Concept 6 Flashcards
If a manager changes his investment strategy, should he acquire written notice from customer first or should he promptly inform the client after the change
Standard V(B) Communication with Clients and Prospective Clients requires prompt disclosure of any change that might significantly affect the manager’s investment processes. The disclosure need not be in writing.
If a candidate changes his mother’s account for tax purpose, but does not do that for other clients, does he violate fair dealing?
No, tax is different for everyone, acting the same on everyone might not be for their best interest
Under GIPS, what does total firm asset include?
Discretionary and non-discretionary accounts, fee-paying and non-fee-paying accounts.
If a candidate change recommendation from “buy” to “sell”. then another customer immediately called to buy the share, what should he do?
He may accept the order but must advise the customer of the change in recommendation before accepting the order. No written permission is required
Can candidate mimic client’s account action on his own account?
Yes, as long as they do not harm client’s interest
If a company want to make a purchase, and a candidate possess material non public information that the purchase should not be executed, what should he do?
He should not act on it. He should not put the company on restriction list because that would also be “acting” on the information. He should contact the source of the information to urge them to make the information public, otherwise would make the purchase anyway.
Contrarian technical analyst
Anticipate bearish market if indicators are bullish, vice versa
Put-call ratio
Put option means people expect price to lower, thus high put-call ratio means a bearish market
Volatility index
High VIX indicates investor fear the drop of stock price, indicates a bearish market
Low mutual fund cash position
Low cash position indicates aggressive investing -> bullish market
Margin debt
Increase in margin debt indicates aggressive borrowing to buy, thus bullish market
Elasticity approach (exchange rate change)
Under the elasticities approach, a currency depreciation will lead to a greater reduction in a trade deficit when export demand and/or import demand are more elastic.
Open market operation
Central buys or sells security.
When central bank buy stocks, cash replace stock position, money supply increase and interest rate decrease
Most used monetary tool for central bank to control money supply
Open market operation
Reserve requirement
Percentage of reserve bank need to keep for deposits. Lower reserve requirement increase money supply and lower interest rate.
Policy rate
Also discount rate or refinancing rate. It is the rate that banks can borrow money from fed.
Lower rate makes it easier to borrow money, decrease interest rate overall
Short run aggregate supply curve
Upward sloped, Output(real gdp, x axis) v.s. Price level (y axis)
Long run aggregate supply curve
Vertical, Output(real gdp, x axis) v.s. Price level (y axis)
What’s the effect of increased money supply on AD and AS
It will increase aggregated demand
A natural monopoly is most likely to exist when
economies of scale are great
Report of extraordinary item
Separately in income statements
How is interest expense categorized for manufacturing company and financial service company?
Interest expense is shown as a non-operating component of net income for a manufacturing company but would typically be classified as an operating expense for a financial services company.
If a 4M bond is converted into 6M common stock, how should that be recorded on cash flow statement?
Conversion of bonds into common stock is a non-cash transaction, but the conversion should be disclosed in a footnote to the statement of cash flows.
Should we use coupon rate or market rate of newly issued debt to estimate debt cost of capital
Market rate
What risk does beta measure
Systematic risk
What risk does standard deviation measure
Total risk
Short sale
Short seller
1) simultaneously borrows and sells securities through a broker
2) must return securities at the request of the lender or when short sale close out
3) must keep a portion of the proceeds of the short sale on the account
Is price of a lower-coupon payment bond more or less sensitive to interest rate change compared to a higher-coupon bond?
Lower coupon payment is more sensitive, since higher coupon bonds always pay same coupon no matter the interest rate.
Positive convexity
Bend inward, default bond yield curve
Price yield curve
It’s curved inward (positive convexity), thus for same percent change, decrease would result in a larger price increase compared to increase would result in the price decrease
Forward rate curve
What’s the next point on the curve for 2y2y?
Plots forward rates in years.
The next point would be 2 year rate 3years from now
In matrix pricing for illiquid bonds, should we use bonds with higher liquidity or similar liquidity?
Matrix pricing for untraded or infrequently traded bonds should be based on yields of more frequently traded bonds with similar credit ratings.
1000 bond is trading for 89.14 , what’s the flat price
$891.4
Benefit of derivative market
- Provide price information
- Allow risk to be managed and shifted among market partificpants
- reduce transactions costs
Under Standard V(C) Record Retention, should records be kept in hard copies or is electronic copy acceptable?
Electronic copies are ok
If clients have confidential information that might relate to illegal activities, how should candidate act?
In the case of illegal activity, candidate have a legal obligation to report the activity. Ideally, he should consult with his employer first about what actions he may be required to take. Seeking the advice of outside counsel as to whether he has such an obligation under local law and whether the activity is indeed illegal is the one permitted under the Standard.
Under Code and Standard, can one report individual account instead of composite?
Individual account performance is permitted and no minimum number of years is recommended
Quintile
Distribution divided into 5 groups
Subjective probability
Subjective probability is based on personal judgement.
empirical probability
Based on historical data
Key assumption of technical analysis
Market price reflect both rational and irrational activity
Investor behavior is reflected in trends and patterns.
Patterns tends to repeat.
Elasticity of an perfectly inelastic supply and perfectly elastic supply
For perfect inelastic, elasticity = 0
For perfect elastic, elasticity = infinity
Think of demand change = supply change * elasticity. For perfect inelastic, demand change = 0, for perfect elastic, demand change = infinity
Law of diminishing return
Determine the upward sloping portion of the short run supply curve
Return to scale
Determine the long run supply curve
Marginal revenue
Note, it is the increase in revenue (NOT PROFIT) for an additional unit
Free trade areas
All barriers to import and export of goods and services among member countries are removed
Customs Union
- All barriers to import and export of goods and services among member countries are removed
- All countries adopt a common set of trade restrictions with non members
Common market
- All barriers to import and export of goods and services among member countries are removed
- All countries adopt a common set of trade restrictions with non members
- All barriers to the movement of labor and capital goods among member countries are removed
Economic Union
- All barriers to import and export of goods and services among member countries are removed
- All countries adopt a common set of trade restrictions with non members
- All barriers to the movement of labor and capital goods among member countries are removed
- Member countries establish common institutions and economic policy for the union
Monetary union
- All barriers to import and export of goods and services among member countries are removed
- All countries adopt a common set of trade restrictions with non members
- All barriers to the movement of labor and capital goods among member countries are removed
- Member countries establish common institutions and economic policy for the union
- Member countries adopt a single currency
retrospectively
Directed to the past
Is change from LIFO to FIFO conducted retrospectively or prospectively?
Prospectively, no adjustments are made to the prior periods
Assumption of IFRS statement
In the IFRS framework, the two assumptions that underlie the preparation of financial statements are the accrual basis and the going concern assumption.
Capitalizing cost and income variability
Capitalizing costs tends to smooth earnings, thus reduce income variability
Declaration date
The data board of directors approves dividend payment
Ex-dividend date
The first day a share of stock trades without dividend. It is the cut-off date for receiving dividend. Occur two days before holder of record date
Holder of record date
Date on which shareholders of record are designated to receive dividends
Payment date (dividend)
Date when dividend checks are mailed out
What if investor’s willingness to take risk greater than his ability to take risk?
The advisor’s assessment of the client’s risk tolerance in the IPS should reflect the client’s ability to bear investment risk.
Given Jan 1, 20X1 Beginning portfolio value $10 million Jul 1, 20X1 Account value $11.2 million Jul 1, 20X1 Deposit of cash $1.2 million Jan 1, 20X2 Account value $12.5 million Jan 1, 20X2 Withdrawal of cash $0.6 million Dec 31, 20X2 Account value $15 million Calculate manager's performance
Since the portfolio manager is not directing the flow of cash into and out of the account, the time-weighted annual rate of return is the appropriate performance measure. Calculate the 2-year holding period return +1, then take the square root and subtract 1 to get the annual time-weighted rate of return:
[(11.2 / 10)(12.5 / 12.4)(15 / 11.9)]1/2 – 1 = 19.29%.
Statutory voting
a minority shareholder could not elect any board members based only on their share voting rights.
In statutory voting, if you owned 50 shares and were voting on six board positions, you could cast 50 votes for each board member, for a total of 300 votes. You could not cast 20 votes for each of five board members and 200 for the sixth.
Modified duration in terms of Macaulay duration
Modified duration = Macaulay duration / (1 + YTM)
Notching
“Notching” refers to the credit rating agency practice of assigning ratings to debt issues that differ from the issuer’s credit rating.
Duration gap
a difference between a bond’s Macaulay duration and the bondholder’s investment horizon.
Management fee for Fund of Fund?
The fee may actually be substantial since, in addition to paying the manager of the FOF, a fee must be paid to each hedge fund within the FOF.
Private investment in public equities
Private investment in public equities refers to a private equity firm providing equity financing to publicly traded companies.
