Economic Factors, Ratios, & Risk Flashcards
What are the 4 Economic Cycles?
Expansion (Bullish)
Peak
Contraction (Bearish)
Trough
What’s Expansion?
When Economic Growth is ▲
What’s a Peak?
When Economic Growth has reached its max point
What’s Contraction?
When Economic Growth is ▼
What’s a Trough?
When Economic Growth has reached its lowest point
What’s a Recession?
2 Consecutive Quarters of ▼ Economic Growth
What’s Stagnation?
Annual Economic Growth of less than 2-3% GDP
What’s a Depression?
A Recession that lasts 2+ years or a ▼ in GDP of 10%+
What’s a Recovery?
A cascading incline in Economic Growth
What’s Fiscal Policy?
The responsibility of the U.S. Executive & Legislative Branches to manage Gov. Spending & Taxes
What’s Monetary Policy?
The responsibility of a Country’s Central Bank to control the overall $$$ Supply & I/R
What’s a Contractionary Fiscal Policy?
A Policy that ▲ Taxes & ▼ Gov. Spending
What’s an Expansionary Fiscal Policy?
A Policy that ▼ Taxes & ▲ Gov. Spending
What’s a Contractionary Monetary Policy
A Policy that ▲ I/R & ▼ the overall $$$ Supply
What’s an Expansionary Monetary Policy
A Policy that ▼ I/R & ▲ the overall $$$ Supply
What happens when Taxes ▲ & Gov. Spending ▼?
▼ Economic Activity & Income
▼ Gov. Deficit
▼ Inflation
▲ Unemployment
What happens when Taxes ▼ & Gov. Spending ▲?
▲ Economic Activity & Income
▲ Gov. Deficit
▲ Inflation
▼ Unemployment
What’s Currency Valuation?
The process of determining Exchange Rates between Currencies
What’s the Foreign Exchange Marketplace (FOREX)
The Marketplace in which Currencies are Traded
What’s Sovereign Debt?
Gov. Debt, Public Debt, & National Debt issued by a Gov.
What’s Inflation?
The Rate at which Prices for Goods & Services ▲ & Purchasing Power ▼
What’s HyperInflation?
A period of Inflation of 50% or more per Month
What’s Stagflation?
Continuing Inflation w/ no Economic Growth
What’s Deflation?
The Rate at which the Nominal Costs of Capital, Labor, Goods & Services ▼ & Purchasing Power ▲
What’s a Credit Spread?
The Basis Point difference in Yield between 2 Debt Securities of the same Maturity, but different Credit Quality
What’s an Interest Rate (I/R)?
The amount a Lender charges a Borrower and is a % of the Principal
What’s a Yield Curve?
The Slope of a Yield or I/R of a Bond
What’s an Investment Yield?
The Rate of Distributed or Realized Returns on an Investment, expressed as a % of the Cost of Investment
What’s a Normal Yield Curve?
When Long-Term I/R’s exceed Short-Term I/R’s
What may a Normal Yield Curve signify?
Economic Expansion
What are the effects of a Normal Yield Curve?
▲ Exports
▼ Imports
▲ Stock/Bond Prices
▼ US Dollar Value
What’s a Flat Yield Curve?
When Long-Term I/R’s are the same as Short-Term I/R’s
What’s an Inverted Yield Curve?
When Long-Term I/R’s are lower than Short-Term I/R’s
What may an Inverted Yield Curve signify?
Economic Contraction
What are the effects of an Inverted Yield Curve?
▼ Exports
▲ Imports
▼ Stock/Bond Prices
▲ US Dollar Value
What’s Disintermediation?
A large-scale Investor movement into Long-Term Debt Securities
What’s Gross Domestic Product (GDP)?
The Total Market Value of all Finished Goods & Services produced within a Country in a set time period
What causes an ▲ in a Currency Exchange Rate?
▲ I/R
What’s Non-Farm Payroll?
The # of Workers (per month) in the U.S. excl. Farming, Private Household, Non-Profit, and Active Military Employees & Proprietors
What’s the GDP Equation?
Gross Domestic Product
C + I + G + NX
Consumer Spending (C)
Firm Investment (I)
Gov. Spending (G)
Net Exports (NX)
What are the 4 most prominent Employment Indicators?
Duration of Unemployment
Non-Farm Payrolls (released monthly)
Unemployment Rate (released monthly)
Weekly Initial Unemployment Claims
What type of Business Cycle Indicator (BCI) is the CPI?
Lagging Indicator
What type of Business Cycle Indicator (BCI) is the Avg. Weekly Claims for Unemployment?
Leading Indicator
What’s a Trade Deficit?
A ▼ in GDP when the value of Imports exceeds the value of Exports
What type of Business Cycle Indicator (BCI) is the Avg. Length of Unemployment?
Lagging Indicator
What’s a Trade Surplus?
An ▲ in GDP when the value of Exports exceeds the value of Imports
What’s the Balance of Payments (BOP)?
Economic Indicator
A record of all International Financial Transactions made by the Residents of a Country
What’s a Price Index?
The tracking of the Prices of Goods & Services over Time
What’s the Consumer Price Index (CPI)
The Weighted Avg. of Prices of a Basket of Goods & Services classified as Primary Consumer Needs reported Monthly since 1913
What’s an Income Statement?
An overview of Revenues, Expenses, NI, & EPS
What’s a Balance Sheet?
An overview of a Firm’s Assets, Liabilities, and Shareholders’ Equity as a snapshot in time
What’s a Cash Flow Statement?
An overview of a Firm’s Financing, Investing, & Operating Activities
What’s an Audited Financial Statement?
A Financial Statement that’s reviewed by a Certified Public Accountant(s) (CPA) for accuracy
What’s an UnAudited Financial Statement?
A Financial Statement that isn’t reviewed by a Certified Public Accountant(s) (CPA) for accuracy, but is instead generated solely by the Firm
What are the 4 Types of Auditor Opinions?
Unmodified or Unqualified Opinion
Qualified Opinion
Adverse Opinion
Disclaimer of Opinion
What’s an Unmodified or Unqualified Opinion?
An Auditor Opinion that confirms everything is accurate and the Firms bookkeeping is following Standard Accounting Practice
What’s a Qualified Opinion?
An Auditor Opinion that confirms everything is accurate except for a specified list of items
What’s an Adverse Opinion?
An Auditor Opinion that the Firms Financial Statements aren’t accurate and that the info can’t be relied upon to make decisions
What’s a Disclaimer of Opinion?
An Auditor Opinion where the Auditor refuses to provide an opinion because they don’t have all of the info to confirm the accuracy of the Financial Statements
What are the 3 SEC Financial Reports required by a Firm?
Form 10K, 10Q, & 8K
What’s SEC Form 10K?
A Firm’s Annual Financial Report
What’s SEC Form 10Q?
A Firm’s Quarterly Financial Report
What’s SEC Form 8K?
An SEC form that can be filed at anytime to inform Shareholders of “unscheduled material events that are important to Shareholders’
What’s SEC Schedule 13D?
Beneficial Ownership Report
A form that must be filed within 10 Days when a Person or Group acquires a 5%+ Stake of a Voting Class of a Firm’s Equity Shares
What’s SEC Schedule 13F?
A Quarterly Report required to be filed within 45 Days by all Institutional Investment Managers w/ $100M+ AUM
What’s the SEC EDGAR?
The SEC’s Electronic Data Gathering, Analysis, & Retrieval System
What are the 2 Bookkeeping Types?
Accrual Accounting
Cash Basis Accounting
What’s Accrual Accounting?
Recording Revenue & Expenses when Transactions occur but before Cash is collected or remitted
Who uses Accrual Accounting?
Large Firms since it smooths out Earnings over time & provides a Long-Term perspective
What’s Cash Basis Accounting?
Recording Revenue & Expenses when Cash related to those Transactions are collected or remitted
Who uses Cash Basis Accounting?
Sole Proprieters & Small Businesses w/ avg. Annual Gross Receipts of $25M- within a prior 3 year period
What’s the Time Value of Money (TVM)?
Present Discounted Value
The concept that a sum of $$$ is worth more now than the same sum will be at a future date due to its earnings potential in the interim
What’s the FRS?
Federal Reserve System
What’s the Federal Open Market Committee (FOMC)?
The FRS Monetary Policymaking Body that manages the U.S. Money Supply
What’s FOMC M1?
Federal Open Market Committee
Cash + Demand Deposits
What’s FOMC M2?
Federal Open Market Committee
M1 + Savings Accounts + Non-Institutional Money Market Funds
What’s FOMC M3?
Federal Open Market Committee
M2 + Large Deposits + Repos + Institutional Money Market Funds
What type of Business Cycle Indicator (BCI) is FOMC M2?
Federal Open Market Committee
Lagging Indicator
What’s the Discount Rate (DR)?
- The I/R the Federal Reserve Board in NY provides the FRS Member Banks
- The I/R used in DCF analysis
What’s the Fed Funds Rate?
The I/R the FRS Member Banks charge each other
What’s the Money Market Rate?
The I/R Investors earn within Money Market Instruments
What’s the Prime Rate?
The I/R that Commercial Banks loan to their best Clients
What’s a Broker-Dealer (BD)?
Any Person or Group engaged in the Business of effecting Securities Transactions for the Accounts of Others or for Themselves
What’s the Broker Call Loan Rate?
The I/R that Commercial Banks loan to BDs for Client Margin Purchases
What’s a Margin Loan Rate?
The I/R BDs charge Customers for Credit
Order the Discount Rates from lowest to highest
FRB DR
Fed Funds Rate
Money Market Rate
Prime & Broker Call Loan Rates
Margin Loan Rate
Which Discount Rate is the most Volatile?
Fed Funds Rate
It can change Overnight
What’s a Discounted Cash Flow (DCF)?
Intrinsic Value
The current value of a future stream of payments from a Firm, project, or Investment
What’s the Internal Rate of Return (IRR)?
Dollar Weighted RoR
The DR that makes the NPV of all CF’s 0 in a DCF analysis
What’s the Net Present Value (NPV)?
The current value of a future stream of payments from a Firm, project, or investment minus the initial investment
What’s a Statistical Mean?
The avg. of a dataset/range
What’s a Statistical Median?
The middle # of a dataset/range
What’s a Statistical Mode?
The # that occurs the highest # of times within a dataset/range
What’s a Statistical Range?
A measure of Dispersion within a dataset
Greatest Value - Smallest Value
What’s a Standard Deviation (Std)?
The Dispersion of a dataset relative to its Mean & is calculated as a SqRt of the Var
What’s an ▲ Standard Deviation mean for a Stock?
That the Stock has a Wide Variation in its Historical Returns, thus ▲ Risk & ▼ Predictability
What’s Beta?
The Volatility of a Security or Portfolio compared to the Systematic Risk of the Overall Market (Benchmark)
What’s Alpha?
Excess Return or Abnormal RoR
ROI - Beta
An Investment Strategies ability to beat the Market
What’s the Sharpe Ratio?
The ROI compared w/ its Risk
What’s the Sharpe Ratio Equation?
What’s a Correlation?
The degree to which 2 variables move in relation to each other
What’s a Liqudity Ratio?
A class of financial metrics used to assess a Debtor’s ability to pay Current Debt Obligations w/out raising External Capital
What’s the Current or Working Capital Ratio?
A Liquidity Ratio that measures a Firm’s ability to meet its Short-Term Obligations w/ all of its Assets
What’s the Current Ratio Equation?
Working Capital Ratio
CA / CL
What’s the Quick Ratio?
Acid-Test Ratio
A Liqudity Ratio that measures a Firm’s ability to meet its Short-Term Obligations w/ its most Liquid Assets w/out selling its Inventory or Prepaid Assets
What’s the Quick Ratio Equation?
Quick Assets / CL
What’s the Quick Assets Equation?
TCA - I - PE
What’s a Solvency Ratio?
A class of financial metrics used to assess a Debtor’s ability to pay its Long-Term Debt Obligations w/out raising external Capital
What’s the Debt-Equity (D/E) Ratio
A Solvency Ratio that measures how much of a Firm’s Debt could be liquidated using Equity
What’s the D/E Equation?
Debt-Equity Ratio
Debt / Equity
What’s a Valuation Ratio?
A class of financial metrics used to assess if a Stock’s past or future performance is over/under-valued by Investors
What’s Earnings per Share (EPS)?
A Valuation Ratio that signifies how profitable a Firm is
What’s the EPS Equation?
Earnings per Share
What’s Diluted EPS?
Earnings per Share
The quality of a Firm’s EPS if all Convertible Securities were exercised
What’s the Diluted EPS Equation?
Earnings per Share
What’s the Price-to-Earnings (P/E) Ratio?
A Valuation Ratio
A Price Multiple
An Earnings Multiple
What’s the P/E Equation?
Price-to-Earnings Ratio
What’s the Price-to-Book (P/B) Ratio?
A Valuation Ratio that compares a Firm’s Market Capitalization to its Book Value
What’s the P/B Equation?
Price-to-Book Ratio
What’s the BVPS Equation?
Book Value Per Share
What’s Systematic Risk?
The Risk inherent to the entire market or market segment, reflecting the impact of Economic, Geopolitical, & Financial Factors
Volatility Risk
Market Risk
Undiversifiable Risk
What are the 4 different types of Systematic Risk?
Geopolitical Risk
I/R Risk
Inflation Risk
Sector or Industry Risk
How do you mitigate Sytstematic Risk?
Asset Allocation Strategies
Diversification
Hedging
What are Unsystematic Risks?
The Risk inherent to a specific Firm or Industry Investment
Nonsystematic Risk
Specific Risk
Diversifiable Risk
Residual Risk
What are the 5 different types of Unsystematic Risk?
Business Risk
Financial Risk
Legal & Regulatory Risk
Operational Risk
Strategic Risk
How do you mitigate Unsystematic Risk?
Diversification
What’s Opportunity Cost?
The Cost of one Choice that must be forfeited for another
What’s the Liquidation Priority of a Firm?
Employee Wages
IRS Tax & Penalty Payments
Secured Bondholders
Unsecured Bondholders & General Creditors
Subordinated Debentures
Preferred Stockholders
Common Stockholders
