Exam 1 Flashcards
Financial Planning Process Steps:
1) understanding the clients personal and financial circumstances
2) identify and select goals
3) analyze current course of action
4) develop FP recommendation
5) present FP recommendation
6) implement FP
7) monitor progress and update
Financial Planning documents:
1) Balance Sheet
2) Cash Flow Statement
3 steps for preparing the balance sheet:
1) Items owned
2) Items owed
3) Net worth = Owned - Owed
Cash Surplus or Deficit Formula:
Cash Received - Cash Paid
Budgeting Process:
1) estimate family income
2) develop expense breakdown
3) determine excess or shortfall of income
4) consider ways to increase/decrease I/E
Emergency Fund
need 3-6 months of expenses
-Clients w/ irregular income may need more
Investment Planning Process:
1) develop a plan based on clients goals
2) determine asset allocation
3) construct diversified investment strategy
4) agree to investment policy statement
5) implement w/ securities
6) continue monitoring
Major Asset Classes:
1) Money Market/ Cash
2) Bonds
3) Common Stock
4) Alt. Assets
5) Real Assets
Money Market/Cash
short return time, very liquid, low return, secure, dry powder
ex: cash, tbills, demand deposit, time deposit, CDs, commercial paper, repo agreement
Bonds
a loan to a corporation, fed government or municipality
-receive semi annual interest rate payments
-inverse relationship with interest rates
Tax exempt yield formula
Taxable Yield * (1 - TR)
Taxable equivalent yield formula
(Tax exempt yield / (1-tax rate))
Common Stock
-Ownership of company
-Voting rights
-Source of return
-Proxy rights
Preferred Stock
-Dividend priority
-no voting rights
-no claim on companies assets
Alternative Assets
Real estate, commodities, derivatives, crypto, private equity
Real Assets
Real estate, commodities
-Hedge against inflation
Factors affecting investment choices
1) risk factors
2) risk return trade off
3) investment income vs growth
4) risk tolerance
Risk Return Trade Off
Higher risk investments, expect higher returns
Asset Allocation
Allocated to stocks, bonds or cash
-willingness/ability to assume risk
-most important factor
Investment Policy Statement Includes:
-return objective
-risk tolerance
-constraints: time, liquidity, tax, legal, unique factors
Rate of Return Formula:
(P1-P0)/P0
Direct Investing Options:
Stocks
Indirect Investing Options:
Mutual funds, ETFs, Hedge funds, Annuities
Arithmetic Return Formula:
(Sum of each years returns) / # of years
Geometric Return Formula:
([(1+r) x (1+r) x (1+r)]^(1/n)) - 1
Holding Period Return Formula:
[(1+r) x (1+r)] - 1
Dollar Return Formula:
Income from investment + Capital Gain/Loss
Dividend Yield Formula:
Income / Beginning Price
Capital Gain Yield Formula:
(P1-P0)/ P0
Total Percentage Return Formula:
Dividend Yield + Capital Gain Yield
3 types of Stock Trade Orders:
1) Market Order
2) Limit Order
3) Stop/Loss Order
Market Order
Buy/sell at current market value
Limit Order
Buy/sell at specified price
Stop/Loss Order
Sell at a specified price
Mutual Funds:
Investors money pooled and invested by a fund manager
-Prices set at EOD
-3 types of funds
3 types of MF:
1) Open - End
2) Close - End
3) ETF
Open End Mutual Fund:
Can issue new shares whenever
-priced 1x a day based on NAV
-NAV = (value of fund port. - liabilities) / # of shares outstanding
Close End Mutual Fund:
Can only buy shares when initially issued
-Can buy shares off of other investors if they’re willing to sell
Exchange Traded Funds(ETFs):
Invests in stocks in a specific stock or security index
-not actively managed by portfolio manager
Expense Ratio for MF fees Formula:
Management Fees + Operation Costs
Separately Managed Accounts(SMA):
Investment firm directly manages the portfolio
Private Equity Fund:
-Private equity company buys and sells other businesses for profit `
Hedge Funds:
unregulated limited investors
-very risk
-need high minimum investment amount
4 Ps of Due Diligence:
1) Philosophy
2) Process
3) People
4) Performance
