Exam III Flashcards
Protective Put
- asset combined with put option
- to guarantee minimum proceeds equal to put’s exercise price
- also called portfolio insurance
- used to prevent significant loss
Covered call
- writing a call on asset together with buying asset
- if the stock price stays flat or falls you get benefits from call premiums
Long Straddle
- combination of call and put
- use when expecting volatility
Short Straddle
- income strategy through premium
- expecting stable price
- generate extra income
Futures Contract
-arrangement calling for future delivery of asset at agreed-upon price
When to use future contract
-best to be used when an individual needs more diversification in their portfolio
Bull market strategy
- short term: Put
- long: call, stock, future
Bear Market strategy
Short: Call, Stock, Future
Long: Put
Real Estate Valuation
- compare different properties
- use income approach
9 step investment process
- understand the clients goals
- identify a target rate of return
- Agree on the time horizon
- Understand the client’s tolerance and capacity for risk
- Define the asset classes to use
- Determine an appropriate asset allocation
- Create the Investment Policy Statement
- Select the investments
- Monitor and rebalance
Strategic asset allocation
- top down approach
- used to determine portfolio’s overall level of risk
- based on long-term capital market expectations
Core strategy
-Low fee, low tax cost; Capture beta
Satellite Strategy
- active management
- behavioral consideration
three steps to portfolio evaluation
- portfolio return
- selection of market index
- selection of comparison method
Sharpe Ratio
-used when choosing among competing portfolios that will not be mixed
Treynor Measure
-used to evaluate portfolio that is part of larger portfolio with different managers
Information Ratio
-used to evaluate the consistency of a portfolio manager
Jensen’s Measure (Alpha)
- 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
average tax rate
- 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
marginal tax rate
- rate at which incremental income is taxed
- only relevant rate for investment decision making purposes
Tax treatment for LTCG & STCG
- 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%
Qualified Dividend Taxation
- 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
Ordinary Dividend taxation
-Taxed as ordinary income
Bond interest tax treatments
- 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
Phantom interest
-interest received from zero coupon bonds that goes into ordinary income even though the money is not received by the taxpayer
loss harvesting
- 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
Taxation on Mutual Funds
- you pay tax on distributions and interest
- even if you never made money on the fund
Taxation of ETF’s
- 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
Benefit of Tax shelters
- postponing payment of tax
- additional earnings on investment of postponed payments
- compounding benefits of untaxed earnings
types of tax shelter
- traditional tax shelter accounts
- IRA’s
- 401(k), 403 b (public), or 457 (government)
- Roth accounts
prospect theory
- investor utility depends on gains/losses from starting point rather than levels of wealth
- loss hurts more than the gains makes twice as much
Overconfidence
- people overestimate precision of beliefs or forecasts
- male investors trade more frequently
- people with lower education
- elder individuals
Conservative
-investors too slow in updating beliefs in response to recent evidence
Framing
-decisions affected by how choices are posted
Mental Accounting
- form of framing; people segregate certain decisions
- spending the dividend or not selling another stocks
Regret avoidance
-people blame themselves for unconventional choices that turn out bably, avoid regret by making conventional decisions
Time inconsistent choice
- myopic, hyperbolic, impulsive,self-control
- remember elephant is short term and rider is long term
commitment devices
- 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
how to help clients
-refer to Dec 1 slides
