Equity Flashcards
What are the three functions of a financial system?
- Help people achieve their purposes in using the financial system.
- To facilitate the discovery of the rate of return where aggregate savings equal aggregate borrowings.
- Allocating capital to its most efficient use.
What are the two types of asset classifications? What do they include?
- Financial - securities, currencies, and contracts
2. Physical - commodities and real assets
What are the two primary differences between forward and future contracts?
Futures contracts are standardized and trade on organized exchanges and a clearing house in the counterparty to all futures contracts.
What is a swap?
A swap is an agreement between two parties to exchange a series of cash flows at periodic settlement dates over a certain period of time. A swap may also be looked upon as a series of forward contracts.
What is a dealer?
Dealers fulfill order for their clients by actually taking positions as counter parties for their trades.
The price at which an investor who goes long on a stock receives a margin call is calculated as:
P= P(1-initial margin)/(1-maintenance margin)
What is a call market?
A market where all bid and ask prices for an asset are gathered to determine one price where the quantity offered for sale is close to the quantity demanded.
When transactions can take place whenever the market is open, this is a ______ market.
Continuous
How do you compute the float-adjusted market-capitalization weighting
Market float usually refers to the number of shares of the constituent security that are available to the investing public. Shares held by controlling shareholders, other corporations and governments, are subtracted from the total number of outstanding shares to determine the market float.
What is fundamental weighting (in regards to indexing)
Utilizing a fundamental metric such as book value, cash flow, revenues, or earnings to determine weights of securities in an index.
What does reconstitution refer to?
Constituent securities need to be examined on a regular basis to evaluate whether they still meet the criteria for inclusion in the index.
What is intrinsic value?
Intrinsic value or fundamental value is the value of the asset that reflects all its investment characteristics accurately. Intrinsic values are estimated in light of all the available information regarding the asset; they are not known for certain.
What are the three forms of efficient market hypothesis and what are the differences between them?
Weak-form EMH assumes that current stock prices reflect all security market information including historical trends in prices, returns, volumes etc.
Semi-strong form EMH is weak-form plus other non-market public information.
Strong form EMH is weak-form plus semi-strong plus all private information.
Explain what a depository receipt is.
A depository receipt is a security that trades like an ordinary share on a local exchange and represents an economic interest in a foreign company. It is created when a foreign company deposits its shares with a bank (the depository) in the country on whose exchange the shares will trade. The bank then issues a specific number of receipts representing the deposited shares based on a pre-determined ratio.
What is the difference between a sponsored and unsponsored depository receipt?
a sponsored DR is when the foreign company that deposits its shares with the depository has a direct involvement in the issuance of receipts.
True or false: Putable common shares are less risky than callable- or non-callable common shares.
True. Putable common shares are shares that can be “called” by the shareholder, not the otherway around (“callable common shares”)
How is return on equity calculated?
Net Income/Average book value equity
What are the five stages of the industry life cycle?
Embryonic, Growth, Shakeout, Mature, Decline
If a market is operationally efficient it means that:
transactions costs are minimal.
What is the primary belief of a information-motivated trader?
That they have superior access to information.
How do you compute the leverage factor?
Leverage factor = 1/(percent margin)
Regarding hedge funds, what is survivorship bias?
Survivorship bias refers to the potential that hedge funds with poor performance may be less likely to report their performance to the database or may stop reporting to the database, so their returns may be excluded when measuring the return of the index.
What does a dealer do?
They make the market, (they quote bid and ask prices)
True or false: The cost of information does not explain why markets are not completely efficient.
False
On $100, a margin requirement of 40% means you have to front how much money?
$40.
You buy 1 share at $100 on margin with a 40% margin requirement. Margin call is 30%. At what price will you have to pay the first margin call?
$85.71
We should be skeptical of any claims made by institutional fund managers to have found a pricing anomaly because:
There are biases in the way stock trading strategies are researched.
Explain the difference between a stop and limit order.
A limit order is the minimum price that is acceptable to either purchase or sell shares, set by the investor. A stop order indicates when an order can be filled, but does not necessarily mean that the order will be filled at that price.
True or False: The Dow Jones Industrial Average is a price weighted index and when there is a stock split of a constituent security the security weighting in the index will be reduced.
True
What happens to the unsold portion of bonds held by the underwriter?
They will remain on the underwriters books.
There are three shares A, B, and C in a price-weighted index and the following information is given:
Share Price # Shares Oustanding A $50 100,000 B $100 40,000 C $75 10,000
If the share price of A doubles and the share prices of B and C remain unchanged then the index will rise by:
22.22%
The geometric mean of the holding period of the constituents of an index are used, rather than the arithmetic mean, to compute an index level. If an investor replicates the index by holding the shares in the same weighting as they are represented in the index, he will see the value of the shares ______ by more than the index in a rising market.
Increase
In Japan, if the share price of a company with a small market capitalization, that is in both the Nikkei Stock Average and the TOPIX index, rises sharply then: there is insufficient information to determine which index will rise the most because:
We do not know the Yen price relative to the market capitalization of the Company’s stock, therefore we do not know which index will rise the most.
Index performance is used to computer what kind of risk in regards to portfolios:
Systematic or market
OTC markets are _____ - driven markets.
Quote
What is the correct way to calculate performance of equities that are unweighted.
Multiply the price performances together and bring to the exponent (1/# of securities)
What is high vs low gearing.
High gearing means a high ratio of debt to equity vs a low ratio of debt to equity
What is asset backing
“net asset value”
Which is least risky: putable preference shares, callable preference shares, non-putable and non-callable preference shares.
Putable preference shares
What does economic profit represent?
The excess ROI above the cost of capital
Treasury Stock is a :
Contra-Equity
When a company issues debt and uses the proceeds to buy back Treasury shares this will tend to _______ return on equity
Increase
The shakeout stage of an industry’s life cycle is usually characterized in the following way:
demand is still growing but at a slower rate and profit margins are declining
How do you calculate the dividend paid if given stock price, eps, and dividend payout ratio?
Multiply dividend payout ratio times eps.
A company’s stock price is $3.2, the estimated eps are $0.24, the dividend payout ratio is 35%, and the estimated P/E is 15. The expected rate of return is :
15.1%
A company maintains a stable dividend payout ratio of 30% and the rate of return on existing equity is 15%. If new projects available to the company earn a return of only 12%, and the company does not raise any outside capital, then the earnings growth rate will be:
What is the appropriate formula used in determining the solution?
8.4%
Growth rate = retention rate x return on equity
If investors’ required rate of return from a stock increases then the P/E of the stock will generally:
Why? What is the formula?
Decrease.
P/E = Dividend Payout ratio/(required rate of return - expected growth rate of dividends)
The Gordon growth model is most likely to be used to value companies which are:
Mature. The Gordon growth model is applicable to companies which have stable growth in dividends so mature is the best answer.
What is the value of preferred stock trading at $90 paying a 6% annual dividend into perpetuity? The investors required rate of return is 6.5%
$92.30. = 6/0.065
Who retains the voting rights in an sponsored DR?
The depository bank
True or false: Stocks with low price/book values have shown higher risk-adjusted returns than the market returns
True
What is the formula for the dividend discount model:
V=D/(k-g)
Which type of capital takes the most amount of time to acquire: Human, Financial, or Physical
Physical Capital
