

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40
Q

Regarding compliance to laws, members should follow the -

A

“more strict law”, be it applicable law or the Code and Standards

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41
Q

Name two types of market manipulation:

A

Information-based AND Transaction-based

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42
Q

Standard 2: Integrity of Capital Markets

A

A. Material Nonpublic information B. Market Manipulation

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43
Q

Standard 3: Duties to Clients

A

A. Loyalty, Prudence and Care B. Fair Dealing C. Suitability D. Performance Presentation E. Preservation of Confidentiality

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44
Q

Standard 4: Duties to Employers

A

A. Loyalty B. Additional Compensation Arrangements C. Responsibilities to Supervisors

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45
Q

Standard 5: Investment Analysis, Recommendations, and Actions

A

A. Diligence and Reasonable Basis B. Communication with Clients and Prospective Clients C. Record Retention

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46
Q

Standard 6: Conflicts of Interest

A

A. Disclosure of Conflicts B. Priority of Transactions C. Referral Fees

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47
Q

Standard 7: Responsibilities as a CFA Institute Member or CFA Candidate

A

A. Conduct as members and candidates in the CFA program B. Reference to CFA Institute, the CFA designation, and the CFA program

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48
Q

The standard in the investment management industry is to express returns on a _________.

A

Time-weighted basis: - not affected by cash withdrawals or contributions to portfolio - averages holding period return over time

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49
Q

Measurement Scales

A

NOIR (Nominal, Ordinal, Interval, Ratio)

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50
Q

Measurement Scales: N

A

Nominal - weakest level of measurement; count of data but no rank

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51
Q

Measurement Scales: O

A

Ordinal - sort of data ranked according to a certain characteristic

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52
Q

Measurement Scales: R

A

Ratio - strongest level of measurement, money

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53
Q

Measurement Scales: R

A

Ratio - strongest level of measurement, money

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54
Q

Chebyshev’s Inequality

A

Method of calculating an appropriate value for the proportion of observations in a data set that lie with a given number (k) of standard deviations from the mean. 1 - (1/k2)

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55
Q

Coefficient of Variation

A

CV=Allows for the comparison of relative dispersion. Standard deviation / sample mean. Or in otherwords, if speaking about investment returns, risk per unit of total return. Scale free measure. Can be used when data sets of significantly different means and units of measurement.

s/x = CV

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56
Q

Sharpe Ratio

A

Measure excess return per unit of risk.

Mean Portfolio Return - Risk Free Return

Standard deviation of portfolio returns

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57
Q

Mean Standard Deviation (MAD)

A

average of all absolute values (AV) of deviations in a data set. Recall that the sum of deviations from the arithemtic mean equal zero. Therefore, AV are used.

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58
Q

Semivariance

A

average of squared deviations below the mean (note still used (n-1) in the denominator). Semideviation is simply the square root of the semivariance.

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59
Q

Describe a postively skewed distribution

A

skewed to the right (this means skinny side stretched to the right - long tail on the right). Bulk of data pushed to left.

Mode < Median < Mean

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60
Q

Described a negatively skewed distribution

A

skewed to the left (this means skinny side stretched to the left- long tail on the left). Bulk of data pushed to right. Mean is pulled down by the lower outliers in the skinny tail.

Mean < Median < Mode

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61
Q

Negative (left) Skewed distribution - sample skewness is _______

A

Sample skewness is negative - numerator is formula will be a negative number because the average number of devations below the mean is large than the average of deviations above the mean.

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62
Q

Positive (right) Skewed distribution - sample skewness is _______

A

Skinny tail on right. Sample skewness is positive - numerator is formula will be a positive number because the average number of devations abover the mean is larger than the average of deviations below the mean.

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63
Q

Kurtosis

A

measures the extent to which a distribution is more or less peaked than a normal distribution. A normal distribution has a kurtosis of 3.

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64
Q

What does the following statement mean: P (AB)

A

Joint probability - what is the probability of both A and B occuring?

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65
Q

What does the following statement mean: P (A | B)

A

Conditional probability - the probability of event A occuring give that event B has occured.

P( A | B) = P (AB)/P(B)

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66
Q

Multiplication rule for probability

A

P (AB) = P( A | B) x P(B)

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67
Q

Addition rule for probabilities

A

P (A or B) = P(A) + P(B) - P(AB)

Calculates the probability of at least one of A and B occuring.

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68
Q

Covariance

A

measures how a random variables varies with another random variable

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69
Q

Limitations of Covariance

A
  • Difficult to compare covariance across data sets that have different scales
  • difficult to interpret as it can take on extreme values
  • does not tell us anything about the strength of the relationship between variabes
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70
Q

Describe Covariance Formula

A

Cov(RA,RB) = Σ Probability * (RA - E(RA)) * (RB - E(RB))

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71
Q

Correlation Coefficient

A

COVA,B/σ(RA)σ(RB)

Covariance divided by product of standard deviations of variables

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72
Q

When is the Combinations Formula used?

A

nCr is used when the order in which the items are assigns the labels in NOT important.

Example: 20 people try out for a team. 11 are chosen. How many different ways can the eleven member team be chose from the 20 aspirants?

20! / (9!)(11!)

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73
Q

When is the Permutations formula used?

A

nPr is used when the order in which the items are assigned to two groups is an important considerations.

Example: 20 people try out for a team. 11 are chosen AND must be ranked according to skill level. How many different ways can the eleven member team be chose from the 20 aspirants?

20! / (20-11)!

n! / (n - r)!

Should result is a greater number than Combinations because, like a padlock, the order of numbers matters. For example, the actual combinations of numbers I use to unlock my padlock (1,3 = 3,1) is much less than the acutal number or unique sequences that could be used to unlock the paddlock.

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74
Q

When would we use the Labeling formula?

A

When we are working with three or more groups of predetermined size and each item must be labled as a member of one of the groups.

In this scenario we need to elimate the counting of redundances.

Refer to page 203 Wiley for example.

12! / 6! x 4! x 2!

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75
Q

Probability estimated from data as a relative requency of occurrence is an ______.

A

Empirical Probability

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76
Q

A probability drawing on personal or subjective judgement is a ___________.

A

Subjective probability.

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77
Q

A probability based on logical analyis is an ____.

A

an a priori probability

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78
Q

The unconditional probability of an event A is denoted by __

A

P(A)

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79
Q

Unconditional probabilities are also called ____

A

marginal probabilities

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80
Q

The probability of an event A given and event B is denoted as

A

P(A | B)

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81
Q

Number of unique covariances depending on ‘n’

A

n (n - 1) / 2

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82
Q

Shortfall Risk

A

The probability that a portfolio’s value or return E(Rp), will fall below a particular target value or return (RT) over a given period.

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83
Q

Roy’s safety first criterion states….

A

that an optimal porfolio minimized the probablity that the actual portfolio return, Rp, will fall below the target return, RT

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84
Q

Define: Binomial Random Variable

A

defined as the number of success in n Bernoulli trials (which are trials that produce one of two outcomes). Binomial distribution is used to make probability statemtns about a crecord of successes and failures or about anything with binary (twofold) outcomes.

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85
Q

Binomial Distribution

A

P(X=x) = nCx(p)x(1-p)n-x

p = probability of success

1-p = probabilty of failure

nCx = number of possible outcomeshave x success in n trials

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86
Q

Variance of a Binomial Random Variable

A

σ2 = n x p x (1-p)

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87
Q

Standard Error

A

Amout by which our sample statistic differs from our population statistic

standard error typically = standard deviation of sample / square root of number of observations

we don’t use standard deviation of population in the numerator because we often do not know it.

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88
Q

Desirable Properties of Estimator:

A
  • Unbiasedness
  • Efficiency
  • Consistency
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89
Q

t-Distribution used in the following scenarios:

A
  1. to construct confidence intervals for a normally (or approx. normal) distributed population whose variance is unknown when the sample size is small (n < 30)
  2. non-normally distributed population whose variance is unknown if the sample size is large (n >= 30)
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90
Q

When the population is normally distributed we ___.

A

use the z-statistic if the population variance is known

use the t-statistic if the population variance is unknown

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91
Q

When the population is non-normally distributed we ___.

A

selection of the appropriate statistic depends on the sample size and whether the population variance is known

  • if population variance is known and sample size is large (n>30) we use z-statistic
  • if population variance is unknown and sample size is large (n>30) we use z-statistic or t-statistic. A t-statistic will give more conservative answer
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92
Q

The probability (1 – α) is referred to as the confidence level while α refers to ___________.

A

the significance level

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93
Q

Normal Good

A

a good that is consumer in greater quantities as income increases

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94
Q

Inferior good

A

as income rises, spend less on good. income elasticity is less than zero (negative).

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95
Q

Profit maximization occurs:

A
  • difference between TR and TC is greatest
  • MR = MC
  • MRP (marginal revenue product) equals the resource cost for each type of input
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96
Q

Economic profit

A

Economic Profit = Accounting Profit - Total Opportunity Costs

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97
Q

Accounting Profit

A

bascially financial statement net income

Accounting Profit = Economic Profit + Normal Profit

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98
Q

Normal Profit

A

is the level of accounting profit needed to just cover the implicit opportunity costs ignored in accounting costs. Cost of equity is a typical example.

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99
Q

In the long run, all inputs to a firm are ________

A

variable - they can be changed. Adjusted. You can sell an asset, leave a business line, etc. Short term is a different story.

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100
Q

Factors the affect the chances of successful collusion:

A
  1. Number and size distribution of sellers
  2. The similiarity of products
  3. Cost Structure
  4. Order size and frequency
  5. The strength and severity of retaliation
  6. the degree of external competition
101
Q

Marginal Product

A

(aka: marginal return) equals the increase in total product brought about by hirign one more unit of labor, while holding quantiies of all other factors of production the same

102
Q

Total Product

A

Labor X Quantity

103
Q

GDP Deflator

A

Value of current year output at current year prices / Value of current year output at base year pricies

x 100

104
Q

GDP Equation

A

C + I + G + (X-M)

  • C= consumer spening on final goods/services
  • I = gross private domestic investment
  • G = Governement spending
  • (X-M) = net exports
105
Q

Steps in financial statement analysis:

A
  1. articuate the purpose and context of the analysis
  2. collect input data
  3. process data
  4. analyze/interpret proceced data
  5. develop and communicate conclusions and recommendations
  6. follow up
106
Q

Characteristics of useful information: Fundemental

A
  • relevance
  • faithful representation
107
Q

Characteristics of useful information: Enchancing

A
  • comparability
  • verifiability
  • timeliness
  • understandability
108
Q

Characteristics of effective Financial Reporting Framework

A
  • transparency
  • comprehensiveness
  • consistency
109
Q

Guidelines for gross reporting

A
  • the company is the primary obligor under the contract
  • bears inventory and credit risk
  • can choose its supplier
  • has reasonable latitude to establish price

if not met - company should report net revenues

110
Q

Basic EPS

A

Net Income - Preferred Dividends

Weighted average # of shares outstanding

111
Q

Diluted EPS

A

Net Income / (weighted average # of shares outstanding + new common shares that would have been issued at conversion)

112
Q

Diluted EPS (if converted)

A

(Net income + After-tax interest on convertible debt -preferred) / (Weighted average # of shares outstanding + additional common shares that would have been issued at conversion)

113
Q

Net profit Margin

A

Net Income / Revenue

114
Q

Gross Profit Margin

A

Gross Profit / Revenue

115
Q

Operating Margin

A

operating income / revenue

116
Q

pretax margin

A

earnings before taxes / revenue

117
Q

ROA

A

Operating income / Average Total Assets

118
Q

ROE (basic formula)

A

Net income / Average Equity

119
Q

Activity Ratios

A

Measure how efficiently a company performs day-to-day taks, such as the collection of receivabes and management of inventory (example: AR Turnover, Inventory Turnover)

120
Q

Liquidity Ratios

A

meausre the company’s ability to meet its short term obligations

121
Q

Solvency Ratios

A

measure a company’s ability to meet long-term obligations. Subsets of these ratios are also known as “leverage” and “long-term debt” ratios.

122
Q

Profitability Ratios

A

measure the company’s ability to generate profits from its resources (assets).

123
Q

Valuation Ratios

A

measure the quantity of an asset of flow (e.g. earnings) associated with the ownership of a specified claim (e.g. a share or ownership of the enterprise)

124
Q

Inventory Turnover

A

Activity Ratio

COS (COGS) / Average Inventory

125
Q

Days of inventory on hand

A

Activity Ratio

Number of Days in Period (365) / Inventory Turnover

126
Q

Receivables Turnover

A

Activity Ratio

Sales (Revenue) / Average AR

127
Q

Days of Sales Outstanding

A

Activity Ratio

Number of days in period (365) / Receivables Turnover

128
Q

Payables Turnover

A

Activity Ratio

Purchases / Average Trade Payables

129
Q

Number of days of payables

A

Activity Ratio

Days in period (365) / Payables Turnover

130
Q

Working Capital Turnover

A

Activity Ratio

Revenue / Average Working Capital

Working Capital = CA - CL

131
Q

Fixed Asset Turnover

A

Activity Ratio

Revenue / Average net fixed assets

132
Q

Turnover ratios will always have

A

An IS account in the numerator and a BS account in the denominator (usually expressed as an average)

133
Q

Total Asset Turnover

A

Activity Ratio

Revenue / Average Total Assts

134
Q

Current Ratio

A

Liquidity Ratio

Currernt Asset / Current Liabilities

135
Q

Quick Ratio

A

Liquidity Ratio

(Cash + Short Term marketable instruments + Receivables) / Current Liabilites

Basically Cash (or equivalents) and AR in Numerator

136
Q

Cash Ratio

A

Liquidity Ratio

Cash+Short-term marketable investment / Current Liabilities

137
Q

Defensive Internal ratio

A

Liquidity Ratio

Cash + Short-term marketable securities + Receivables / Daily Expenditures

138
Q

Cash conversion cycle (net operating cycle)

A

Liquidity Measure

DOH + DSO - Number of Days of payable

139
Q

Debt-to-Assets

A

Solvency Ratio

Total debt / Total Assets

140
Q

Debt-to-Capital Ratio

A

Solvency Ratio

Total Debt / Total Debt + Total Shareholders Equity

141
Q

Debt-to-Equity

A

Solvency Ratio

Total Debt / Total Stockholders Equity

142
Q

Financial Leverage Ratio

A

Solvency Ratio

Average Total Assets / Average Total Equity

143
Q

Interest Coverage

A

Solvency - Coverage Ratio

EBIT / Interest Payments

144
Q

Fixed Charge Coverage

A

Solvency - Coverage Ratio

(EBIT + Lease Payments) / (Interest Payments + Lease Payments)

145
Q

Gross Profit Margin

A

Profitability Ratio

Gross Profit / Revenue

146
Q

Operating Profit Margin

A

Profitablity Ratio

Operating Profit / Revenue

147
Q

Pretax Margin

A

Profitability Margin

EBT (earning before taxes, after interest) / Revenue

148
Q

Net Profit Margin

A

Profitability Ratio

Net Income / Revenue

149
Q

Operating ROA

A

Profitability (ROI) Ratio

Operating Income / Average total assets

150
Q

ROA

A

Profitability (ROI) Ratio

Net Income / Average Total Assets

151
Q

ROE

A

Profitability (ROI) Ratio

Net Income / Average Total Equity

152
Q

Return on Common Equity

A

Profitability (ROI) Ratio

(Net Income - Preferred Dividends) / Average Common Equity

153
Q

Components of ROE (per DuPont model)

A

Function of: Efficiency, operating profitability, taxes, leverage

154
Q

ROE (DuPont - 2 components)

A

ROE = ROA x Leverage

Remember ROA = Net Income / Avg Total Assets

Remember Leverage = Avg Total Assets / Avg Equity

155
Q

ROE (DuPont - 3 components)

A

ROE = Net Profit Margin x Total Asset Turnover x Leverage

The first two components essentially create ROA

Helps to analyze ROE as a function of profitability, effeciency and leverage

156
Q

ROE (DuPont - 5 components)

A

This breaks down Net Profit margin into 3 components - Tax Burden, Interest Burden, and EBIT Margin

Then we multiply, these 3 components by Total Asset Turnover x Leverage

157
Q

Cash Conversion Cycle

A

DOH + DSO - Number of Days of Payables

Remember each of these requires 365 in the numberator and the associated turnover ratio in the denominator

158
Q

Net Realizable Value

A

Estimate Selling Price in the ordinary course of busienss less the stimated costs necessary to get the inventory in condition for sale and to make the sale

159
Q

Under US GAAP, inventory is measured as:

A

lower of cost or market. Market value is defined as current replacement cost subject to upper and lower limits.

Upper Limit: Net Realizable Value

Lower Limit: Net Realizable Value - Normal Profit Marign

160
Q

Reversals of previously written down inventory is allowed under:

A

IFRS, but not US GAAP. The reversal is limited to the amount of the original write down.

161
Q

Income Tax Payable

A

Calculated on the basis of the company’s tax base

162
Q

tax expense

A

appears on income statement and is an aggreagte of its income tax payable and any changes in deferred tax assets and liabilities. Liabilties increase tax expense; deferred tax assets reduce tax expense.

163
Q

Tax Expense < Taxes Payable

A

Deferred Tax Asset

164
Q

Tax Expense > Taxes Payable

A

Deferred Tax Liability

165
Q

Gain from the exstinguishment of debt is recorded…

A

On the income statement

166
Q

Under US GAAP, what are the two types of capital leases (from lessor’s perspective)?

A
  1. Direct Financing Lease
  2. Sales-type Lease
167
Q

Direct Financing Lease

A

PV of lease payments (and associated receivable) equal CV of leased asset - no profit, strictly financing.

168
Q

Sales-type Lease

A

PV of lease payment (and associated receivable) exceed CV of leased asset - will show profit in year of sale and interest revenue thereafter

169
Q

Financial Reporting Quality

A

pertains to quality of the information in financial reports, including disclosures in notes. Provides decision-useful information, which is relevant and faithfuly represents the economic reality of company’s activities

170
Q

Earnings Quality

A

pertains to the earnings and cash generated by the company’s activitie, results from activities that a company will likely be able to sustain in the future and provide a sufficient return on company’s investment.

171
Q

Free Cash Flow to the Firm (FCFF) - explanation

A

the cash flow avaiable to the company’s suppliers of capital after all operating expesnes have been paid and necessary investments in working capital and fixed capital have been made

172
Q

Free Cash Flow to the Firm (FCFF) - formula

A

FCFF = NI + NCC + IntExp (1 - tax rate) - FCInv - WCInv

NCC = Non cash charges

IntExp = Interest expense

FCInv = Capital Expenditures

WCInv = Working Cap investment

173
Q

Wilcoxon signed-rank test

A
174
Q

Mann-Whitney U-test

A

most appropriate for tests of differences in means for nonparametric data such as analysts’ rankings

175
Q

Relative strength index (RSI)

A

Relative strength index (RSI) is a momentum oscillator and provides information on whether or not an asset is overbought or oversold. An RSI greater than 70 indicates that a stock is overbought; an RSI lower than 30 suggests that a stock is oversold

176
Q

Under IFRS, the costs incurred in the issuance of bonds are most likely:

A

included in the measurement of the bond liability.

177
Q

IFRS measures inventory at the lower of cost and net realizable value.

Under IFRS, net realizable value (NRV) is defined as:

A

the estimated selling price less the estimated costs necessary to get the inventory ready for sale and make the sale.

178
Q

A higher tax burden ratio (Net income/Earnings before tax) implies

A

that the company can keep a higher percentage of pretax profits; this result implies a lower tax rate and a higher ROE.

179
Q

Both IFRS and U.S. GAAP allow agricultural inventories to be valued

A

at net realizable value.

180
Q

Cash to income =

A

Cash to income = Cash flow from operating activities (CFO)/Operating income

181
Q

Formula for Sustainable Growth Rate

A

Sustainable Growth Rate = Retention ratio (b) × Return on equity (ROE).

Note: The Rention ratio is the inverse of the dividend payout ratio. One states what is paid out (dividends), the other states what is retained (retained earnings).

182
Q

Reminder: When faced with a diluted EPS question, first calculate the basic EPS. You have to do this in order to determine whether a convertbile security is dilutive. If Diluted EPS is lower than Basic, include the convertible security in the analysis. If Diluted EPS is greater than Basic EPS, exclude the convertible security.

A

You can do this!

183
Q

Is convertible debt dilutive?

A

Maybe/maybe not. Must compare EPS under both scenarios to decide.

184
Q

Are options dilutive?

A

Yes - always.

185
Q

For recognition in the financial statements, an element must _____.

A

have a cost or value that can be measured with reliability.

186
Q

Cash Return on Assets =

A

CFO / Avg. Total Assets

187
Q

Margin Call Formula

A

Price0 x (1 - initial margin) / (1 - maintenance margin)

188
Q

A dealer market is

A

quote-driven or price-driven

189
Q

A pure auction market is

A

order-driven market - where participants submit their bid and ask prices to a central location. Two sets of rules:

  • Order Matching: PDT (price, display, time)
  • Trade Pricing (uniform, discriminatory, derivative)

See page 179 Wiley

190
Q

Speaking about a company’s value: What is Book Value?

A

The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities.

191
Q

The weekend effect suggests that

A

returns on weekends tend to be lower than returns on weekdays.

192
Q

The holiday effect suggests that returns

A

on stocks in the day prior to market holidays tend to be higher than other days.

193
Q

The phenomena that people ignore their own preferences and follow other people’s investment decisions is referred to as:

A

Information Cascade

194
Q

Herding is

A

clustered trading that may or may not be based on information.

195
Q

Gambler’s fallacy is

A

a behavioral theory which suggests that recent outcomes affect investors’ estimates of future probabilities.

196
Q

Categories of pricing anamolies:

A
  1. Time Series
    • Calendar
      • January Effect
      • Turn-of-the month
      • Day-of-the week
      • Weekend
      • Holiday
    • Momentum and Overaction
  2. Cross-sectional
    • Size Effect (small over large)
    • Value Effect (value over growth)
  3. Other
    • Closed-end Investment Fund
    • Earnings Surprises
    • IPO
    • Predictability of Returns Based on Prior Info
197
Q

Statutory Voting (elections of board of directors)

A

each share represents one vote

198
Q

Cumulative Voting (elections of board of directors)

A

total voting rights are based on the number of shares owned multiplied by the number of board directors being elected. Provided a better representation of minority shareholders.

199
Q

Sponsored Depository Receipt (DR)

A

the forgein company has direct involvement in the issuance. Investors have same rights as those enjoyed by direct owners.

200
Q

Unsponsored Depository Receipt (DR)

A

No involvement by foreign company. Investors do not enjoy same rights as direct stock investors.

201
Q

Porter identified the following five forces:

A
  1. Threat of substitute products
  2. Bargaining power of customers
  3. Bargaining power of suppliers
  4. Threat of new entrants
  5. Intensity of rivalry
202
Q

Three major categories of equity valuation models:

A
  1. Present Value (discounted cash flow)
  2. Multiplier Models
  3. Asset-based valuation models
203
Q

Calculation of Enterprise Value

A

Think of it as the cost of taking over a company. Market Value of CS + Market Value of PS + Market Value of Debt - Cash (and equivalents).

204
Q

Execution Orders

A

indicte how to fill the order (market, limit)

205
Q

Validity Instructions

A

indicate when the order may be filled

206
Q

Clearing Instructions

A

indicate how the arrange the final settlement of the trade

207
Q

Enterprise Value

A

EV = Cost of taking over company

EV = Mkt CS + Mkt Pref + Debt - Cash (equivalents)

208
Q

Representativeness

A

Behavioral Bias - investors assessing probabilities of outcomes depending on how simlar they are to the current state

209
Q

Bond: Conversion Price

A

the price per share at which the convertible bond can be converted into shares

210
Q

Bond: Conversion Ratio

A

number of common shares that each bond can converted into.

Bond Par Value / Conversion Price

211
Q

Bond: Conversion Value

A

sometimes called parity value, current share price multiplied by the conversion ratio

212
Q

Conversion Parity

A

Occurs if the conversion value is equal to the convertible bond’s price.

213
Q

Interbank Offered Rate

A

Used as reference rates not only for floating-rate bonds, but also for other debt instruments including mortgages, derivatives such as interest rate and currency swaps, and many other financial products and and contracts.

214
Q

Commerical Paper

A

whether US or Eurocommercial paper - it is negotiable which means that investors can buy and sell it on secondary markets. Companies use it as source of funding working capital (CA-CL), seasonal demand for cash, but also as a source of interim financing for long-term projects.

215
Q

Coupon Effect

A

Lower coupon bonds experience more price volatility all else being equal

216
Q

Maturity Effect

A

Longer maturity bonds experience more price volatility all else being equal

217
Q

Convexity

A

Price increases are greater in absolute terms than price decreases for a given +/- change in bond market discount rate.

In otherwords, if yield decreases, I’m going to expect to receive a higher price. Stingy - don’t want to let go. If yields increase, i’m only going to be willing to give up a little.

218
Q

Bond duration and convexity are measure of

A

interest rate risk

219
Q

Sources of return for a fixed-rate bond investor

A
  1. receipt of promised coupon and principal payments on scheduled dates
  2. reinvestment of coupon payments
  3. potential capital gains or losses on the sale of the bond prior to maturity
220
Q

Two types of duration:

A
  1. Yield Duration = Sensativity of the bond price with respect to the bond’s own yield-to-maturity
  2. Curve Duration = Sensativity of the bond price (or more generally, the market value of a financial asset or liability) with respect to a benchmark yield curve
221
Q

Yield Duration Statistics

A

Macaulay Duration, modified duration, money duration, price value of a basis point (PVBP)

222
Q

Curve Duration Statistic

A

Effective Duration

223
Q

Duration Gap (FI page 553-554)

A

Bond’s Macaulay duration (MD) minus the investment horizon (IH).

  • IH > MD: Coupon reinvestment risk dominates market price risk. Risk is lower interest rates. Duration gap negative.
  • IH = MD: Coupon reinvestment risk offsets market price risk. Duration gap is zero.
  • IH < MD: Market price risk dominates coupon reinvestment risk. Risk is higher interest rates. Duration gap positive.
224
Q

Expected Loss =

A

Probability of Loss x Loss Severity

225
Q

What is the risk that a bond issuer’s creditworthiness may deteriorate or migrate lower?

A

Credit Migration Risk OR Downgrade Risk

226
Q

Describe what backs these types of fixed income instruments:

  • mortgage-backed security
  • equipment trust certificate
  • collateral trust bond
A
  • mortgage-backed security - mortgages on property
  • equipment trust certificate - physical assets or equipment (plans, shipping containers, vehicles)
  • collateral trust bond - securities
227
Q

Incorporating both duration and convexity, the percentage change in a bond’s price =

A

(–Modduration × ∆yield) + (0.5 × Convex × (∆yield)2 )

228
Q

Effective Cost of skipping trade payable discount

A

(1 + (Discount/1-Discount) (365/# days past discount period) -1

229
Q

CML

A

Capital Markets Line - the line with an intercept point equal to the risk-free rate that is tangent to the efficient frontier of risky assets; represented the efficient frontier when a risk-free asset is available for investment.

230
Q

CAL

A

Capital Allocation Line - a graph line that describes the combinations of expected return and standard deviation of return available to an investor from combining the optimal portfolio of risky assets with the risk-free asset.

231
Q

SCL

A

Security Characteristic Line - a plot of the excess return of a security on the excess return of the market

232
Q

SML

A

Security Market Line - the graph of the capital asset pricing model (CAPM). Risk free rate is the intercept, beta is the slope.

233
Q

Calulation of Beta

A

Beta = Correlation * Standard Dev Asset / Standard Dev Mkt

OR

Covariance / Standard Dev Mkt2

βi = Cov(Ri, Rm)/σm2

234
Q

A commodity market is in contango when futures prices are:

A

higher than the spot price.

235
Q

The value at risk (VaR)of an alternative investment is best described as the:

A

minimum amount of loss expected over a given time period at a given probability level.

236
Q

The power of a test is the

A

probability of correctly failing to accept the null hypothesis when it is false.

237
Q

Explain flat, clean, full, dirty bond prices…

A

When a bond is between coupon payment dates, its price has two parts—the flat price or clean price and the accrued interest. The sum of the parts is the full price or dirty price. The full price is equal to the flat price plus the accrued interest.

238
Q

The Change of Polarity Principle

A

The Change of Polarity Principle asserts that once the price rises above the resistance level, it becomes the new support level. Similarly, once the price falls below a support level, it becomes the new resistance level.

239
Q

Which quantities does the Laspreyes index use in determined price level inflation?

A

Base year quantities are used - remember always to use prices from each year.

240
Q

Which quantities does the Paasche index use in determining price level inflation?

A

Current composition of basket is used in all years. Prices from each respective year are used.

241
Q

Using fixed basket of goods in a price index can give rise to biases:

A
  1. Substition Bias
  2. Quality Bias
  3. New Product Bias
242
Q

CA = Sp – I + (T – G – R)

A

CA = Current Account balance

Sp = Private sector savings

I = Investments

T = Taxes

G = Government spending

R = Transfers

243
Q

Valuation of Inventory: IRFS vs US GAAP

A

Under IFRS, inventory is valued at its net realizable value, whereas under US GAAP, market value is defined as current replacement.

244
Q

If the p-value is _____ than the specified _______, the ______ hypothesis is rejected.

A

If the p-value is less than the specified level of significance, the null hypothesis is rejected.

245
Q

Percentiles Formula

A

(n+1)y/100

246
Q

RSI

A

Relative Strength Index - Neutral = 30-70.

Below 30, oversold

Above 70, overbought

247
Q

Fiscal Multiplier Formula

A

1/(1-c(1-t))

c = propensity to consume (%consumption/%disposable income)

t = tax rate

248
Q
A

CFA (4 decks)

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