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CFP - RL Flash cards > CFP - Investment planning > Flashcards

CFP - Investment planning Flashcards

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1
Q

Best Efforts

A

Underwriter agrees to sell as much of the offering as possible
Risk resides with firm

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2
Q

Firm Commitment

A

Underwriter agrees to buy entire issuance from company
Risk resides with underwriter

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3
Q

Red herring

A

Preliminary prospectus issued before SEC approval

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4
Q

10k and 10Q

A

10K is annual report of financial statements filed with SEC - audited
10Q is a quarterly report - not audited

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5
Q

Limit Order

A

Price more important than timing
Best for volition sticks

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6
Q

Stop Order

A

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

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7
Q

Stop limit or stop loss limit

A

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

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8
Q

Margin

A

Assume 50 % requirement

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9
Q

Maintenance Margin

A

Minimum amount of equity required before a margin call

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10
Q

Margin call

A

Loan / 1- maintenance margin

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11
Q

Value Line

A

Ranks Stocks
Rank of 1 represents highest rating ( signal to buy)
Rank of 5 is lowest rating ( signal to sell)

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12
Q

Morningstar

A

Ranks mutual funds, stocks and bonds
1 star is lowest and 5 stars is highest

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13
Q

To receive a dividend

A

Investor must purchase prior to stock prior to ex- dividend date or 2 business days before the date of record

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14
Q

Cash Dividends tax treatment

A

Qualified dividends receive cap gains treatments
Cash dividends are taxed upon receipt

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15
Q

Stock dividends

A

Not taxable to shareholder until the stock is sold

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16
Q

Securities Act of 1933

A

Regulates new issues
Requires prospectus

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17
Q

Securities Act of 1934

A

Regulates secondary market and trading of securities
Created the SEC to enforce compiance

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18
Q

Investment company Act of 1940

A

Authorized SEC to regulate investment companies
Open, closed and UIT

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19
Q

Investment advisors act of 1940

A

Requires investment advisors to register with SEC

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20
Q

Securities Investors Protection Act of 1970

A

Established SIPC to protect investors for losses resulting from brokerage firm failures

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21
Q

Insider Trading and Securities Fraud Enforcement Act

A

Defines and insider as anyone with information that is not available to the public

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22
Q

Treasury Bills

A

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

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23
Q

Commercial Paper

A

Short term loans between corporations
Maturities of 270 days or less
Denominations of $100 sold at discount

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24
Q

Bankers Acceptance

A

Facilitates imports/ exports
Maturities of 9 months or less
Held until maturity or traded

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25
Q

Eurodollars

A

Deposits in Foreign Banks that are denominated in US dollars

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26
Q

Investment policy statement establishes

A

RR TTLLU
Risk, Return, Taxes, Time-line, Liquidity, Legal and Unique circumstances

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27
Q

Dow Jones Industrial Average

A

Simple price adjusted average
Does not incorporate market cap

28
Q

S&P 500

A

Value weighted index - incorporates market cap of individual stocks into average

29
Q

Russell 200”

A

Value weighted index of smaller market cap stocks in the Russell 3000

30
Q

Wiltshire 5000

A

Broadest index that measures performances of over 3000 stocks

Haven’t contained 5000 stocks since 12/2005

31
Q

EAFE

A

A value weighted index that tracks stock in Europe, Australia, Asia and FAr East

32
Q

Affect Heuristic

A

Judging something - based on non financial issues

33
Q

Anchoring

A

Anchoring to a reference point

34
Q

Availability Heuristic

A

Relies on knowledge that is readily available in memory

35
Q

Bounded Rationality

A

Rationality is limited by available information

36
Q

Confirmation Bias

A

People focus on info that supports decisions

37
Q

Cognitive Dissonance

A

Misinterpret info that is contrary to an existing opinion

38
Q

Disposition effect

A

Investors create mental accounts when they purchase stocks and continue to mark value to purchase prices

39
Q

Prospect theory

A

People value gains and losses differently

40
Q

Similarity Heiristic

A

Used when a similar situation occurs even though situations have different outcomes

41
Q

Standard deviation can be used to measure

A

Total risk of an undiversified portfolio

42
Q

Standard Deviation Example

A
43
Q

Coefficient of variation

A

Standard deviation divided by average return

44
Q

Standard Deviation Example

A
45
Q

Positive Skewness

A
46
Q

Negative skewness

A
47
Q

Kurtosis

A
48
Q

Lepotokurtic

A

High peak and fat tails ( LIPO)
Higher chance of extreme events

49
Q

Platykurtic

A

Low peak and thin tails( lower chance of extreme events) PLatonic

50
Q

Covariance

A

Measure of 2 securities combined and their interactive risk

Measure of relative risk

51
Q

Beta

A

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

52
Q

Beta of Market is 1

A

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

53
Q

Systematic Risk

A

Nondiversifiable
Market risk
Economy basked risk

54
Q

Unsystematic Risk

A

Diversifiable
Unique risk
Company - specific Risk

55
Q

PRIME Systemic Risk

A

Purchasing Power
Reinvestment
Interest rate
Market risk
Exchange rate

56
Q

Unsystematic Risk
ABCDEFG

A

Accounting risk
Business Risk
Country Risk
Default Risk
Executive Risk
Financial risk
Government/ regulation risk

57
Q

Treynor Index

A

Realized return on portfolio minus risk free rate of return divided by the beta of the portfolio

58
Q

Treynor Index Facts

A

One Treynor must be compared to another

The higher the ratio the better
Measures reward relative to risk

59
Q

Sample Portfolio Theory Question

A
60
Q

Sharpe Index

A

Realized return of portfolio minus risk free rate of return divided by standard deviation

61
Q

Sharpe Ratio Facts

A

Sharpe needs to be compared to another sharpe

The higher the ratio the better

62
Q

Sample portfolio theory question

A
63
Q

Jensen Model

A

Absolute performance measure
Positive alpha = find manager provided more return then was expected
negative = less return
Zero = return equal to what was expected

64
Q

Sharpe, Treynor and Alpha Application

A
65
Q

Summary of performance measures

A

CFP - RL Flash cards (5 decks)

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