Ethics, Financial Math and Investments Flashcards

1
Q

Areas of Financial Planning

A

F-I-I-T-R-E
Financial Management
Investment Planning
Insurance and Risk Management
Tax Planning
Retirement Planning
Estate Planning and Legal Aspects

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2
Q

Financial Management

A

Cash Flow

Net Worth Statements

Budget

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3
Q

Investment Planning

A

Manage the Clients Assets

clients investment experience

investment objectives

Time Horizons

Risk Tolerance

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4
Q

Insurance and Risk Management

A

Financial Loss Due to Death

Disability

critical illness

long term care needs

property damage and other risks

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5
Q

Tax Planning

A

Current and Future Tax Obligations

Minimize or Defer Taxation

Interest: Tax-deductible or non-deductible

Minimize Taxes at death

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6
Q

Retirement Planning

A

Financial Well Being after employment has stopped

expected lifestyle in retirement

current retirement assets,

planned savings

expected rates of return on investments

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7
Q

Estate Planning and Legal Aspects

A

payment of expenses and obligations at death

transfer of assets to beneficiaries

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8
Q

3 Basic Functions of Financial Planning

Collection

Analysis

Recommendation

A

Collect both Qualitative and Quantitative

Analysis: assess client situation, identifies and evaluates appropriate strategies, identify issues and opportunities, perform required calculations, develop projections,

Recommend …develop recommendations, PRIORITY, help meet client personal goals, needs and priorities, and optimize the client situation.

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9
Q

Letter of Engagement

C-C-C R-O-P-E-S Q-D-F

A
  1. Confidentiality
  2. Conflicts of Interest
  3. Compensation
  4. Responsibilities of the Client
  5. Outside Professionals must be compensated
  6. Process used for Financial Planning
  7. Expectations and Assumptions that will be used in Financial Plan
  8. Services to be provided
  9. Qualifications of the planner
  10. Documentation required from the client
  11. Future Meetings to review the plan.
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10
Q

Standards of Responsibility

4 Parts…What are they?

A
  1. Code of Ethics
  2. Rules of Conduct
  3. Fitness Standards
  4. Financial Planning Standards
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11
Q

Code of Ethics

Eight Principles

LIOC FCDP

Loyal Investment Officers Conduct

Financial Compliance Duties Personally

A

Duty of Loyalty

Integrity

Objectivity

Competence

Fairness

Confidentiality

Diligence

Professionalism

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12
Q

Rules of Conduct

Di4

A

Dishonesty

Integrity

Impugn

Inform

Illegal

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13
Q

Discretionary Authority - Professional Obligations to the Client

A

Funds

Disclosure

Planning

Ongoing

Lending

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14
Q

Client Relations

A

Terms

Material

Thorough

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15
Q

Withdrawal of Services

A

Notice

Departure

Transition

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16
Q

Client Property

A

Records

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17
Q

Professional Oversight

A

Supervision

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18
Q

Duties to Prospective Clients

A

Misleading

Prospective

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19
Q

Financial Planning Services

A

Judgment

Recommedations

Strategies

Laws

Competent

Refer

Scope

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20
Q

Use Of Technology NEW

A

Technology

Documented

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21
Q

Duty of Confidentiality

A

Confidential

Protect

Name

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22
Q

Relationship to FP Canada

A

Certification

Disciplinary

Reply

Cooperate

False

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23
Q

Fitness Standards

A

Bars to Certification

Personal or Business Bankruptcy

Revocation or suspension

Criminal Offence

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24
Q

Practice Standards

REGI ASRRII

or

REGI ASR2I2

A
  1. Role
  2. Engagement
  3. Goals Needs Priorities
  4. Gather Info
  5. Assess
  6. Identify and Evaluate
  7. Develop Recommendations
  8. Compile and Present Recommendations
  9. Discuss Implementation, Actions, Responsibilities, and Time Frames
  10. Implement the Recommendations
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25
**Rates of Return**
1. HPR 2. Annualizing a HPR 3. Real Rate of Return 4. Real After-Tax Rate of Return 5. Arithmetic Mean 6. Geometric Mean 7. Time-Weighted Rate of Return and IRR (Dollar Weighted) 8. Effective, Annual Rate of Return 9. Return on a Foreign Investment in Canadian Dollars
26
HPR Formula
HPR =_E -B + Cash Flows_ B
27
**HPR Annualized**
Step 1 HPR =_E -B + Cash Flows_ B **Step 2 TVM** PV -1, **FV1.31** (interest from the previous step was 31%), PMT 0, **N 2.5**, **CPT I/YR** Now N= 30 months/12 = 2.5 (or N= 238 days/365)
28
Real Rate of Return
r = *1 -inf* 1+ inf
29
**Real After-Tax Rate of Return**
RATRR = *_(After tax return) -inf_* 1+ inf *Pretax Return x (1- MTR expressed as a decimal)*
30
**Geometric Mean Return (IS AN ANNUAL COMPOUND ROR)**
$1 x (1+r1)(1+r1)(1+r1)(1+r1)…(1+rn) 1/n -1 find (1+ r) portion then (1.435) shit Yx shift 1/x - 1 = ANSWER **or** USE TVM PV 1 FV 1.435 N = 2 (number of returns) PMT 0
31
**Time Weighted ROR (IRR)** **One investment made at the beginning**
1. Find the Geometric 2. then TVM…FV is the Geometric return, PV 1, N # of returns, PMT 0
32
**Internal ROR (IRR)**
**Cf0….Cfn** **Shift IRR**
33
Effective Annual Rate Conversions Given 12% compounded Quarterly…Convert it? Hint 2 ways
1. 12/4 = 3, then 1.03 Shift yx 4 -1 = 12.55% **or** CALC 12, 1 I/YR, SHIFT EFF, 4 P/YR, SHIFT EFF = 12.55%
34
**Return on Foreign Investment in CDN$**
1. End (Foreign $) x Exchange Rate - _Beg (Foreign $) x Exchange Rate_ = Profit (Loss) CDN $ 2. Percentage Return = _Profit (Loss) CDN $_ Beg CDN $
35
**Banks** **Schedule 1** **Schedule 2** **Schedule 3**
Schedule 1 - Canadian Controlled, Big 6 Schedule 2 -Foreign-owned subsidiaries HSBC Schedule 3 - Foreign Banks with Branches in Canada no Subsidiaries
36
**Government Regulators**
OSFI Provincial Securities Commissions
37
Client Protection FUNDS
CDIC CIPF Assuris
38
CDIC
Crown Corp Funded by Members Crown Corp Protects Depositors Each Category $100,000 x 7 1. one name 2. joint name 3. RRSPs 4. RRIFs 5. TFSAs 6. RESPs 7. Deposits for Prop Tax
39
**CIPF** **Canadian Investor Protection Fund**
Protect clients against bankruptcy 2 categories of accounts: general and separate General Accounts…1 Million i) total of all accounts in the name of the individual (cash and securities) Separate Accounts…each 1 Mil… i) Pension accts RRSPs RRIFs ii) RESPs iii) Testamentary Trusts Joint accounts are split 180 Days to make a claim
40
**Assuris**
1. $200k DB or 85% of the promised benefit 2. CSV up to $60,000 or 85% of the benefit 3. up to $100k for non-Reg plans 4. up to $100K for RRSPs RRIFs, pension policies 5. Annuities, di policies…$2000 per month or 85% 6. Ci $60k or 85% of the promised benefit 7. Seg funds $60k or 85% of the promised benefit
41
Economics
GDP…In Country…What's been produced in Canada …**CIGNET (Spending Approach) or PERTI (Earnings Approach)** GNP…Citizens producing in the World * *Real GDP = _Nom GDP_** * *1 + Inf**
42
**Economic Policies**
Fiscal Policy…Tax and Spending…Government Monetary Policy…Money Supply and Interest Rates…BOC Open Market Operations…Buy and Sell Securities, Cash Management Techniques…Deposit and WIthdraw Cash
43
**BoC Details**
Moral Suasion…BoC advice Bank Rate…BoC to Banks Prime Rate… Bank to Clients Overnight Loan Rate… Between Banks
44
**Economic Indicators**
SCHMMAC…LEADING GRIP…COINCIDENT UI3LP…LAGGING
45
**Investor Considerations**
**Risk Tolerance**…Low Med High…Cons…Bal…Grow **Suitability**…Safety, Income, Growth, Liquidity, Tax Savings and Tax Deferral
46
**Investor Profile**
**R2 L2 T2 U** Return Requirement Risk Tolerance Liquidity Legal Issues Time Horizon Taxation Unique Circumstances
47
**Types of Risk**
Principal Inflation Liquidity Interest Rates…(DURATION of a Bond) Market (Systematic) (BETA) Unique (Unsystematic)…(Business Risk) APLHA Currency…(Foreign) Total Risk (SD) Credit Risk…(Rating CCC)
48
**Money Market Instruments**
T-Bills…3 mo, 6 mo, 1 yr Commercial Paper…up to 1 yr Asset-Backed commercial paper…up to 1 yr Bankers Acceptance BA…up to 1 yr
49
**T-Bill Yield**
This is the Current Yield End - Beg / Beg x 365/#days x 100 Can use prices or dollar values Interest paid is the difference when the T Bill matures
50
**Bond Current Yield**
CY = **_Annual_** _Interest Income $_ x 10 Purchase Price of Bond \*Annual interest x 100 = **_Annual_** _Interest Income $_
51
**Duration**
Longest Term Lowest Coupon Rate Lowest YTM
52
**Modified Duration**
Predicts a Percentage Change in the price of a bond MD = _Macaulay Duration_ 1 + Semi-Annual YTM (in decimals) Strip Bonds and Coupons…Macaulay Duration is the # yrs (periods) to maturity Coupon Bonds….
53
**Convertible Debenture 3 Calcs**
1. **Conversion Value** # common shares on conversion x MP 2. **Conversion Premium** MP - Conversion Value 3. **% Conversion Premium** Conversion Premium / Conversion Value
54
**Preferred Share Calc 2 Formula?**
MP = Annual Dividend Income $ / Yield (as a decimal) MP = _DIV_ YIELD Yield = Annual Dividend Income $ / Purchase Price YIELD = _DIV_ PP
55
**Warrants**
Long term expiry Often offered as a free sweetener on a new offering fixed price and fixed period to offer…the right to buy not the obligation could sell and buy common stocks
56
**Warrant and Option Calculations Similar 3**
1. Intrinsic Value = MP - Excercise Price 2. Time Value = MP - Intrinsic Value 3. Break-Even Value = Excercise Price + Cost of Warrant or Option - for put options….subtract the cost of the put premium
57
**Why Buy a Call?**
1. Leverage: Magnify % of the return 2. Fix a future price. 3. Hedge against a short sale
58
**Why Write Covered Call?**
1. The investor owns the underlying stock he is covering his position - Premium - Partial protection against a stock dropping
59
**Why Write A Naked Call?**
1. The investor does not own the underlying stock - Premium
60
**Motives for buying a Put Option?**
1. The investor does not own the underlying stock…they want the stock price to fall, so they can buy it cheaper and then resell it higher. 2. If they own it…protection or insurance against the stock price falling.
61
**Motives for writing a Put Option?**
1. Premium 2. The investor's cost base is lowered by the amount of the premium.
62
**Forwards and Futures**
Forward - Private Deals…no margin required Futures - Traded on exchanges…margin required
63
**MF Risk/Return Chart High to Low**
Specialty Equity Balanced Fixed Income Money Market
64
**Mutual Funds (Open-End Fund NOT ON THE EXCHANGE)**
NAVPS = TA -TL/#CSO
65
Variance…to get SD
Variance = _(R1 - x)_2 + _(R2 - x)_2 + _(R3 - x)_2 _…..(Rn - x)_n N SD = Square root of Variance
66
Markowitz
Covariance and Correlation Relationship between securities Move together then positively correlated +1 no risk reduction -1 Best risk reduction
67
**Markowitz**
Efficient Frontier Highest Return relative to the risk assumed (SD) on the portfolio The line that connects the portfolios with the highest expected returns See Sharpe
68
**Sharpe Rato**
Sharpe Ratio = Rp - Rf / SD is the % return above the Risk free rate
69
**Sharpe also developed CAPM**
most efficient portfolio asset allocation model…highest return relative to risk Above beta and CAP line then leverage
70
Jensen ALPHA to Judge Performance of Portfolio Managers
Er = Use Capm then Determine Alpha Alpha = Actual Return - Expected Return Also Called Jensen Alpha
71
**Treynor Alpha uses Beta** **better for people with diversified portfolios**
Rp -Rf /B
72