CFP Investments Flashcards
3 differences btwn Warrants & Call options
- Warrants created by corps, options created by individuals
- Warrants typically have maturities of several years
- Warrant terms aren’t standardized, call options are
Reg D: Accredited vs Non-accredited investor
Accredited (unlimited)
• NW over $1mm or
• Individual w/ income of $200k
• Couple w/ income of $300k
Non-accredited
• max of 35 investor
• Must use a purchase representative if not sophisticated
Coefficient of Variation (CV) formula
Standard deviation / mean return
CV indicates risk per unit of expected return. Helps ID what investment is riskier
What does Beta measure
• systematic risk
• volatility of returns in a diversified portfolio
What does Standard Deviation measure
• Total risk
• variability of returns in a nondiversified portfolio
If correlation coefficient is negative, will Beta be negative?
Yes
Geometric mean is what type of return?
And calculation
Time-weighted
Factors percentages (manager comparisons)
Multiply returns = FV
PV -1; n=years; i = solve
IRR and NPV are what type of return
Dollar-weighted
Factors cash flow (absolute dollar amounts)
What is the most important consideration relative to the Markowitz Efficient Frontier?
Risk
What type of index is the Russell 2000?
Capitalization weighted
• smallest 2000 stocks in the Russell 3000
What type of index is the Wilshire 5000?
Value weighted
What type of index is the Value Line?
Equally weighted
What type of index is the NASDAQ?
Capitalization weighted
Margin call formula
(1 - initial margin %) / (1 - maintenance margin %) x Purchase Price of Stock
Capitalization of Large Cap Stocks
> $10 billion
Capitalization of Mid Cap Stocks
$2 billion - $10 billion
Capitalization of Small Cap Stocks
< $2billion
Capitalization of Micro Cap Stocks
< $300 million
Types of Systematic Risk
(Non-diversifiable)
PRIME
Purchasing power (inflation)
Reinvestment
Interest Rate (change in rates will cause value of fixed income to fall)
Market
Exchange Rate
Types of non-systematic risks
(Unsystematic/non-diversifiable)
Financial
Business
If the yield curve moved upward, duration has increased or decreased?
Decreased.
Interest rates and duration have an inverse relationship.
What is the best way for a US investor to buy a foreign stock?
ADR
Call options (9 mos or less) - taxability
• Taxability to writer due to lapse - premium received is STCG
• Taxability to the writer due to exercise (covered call) - premium received is added to sale price
- becomes LTCG if underlying security held for > 1yr
- STCG if held < 1yr
Taxability to a call option holder
• if exercised, then option is considered sold (expires), and it is a short term gain/loss
• if not exercised, still short term gain/loss
What yield is generally the most important to a bond investor?
YTM
What is the intersection of the CML called?
Rf or Risk free (100% T bills)
What is point B called on the CML?
The optimal risky portfolio, a proportional percentage of risky assets, or the tangent of the CML and the Markowitz efficient frontier.
What happens if the portfolio moved from point of tangency to Rf on the CML?
The investor sells risky assets and buys T bills
Are REITS redeemable?
No, they are negotiable and trade on exchanges
Is Modern Portfolio Theory active or passive?
Active
It is the selection of an optimal combo of assets so the investor secured the highest return for a given level of risk
2:1 or 2 for 1 stock split
You get 2 shares for 1, thus reducing the par value of the stock
Duration correlation w/ interest rates, coupon rate, and maturity
• interest rates = inversely correlated
• coupon rate = inversely correlated
• maturity = positively correlated
Using duration to manage bond portfolios
• if interest rates are expected to rise
• if interest rates are expected to fall
• interest rates rise = buy high coupons w/ short maturities to shorten duration (UPS: interest rates UP, Shorten duration)
• interest rates fall = buy low coupons w/ long maturities to lengthen duration (Fallen: interest rates FALL, LENgthen duration)
