CFP - Investment planning Flashcards
Best Efforts
Underwriter agrees to sell as much of the offering as possible
Risk resides with firm
Firm Commitment
Underwriter agrees to buy entire issuance from company
Risk resides with underwriter
Red herring
Preliminary prospectus issued before SEC approval
10k and 10Q
10K is annual report of financial statements filed with SEC - audited
10Q is a quarterly report - not audited
Limit Order
Price more important than timing
Best for volition sticks
Stop Order
Price hits a certain level and turns to market order
Once a stop sell order price is reached it turns to market order, stock sold at that price or less since it’s market order
Risk that investor could get less if market is moving quickly
Stop limit or stop loss limit
Investor sets 2 prices
First is stop loss price, once reached order turns to limit
Second price is limit price- investor will not sell below price
Risk if market moves quickly order may not fill and investor left with lower price
Best for investors with significant gain
Margin
Assume 50 % requirement
Maintenance Margin
Minimum amount of equity required before a margin call
Margin call
Loan / 1- maintenance margin
Value Line
Ranks Stocks
Rank of 1 represents highest rating ( signal to buy)
Rank of 5 is lowest rating ( signal to sell)
Morningstar
Ranks mutual funds, stocks and bonds
1 star is lowest and 5 stars is highest
To receive a dividend
Investor must purchase prior to stock prior to ex- dividend date or 2 business days before the date of record
Cash Dividends tax treatment
Qualified dividends receive cap gains treatments
Cash dividends are taxed upon receipt
Stock dividends
Not taxable to shareholder until the stock is sold
Securities Act of 1933
Regulates new issues
Requires prospectus
Securities Act of 1934
Regulates secondary market and trading of securities
Created the SEC to enforce compiance
Investment company Act of 1940
Authorized SEC to regulate investment companies
Open, closed and UIT
Investment advisors act of 1940
Requires investment advisors to register with SEC
Securities Investors Protection Act of 1970
Established SIPC to protect investors for losses resulting from brokerage firm failures
Insider Trading and Securities Fraud Enforcement Act
Defines and insider as anyone with information that is not available to the public
Treasury Bills
Issued in varying multiples up to 52 weeks
Denominations in $100 increments through treasury Direct up to 5 million per auction
Larger amounts available through Bid
Commercial Paper
Short term loans between corporations
Maturities of 270 days or less
Denominations of $100 sold at discount
Bankers Acceptance
Facilitates imports/ exports
Maturities of 9 months or less
Held until maturity or traded
Eurodollars
Deposits in Foreign Banks that are denominated in US dollars
Investment policy statement establishes
RR TTLLU
Risk, Return, Taxes, Time-line, Liquidity, Legal and Unique circumstances
Dow Jones Industrial Average
Simple price adjusted average
Does not incorporate market cap
S&P 500
Value weighted index - incorporates market cap of individual stocks into average
Russell 200”
Value weighted index of smaller market cap stocks in the Russell 3000
Wiltshire 5000
Broadest index that measures performances of over 3000 stocks
Haven’t contained 5000 stocks since 12/2005
EAFE
A value weighted index that tracks stock in Europe, Australia, Asia and FAr East
Affect Heuristic
Judging something - based on non financial issues
Anchoring
Anchoring to a reference point
Availability Heuristic
Relies on knowledge that is readily available in memory
Bounded Rationality
Rationality is limited by available information
Confirmation Bias
People focus on info that supports decisions
Cognitive Dissonance
Misinterpret info that is contrary to an existing opinion
Disposition effect
Investors create mental accounts when they purchase stocks and continue to mark value to purchase prices
Prospect theory
People value gains and losses differently
Similarity Heiristic
Used when a similar situation occurs even though situations have different outcomes
Standard deviation can be used to measure
Total risk of an undiversified portfolio
Standard Deviation Example
Coefficient of variation
Standard deviation divided by average return
Standard Deviation Example
Positive Skewness
Negative skewness
Kurtosis
Lepotokurtic
High peak and fat tails ( LIPO)
Higher chance of extreme events
Platykurtic
Low peak and thin tails( lower chance of extreme events) PLatonic
Covariance
Measure of 2 securities combined and their interactive risk
Measure of relative risk
Beta
Beta coefficient is a measure of an individual security’s volatility relative to that of the market
Used to measure volatility of a diversified portfolio
Beta of Market is 1
Stock with beta of 1 is expected to mirror the market
Stock higher than 1 means the stock fluctuates more than market
Stock less than 1 indicates less fluctuations relative to market
Systematic Risk
Nondiversifiable
Market risk
Economy basked risk
Unsystematic Risk
Diversifiable
Unique risk
Company - specific Risk
PRIME Systemic Risk
Purchasing Power
Reinvestment
Interest rate
Market risk
Exchange rate
Unsystematic Risk
ABCDEFG
Accounting risk
Business Risk
Country Risk
Default Risk
Executive Risk
Financial risk
Government/ regulation risk
Treynor Index
Realized return on portfolio minus risk free rate of return divided by the beta of the portfolio
Treynor Index Facts
One Treynor must be compared to another
The higher the ratio the better
Measures reward relative to risk
Sample Portfolio Theory Question
Sharpe Index
Realized return of portfolio minus risk free rate of return divided by standard deviation
Sharpe Ratio Facts
Sharpe needs to be compared to another sharpe
The higher the ratio the better
Sample portfolio theory question
Jensen Model
Absolute performance measure
Positive alpha = find manager provided more return then was expected
negative = less return
Zero = return equal to what was expected
Sharpe, Treynor and Alpha Application
Summary of performance measures
