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SEC PHASE 1 > ECONOMICS > Flashcards

ECONOMICS Flashcards

1
Q

Describe and Enumerate the Drivers of an Economy

A

*refer to NASBI PDF material

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2
Q

Describe and Enumerate the Economic Cycle

A

*refer to NASBI PDF material

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3
Q

How is economic productivity measured?

A

A. GDP vs GNP
B. Interest rates
C. Inflation as measured by PCPI
D. Real return = Nominal return - Inflation

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4
Q

How does government policy affect the economy?

DEMAND SIDE

A

A. Fiscal Policies (C + I + G + X – M) – demand side

  1. Private Consumption (C)
  2. Investments (I)
  3. GovernmentSpending(G)
  4. Exports (X)
  5. Imports (M)
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5
Q

How does government policy affect the economy?

SUPPLY SIDE

A

1.Open Market Operations–buy and sell of government securities
2. Policy Rates (RP, RRP)
3. ReserveRequirements
4. Moral Suasion

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6
Q

How does government policy affect the economy?

A

A. BSP
B.Measures of Money Supply

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7
Q

How does government policy affect the economy?

BSP

A

A. BSP
1. Three Stars
a. Price Stability
b. Stable Banking
System
c. Safe and reliable payments system

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8
Q

How does government policy affect the economy?

Measures of Money Supply

A
  1. M1 – Narrow Money
  2. M2 – Broad Money (Near Money)
  3. M3 – Domestic Liquidity (Near Near Money)
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8
Q
  1. M1 – Narrow Money
A

Currency in circulation and Demand deposits (checking)

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9
Q
  1. M2 – Broad Money (Near Money)
A

M1 + plus peso savings and time deposits

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10
Q

M3 – Domestic Liquidity (Near Near Money)

A

a. M2 + peso deposit substitutes, such as promissory notes and commercial papers (i.e., securities other than shares included in broad money)

b. Money of Financial Institutions

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11
Q

What is not included in M1?

a. Time deposits
b. Checking accounts
c. Coins
d. Currency

A

a. Time deposits

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12
Q

At what point in the economic cycle is unemployment the lowest?

a. Expansion
b. Peak
c. Trough
d. Recession

A

b. Peak

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13
Q
  1. What should the government do if the economy concerned about unemployment?
A

b. Increase government spending

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14
Q
  1. Which government agency is in charge of controlling money supply?

a. BSP
b. PSE
c. SEC
d. PDEx

A

a. BSP

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15
Q
  1. If the government is concerned about the economy overheating, what should it do?

a. Raise interest rates
b. Sell bonds
c. Increase government spending
d. Nothing, its out of their control

A

a. Raise interest rates

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16
Q

Types of Market?

A

A. Primary Market
B. Secondary Market
C. Third Market
D. Fourth Market

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16
Q
  1. What phase of the economic cycle is marked by rising interest rates?

a. Expansion
b. Peak
c. Trough
d. Recession

A

a. Expansion

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17
Q

Market Participants

A
  1. Broker
  2. Dealer
  3. Market Maker
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17
Q

Secondary Market

A
  1. Trading of outstanding
    securities
  2. Provide liquidity
  3. Done in an Exchange
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18
Q

Third Market AKA Over the Counter Market (OTC)

A

Involves dealers and brokers who trade shares that are listed on an exchange away from the exchange

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18
Q

A. Primary Market

A

New issuances of bonds or stock to acquire new capital

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19
Q
A
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19
Q

Fourth Market – Black Market

A

Directtradewithoutintermediation

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20
Q

Call Market vs Continuous Market

A

Call Market
1. Trading sessions
2. Auction or order driven
3. Centralized
4. Agent matches orders
5. One price execution
6. Used for opening or during resumption
7. Used for small markets

Continuous Market
1. Trade anytime market is open
2. Dealerorquote driven
3. Decentralized
4. Place orders continuously

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21
Q

Dealer

A

a. Buys and sells for own account
b. Acts as seller

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22
Q

Broker

A

a. Buys and sells for others
b. Acts as agent

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23
Q

Market Maker

A

a. Act as both broker and dealer
b. Provide liquidity

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24
Q

Indices

A
  • Measure of performance of a group of securities
  • Benchmark
  • Used as an overall gauge in the economic cycle/ overall market sentiment
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25
Q

Market Weighted Index

A

Pros

  1. Can reflect market sentiment more (Sum of the market value of all stocks)
  2. More stable in bear markets

Cons

  1. Bias towards large cap stocks
  2. Buy more as prices go up, counter intuitive to buy low sell high
  3. Higher risk of a bubble
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26
Q

2 Types of Securities Analysis

A

1) TECHNICAL
2) FUNDAMENTAL

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26
Q

Price Weighted Index

A

Pros

  1. Simple to compute and construct (Simple average of current prices)
  2. Reflects portfolio performance of equal number of shares

Cons

  1. Biased towards high priced stocks
  2. Ignores liquidity
  3. Does not take into account splits, spinoffs and mergers
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26
Q

Types of Indices

A

A. Price Weighted
B. Market Weighted
C. Equal Weighted

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27
Q

Equal Weighted Index

A

 Computation of average day change from previous day then apply to the base

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28
Q

What are the components of Technical Analysis ?

A

A. BasicTenets
B. Information needed
C. Criticism

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29
Q

Equal Weighted Index (PROs and CONs)

A

Pros

  1. Portfolio of same allocation per stock
  2. Can be more diversified than a market cap index
  3. Focuses more on value investing (buy low sell high)

Cons
1. Bias toward small cap stocks
2. Higher turnover rate to maintain equal weight
3. Transactional costs

29
Q

What are the components in Technical Analysis that info is only needed ?

A
  1. Price
  2. Volume
  3. Open Interest (optional)
29
Q

What are the components of Fundamental Analysis ?

A

A. Balance Sheet
B. Income Statement
C. Ratios

30
Q

What are the “Criticisms” in Technical Analysis?

A
  1. Efficient Market Hypothesis

a. Impossible to beat the market
b. Buy and hold
c. Prices incorporate all that can be known
2. Random Walk
3. Can past predict the future?
4. Self fulfilling prophecy –20/20

30
Q

What are the Basic Tenets of Technical Analysis?

A
  1. Price discounts everything else
  2. Prices move in trends
  3. History repeats itself
  4. Study of mass psychology
31
Q

What is expected in the Fundamental Analysis - Balance Sheet / Statement of Financial Position

A
  1. Statement on financial condition of a company
  2. AS OF a specific date
31
Q

Operating Profit Margin?

A

a. Measures how much a company makes after paying for its operational costs

b. Operations – day to day expenses

c. Operating profit = Gross profit – Operating expenses

d. Operating Profit/ Net Sales

32
Q

Net Profit Margin?

A

a. Measures how much a company makes after paying for all expenses

b. Net Income / Net Sales

32
Q

What are the components of Fundamental Analysis?

A
  • Profitability Ratio
  • Activity Ratio
  • Liquidity Ratio
  • Coverage Ratio
  • Valuation Measures
32
Q

What is expected in the Fundamental Analysis - Income Statement?

A
  1. Statement on financial performance of a company
  2. For a given period
32
Q

What are the components of Profitability Ratio?

A
  1. Gross Profit Margin
  2. Operating Profit Margin
  3. Net Profit Margin
  4. Return on Assets
  5. Return on Common Equity
  6. Return on Equity
    Looks at results/value the company produced
33
Q

Return on Common Equity?

A

a. Measure of income generated for the common stockholders of the Company

b. Measure of how much of net income is attributable to the common stockholders

c. (Net Income – Dividends to Preferred Shares) / Average Common Equity

33
Q

Return on Assets?

A

a. Measure of how much income was generated through the use of company assets

b. Net Income / Total Average Assets

33
Q

What are the components of Activity Ratio?

A

*Measures efficiency of asset use

  1. Inventory Turnover
  2. Average Days of Inventory
  3. Accounts Receivable Turnover
  4. Average Days Sales/ Collection Period 5. Accounts Payable Turnover
  5. Average Days Payable/ Payment Period 7. Asset Turnover Ratio
33
Q

What is Gross Profit Margin?

A

a. Measures how much a company makes on top of its cost of sales
b. Gross Profit / Net sales

34
Q

Inventory Turnover?

A

a. Measure of how many times were inventory sold (turned over)
b. Too high = inventory might be not enough
c. Too low = poor inventory management or slow sales
d. = Cost of Goods Sold/ Average Inventory

35
Q

Return on Equity?

A

a. Measure of income generated for the owners/ stockholders
b. Includes preferred shares
c. (Net Income) / Average Equity

36
Q

Average Days of Inventory?

A

a. Measure of how many days inventory stays with the company from production/purchase until ultimate sale
b. = 365/Inventory Turnover

37
Q

Accounts Payable Turnover?

A

a. Measure of how many times a company pays its receivables
b. Too high = risk of low cash level; paying too fast
c. Too low = reputational risk because of slow payments
d. = Purchases/ Average Accounts Payable

37
Q

Average Days Sales / Collection Period ?

A

a. Average number of days a receivable is outstanding
b. = 365/ Accounts Receivable Turnover

37
Q

Accounts Receivable Turnover?

A

a. Measure of how many times a company collects its receivable
b. Too low = slow collection / bad accounts
c. = Sales/ Average Accounts Receivable

38
Q

Average Days Payable/ Collection Period?

A

a. = 365/ Accounts Payable Turnover

38
Q

Asset Turnover Ratio?

A

a. Measure of how many times company assets were used to produce sales in a given period
b. = Sales / Average Assets

39
Q

What are the components of Liquidity Ratio?

A
  1. Net Working Capital
  2. Current Ratio
  3. Quick Ratio/ Acid Ratio
  4. Cash Ratio
40
Q

Net Working Capital ?

A

a. = Current Assets – Current Liabilities
b. Can the company pay its short term liabilities
c. How much of company resources is allotted to short term use

41
Q

Current Ratio?

A

a. = Current Assets/ Current Liabilities
b. How many times can the short term assets pay for short term liabilities
c. What is a good ratio for this?

*current means short term (i.e., 1 year or less)

42
Q

Quick Ratio/ Acid Ratio?

A

a. = (Cash+ Cash Equivalents+ Receivables)/ Current Liabilities
b. = (Current Assets – Inventory)/ Current Liabilities
c. Was made because realization/sale of inventory might take time

43
Q

Cash Ratio ?

A

a. = (Cash+ Cash Equivalents)/ Current Liabilities
b. Was made to measure immediate cash
shortfalls

44
Q

What are the components of Coverage Ratio?

A
  1. Debt to Equity Ratio
  2. Times Interest Earned
45
Q

Debt to Equity Ratio?

A

a. Used to evaluate financial leverage
b. Measure to which degree are liabilities funding company assets
c. = Total Liabilities / Total Equity

46
Q

Times Interest Earned?

A

a. Measures ability to pay company debts
b. Earnings before interest and taxes (EBIT)/ Interest Expense

47
Q

Components of Valuation Measures?

A
  1. Earnings Per Share
  2. Price Earnings (PE) Ratio
  3. Book Value Per Share
  4. Price to Book Value Ratio
  5. Dividend Payout Ratio
  6. Dividend Yield
48
Q

Earnings Per Share?

A

a. Measure how much of company net income goes to common shares on a per share basis
b. = (Net Income – Preferred Dividends)/ Outstanding Shares

49
Q

Price Earnings (PE) Ratio?

A

a. = Price/ Net Income
b.= Market price of a share/ Earnings Per Share

50
Q

Book Value Per Share?

A
  1. Amount common stock holders are entitled if the corporation were to liquidate today
  2. = (Assets – Liabilities – Preferred Shares)/ Outstanding Shares
51
Q

Price to Book Value Ratio?

A

a. Share Price * Outstanding Shares / (Assets – Liabilities – Preferred Shares)
b. Share Price / Book Value Per Share

52
Q

Dividend Payout Ratio?

A

a. How much of company income is paid out as dividends
b. = (Net income – Preferred Dividends – Retained Earnings for the year) / Net Income
c. = Dividend per common share / Earnings per share

53
Q

Dividend Yield?

A

Dividends paid to common shares / Share Price

54
Q

What is a portfolio? (1)

A

(A) combination of different assets mixed and matched to serve the purpose of achieving an investor’s goals while maximizing return for each unit of risk

55
Q

Portfolio Management can be composed of:

A
  1. Equities
  2. Fixed income
  3. Cash
  4. Alternatives
    a. Art, bags, real estate
56
Q

What is a portfolio? (2)

A

(C.) Asset allocation to lower risk via diversification

57
Q

What are the Risks involved in Investing? – some but not all

A

A.Credit

B.Market
1. Currency
2. Price
3. Interest rate
4. Inflation

C.Operations

D.Liquidity

E. Sovereign/ political

F. Prepayment/ reinvestment

57
Q

What is a portfolio? (3)

A

D. Concept of Correlation
1. Not cause and effect
2. Low correlation not a perfectly negative correlation
3. Spurious correlation

57
Q

What are the Steps in constructing a portfolio:

A

A.Specify the Objective
B.Determine suitability
C.Identify constraints
D.Identify risks
E. Evaluate risks
F. Manage the risks
G.Monitor and evaluate

58
Q

What are the constraints in Portfolio Management?

A

A. Liquidity
B. Time horizon
C. Taxes
D. Legal and regulatory environment
E. Unique circumstances
F. Risk profile and tolerance

58
Q

What are the specific constraints in TAXES?

A
  1. Income Tax
  2. Gains
  3. Wealth Transfer
  4. Tax Deferral vs. Avoidance
58
Q

What are the additional risks in Portfolio Management?

A

A. Concentration
B. Horizon
C. Longevity
D. Agency Problem

58
Q

What are the specific constraints in LIQUIDITY?

A
  1. Ongoing Expenses
  2. Emergency Reserves
  3. Transaction Costs
  4. Negative and Positive Liquidity Events
59
Q

What are the specific constraints in Risk Profile and Tolerance?

A
  1. Conservative or Moderate or Aggressive
  2. Ability AND willingness to take risk
  3. Stage of Life
  4. Education
  5. Attitude toward risk taking
    6.Return expectations
  6. Rational/ Logical or emotional
  7. Income goals
60
Q

How to make a MARKET OUTLOOK?

A

1) At what stage of the economy are we in?
2) Think of what indicators to look for:
a. GDP
b. Inflation
c. Unemployment
d. Direction of government spending
e. Political outlook locally and internationally

61
Q

How to know what BEST STRATEGY to use?

A

Based on the outlook identified:

  1. Do we lock in higher rates today in expectation of lower rates in the future?
  2. Do we go for shorter tenors because rates are expected to trend up
  3. Will it not matter because there is no additional reward for “timing the market?”
  4. Passive vs active investing
62
Q

Which type of security to buy?

A
  1. Take into account the risk and reward profile of the client and their constraints
  2. Is a specific security the best type of investment or a diversified fund
63
Q

When to buy a security?

A
  1. Answered by technical analysis
  2. Can be timing insensitive, i.e., focus is on exposure

SEC PHASE 1 (3 decks)

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