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Asset Management > Exam III > Flashcards

Exam III Flashcards

1
Q

Protective Put

A
  • asset combined with put option
  • to guarantee minimum proceeds equal to put’s exercise price
  • also called portfolio insurance
  • used to prevent significant loss
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2
Q

Covered call

A
  • writing a call on asset together with buying asset

- if the stock price stays flat or falls you get benefits from call premiums

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3
Q

Long Straddle

A
  • combination of call and put

- use when expecting volatility

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4
Q

Short Straddle

A
  • income strategy through premium
  • expecting stable price
  • generate extra income
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5
Q

Futures Contract

A

-arrangement calling for future delivery of asset at agreed-upon price

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6
Q

When to use future contract

A

-best to be used when an individual needs more diversification in their portfolio

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7
Q

Bull market strategy

A
  • short term: Put

- long: call, stock, future

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8
Q

Bear Market strategy

A

Short: Call, Stock, Future
Long: Put

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9
Q

Real Estate Valuation

A
  • compare different properties

- use income approach

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10
Q

9 step investment process

A
  1. understand the clients goals
  2. identify a target rate of return
  3. Agree on the time horizon
  4. Understand the client’s tolerance and capacity for risk
  5. Define the asset classes to use
  6. Determine an appropriate asset allocation
  7. Create the Investment Policy Statement
  8. Select the investments
  9. Monitor and rebalance
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11
Q

Strategic asset allocation

A
  • top down approach
  • used to determine portfolio’s overall level of risk
  • based on long-term capital market expectations
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12
Q

Core strategy

A

-Low fee, low tax cost; Capture beta

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13
Q

Satellite Strategy

A
  • active management

- behavioral consideration

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14
Q

three steps to portfolio evaluation

A
  • portfolio return
  • selection of market index
  • selection of comparison method
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15
Q

Sharpe Ratio

A

-used when choosing among competing portfolios that will not be mixed

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16
Q

Treynor Measure

A

-used to evaluate portfolio that is part of larger portfolio with different managers

17
Q

Information Ratio

A

-used to evaluate the consistency of a portfolio manager

18
Q

Jensen’s Measure (Alpha)

A
  • helps determine if the average return is worth the level of risk
  • if the value is positive, then the portfolio is earning excess returns.
  • A positive value for Jensen’s alpha means a fund manager has “beat the market” with his/her stock picking skills
19
Q

average tax rate

A
  • total amount of income tax paid divided by total income

- person’s average tax rate always lower than or equal to his or her marginal tax rate

20
Q

marginal tax rate

A
  • rate at which incremental income is taxed

- only relevant rate for investment decision making purposes

21
Q

Tax treatment for LTCG & STCG

A
  • STCG- ordinary income
  • LTCG- if MTR is 10% or 15%, then taxed at 0%
  • if MTR is 25%,28%,33%,or 35%, then taxed at 15% rate
  • if MTR is 39.6, then taxed at 20%
22
Q

Qualified Dividend Taxation

A
  • if MTR is 10% or 15%, then taxed at 0%
  • if MTR is 25%, 33%, or 35%, then taxed at 15% rate
  • if MTR is 39.6%, then taxed at 20% rate
  • minimum 60 day holding period
23
Q

Ordinary Dividend taxation

A

-Taxed as ordinary income

24
Q

Bond interest tax treatments

A
  • municipal normally exempt from both
  • treasury bonds & federal agency bonds exempt from state & local taxation, not federal taxation
  • bonds of gov’t sponsored corporations not exempt from state & local taxation
  • some states tax only income from dividends and interest
25
Q

Phantom interest

A

-interest received from zero coupon bonds that goes into ordinary income even though the money is not received by the taxpayer

26
Q

loss harvesting

A
  • recognize at least up to $3,000 in capital losses each year if have them
  • savings on income taxes
  • allows recognition of some capital gains without a tax bill, and/or
  • opportunity to rebalance portfolio
27
Q

Taxation on Mutual Funds

A
  • you pay tax on distributions and interest

- even if you never made money on the fund

28
Q

Taxation of ETF’s

A
  • pay short term or long term capital gains
  • only taxed when sold
  • dividends taxed like a regular fund
  • hard to beat in taxable accounts…mutual funds are better in sheltered
29
Q

Benefit of Tax shelters

A
  • postponing payment of tax
  • additional earnings on investment of postponed payments
  • compounding benefits of untaxed earnings
30
Q

types of tax shelter

A
  • traditional tax shelter accounts
  • IRA’s
  • 401(k), 403 b (public), or 457 (government)
  • Roth accounts
31
Q

prospect theory

A
  • investor utility depends on gains/losses from starting point rather than levels of wealth
  • loss hurts more than the gains makes twice as much
32
Q

Overconfidence

A
  • people overestimate precision of beliefs or forecasts
  • male investors trade more frequently
  • people with lower education
  • elder individuals
33
Q

Conservative

A

-investors too slow in updating beliefs in response to recent evidence

34
Q

Framing

A

-decisions affected by how choices are posted

35
Q

Mental Accounting

A
  • form of framing; people segregate certain decisions

- spending the dividend or not selling another stocks

36
Q

Regret avoidance

A

-people blame themselves for unconventional choices that turn out bably, avoid regret by making conventional decisions

37
Q

Time inconsistent choice

A
  • myopic, hyperbolic, impulsive,self-control

- remember elephant is short term and rider is long term

38
Q

commitment devices

A
  • something like a house that will make you commit to an investment
  • an alarm clock that runs away until you get up to make it shut up
39
Q

how to help clients

A

-refer to Dec 1 slides

Asset Management (1 decks)

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