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FIN 333 > Final Exam > Flashcards

Final Exam Flashcards

1
Q

Define Efficient Technical Analysis

A

The search for recurrent and predictable patterns in stock prices

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2
Q

Define Efficient Fundamental Analysis

A 
Analysis of
1. quality of management
2. balance sheet
3. patents held
4. earnings forecast
5. accounting practices
6.dividend announcements
7.interest rates 
to arrive at a proper stock price
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3
Q

Weak Form 3

A

Stock prices already reflect all info found by examining the market trading data including
1. historical prices
2. trading volume
3. an short interest
(Ex. Random walk and Trading rules/ Technical analysis)

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4
Q

Semi Strong Form 7

A

all public information on the firm is reflected in the stock price including:

  1. past price
  2. fundamental analysis
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5
Q

Strong Form

A

Stock prices reflect private information and insider information

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6
Q

Efficient Market Hypothesis

A

the notion that stocks already reflect all available information (3 forms)

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7
Q

4 Types of Technical Analysis

A
  1. Trend Extrapolation (filter rules, resistance points)
  2. Serial Correlation
  3. Moving Averages
  4. Indicators (confidence index, put/call ratio)
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8
Q

Reason Arbitrage May Not Happen (6)

A
  1. Fundamental Risk
  2. Implementation Costs (restrictions on short sales/ transaction costs)
  3. Model Risk (bad model)
  4. Siamese Twin companies (fundamental risk)
  5. Equity Carve Outs (limited short sales)
  6. Closed End Funds ( rational return expectations)
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9
Q

Define CAPM

A

Provides us with a measure of an assets risk and its expected return and attempts to provide the equilibrium expected return for a risky asset
(gives benchmark rate of return to compare investments

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10
Q

3 Types of Anomalies of EMH

A
  1. Small Firm Effect (January)
  2. Book to Market Ratios (powerful predictor of returns)
  3. Reversals (due to overreaction)
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11
Q

2 Small Firm Effects (January)

A
  1. the neglected firm effect

2. the liquidity effect

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12
Q

Behavioral Finance says (2)

A
  1. What if investors don’t behave rationally

2. The people factor matters`

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13
Q

Information Processing Problems (4)

A

is the inability to correctly forecast due to

  1. Forecasting Errors
  2. Sampling Issues (representativeness)
  3. Conservatism (too slow to update belief)
  4. Overconfidence
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14
Q

Decision Making Limitations (4)

A
  1. Framing
  2. Mental Accounting
  3. Regret Avoidance
  4. Prospect Theory
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15
Q

Framing

A

how choices are presented

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16
Q

Mental Accounting

A

A type of framing when people segregate decisions

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17
Q

Prospect Theory

A

Rational Risk Adverse ( utility increases with wealth)

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18
Q

Preferred Stock

A

Valued as a perpetuity and uses zero growth model

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19
Q

Sustainable Growth Rate

A

maximum growth a firm can sustain without expanding financial leverage

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20
Q

Plowback Ratio

A

the fraction of earnings reinvested in firm

Plowback=1- dividend payout ratio

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21
Q

Common Size Analysis

A

restatement of financial statement information in a standardized form

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22
Q

Horizontal Common Size Analysis

A

Uses account amounts in a specific year as base year. Useful to compare growth of different accounts over time

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23
Q

Vertical Common Size Analysis

A

Uses aggregate value for a given year as base
Balance sheet: each account/ Total assets
Income Statement: Each account/ sales or revenue

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24
Q

DuPont Formula

A

uses relationships among financial statement accounts to decompose a return into components

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25
Q

5 parts of ROE in DoPont Formula

A
  1. tax burden
  2. interest burden
  3. margin
  4. turnover
  5. leverage
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26
Q

Trailing P/E

A

Last EPS

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27
Q

Leading P/E

A

Forecasted EPS

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28
Q

DDM

A

a formula stating that the intrinsic value of a firm is the PV of all expected further dividends

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29
Q

FCF

A

Firm level discounted cash flow

can be used for firm or the equity

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30
Q

Residual Income Valuation

A

EVA and MVA

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31
Q

Activity Ratios

A

effectiveness in putting its asset investment to use

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32
Q

Liquidity Ratios

A

Ability to meet short term and immediate obligations

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33
Q

Solvency Ratios

A

Ability to satisfy debt obligations

34
Q

Profitability Ratios

A

Abilty to manage expenses to produce profits from sales

Ex. ROA, ROE, PM

35
Q

Open-Ended Mutual Funds (90% of Funds)

5

A
  • issues shares when investors buy
  • redeems shares when investors sell
  • Priced at NAV but could be higher if charged a load
  • Shares outstanding change
  • Buy and sell directly with firm
36
Q

Closed-End Mutual Funds (10% of Firms)

5

A
  • Shares outstanding are constant
  • investors cash out by selling to new investors
  • priced at premium or discount to NAV
  • Traded OTC or on an Exchange
  • Need to find investors will to buy or sell
37
Q

Hedge Fund (3T as of 2016)

A
  • Allow private investors to pool assets
  • Limited partnership
  • Initial investment between 100k - 20M
38
Q

7 Risks of Hedge Funds

A
  1. Leverage
  2. Short Selling
  3. Appetite for Risk
  4. Lack of Transparency
  5. Lack of Regulation
  6. Short Volatility (options)
  7. Conflicts of interest
39
Q

Exchange Traded Fund

A
  • basket of securities traded on exchange throughout trading day
  • 1/3 cost of index mutual funds
  • do not always trade at NAV
  • approx 1000 ETFs today in all types of assets, sectors and indices
    Ex) Spider, Diamond, Cubes
40
Q

ETF Advantages

A
  • trade continuously like stocks
  • can be sold short or purchased on margin
  • lower costs
  • tax efficient
41
Q

ETF Disadvantages

A
  • prices can depart from NAV
  • ## must be purchased from broker
42
Q

Net Asset Value (NAV)

A

used as basis for valuation of investment company shares

- for no load funds, NAV is the price at which you can buy and sell shares

43
Q

NAV Formula

A

NAV= market value of assets- liabilities / shares outstanding

44
Q

Call Option

A

right to BUY

excercise if market value > strike price

45
Q

Put Option

A

right to SELL

exercise if market value < Strike price

46
Q

Call option Effects that Increase Value

A

Increasing

  • stock price
  • volatility
  • time
  • interest rate
47
Q

Call option Effects that Decrease Value

A

Increasing

  • Exercise price
  • dividend payout
48
Q

Put - Call Parity

A

the call plus bond portfolio (left) must cost same as the stock plus put portfolio (right)

C+(X/ 1+ rf^t)= stock price + P

49
Q

Protective Put

A

puts can be used as insurance against stock price declines

50
Q

Covered Calls

A
  • Purchase stock and write calls against it

- Call writer gives up any stock value above X in return for the initial premium

51
Q

Straddle

A
  • Buy call and put with same exercise price and maturity
  • Bet on volatility. Want strong change in stock price in either direction
  • Profit made when the stock price exceeds cost of both options
  • Writer is betting the stock price will not change much
52
Q

Spreads

A
  • A combo of two or more calls or puts on the same stock (differing exercise price and maturity)
  • A bullish spread is a way to profit from stock price increases
53
Q

Collars

A

An option strategy that brackets the value of a portfolio between two bounds

54
Q

Bid Price

A
  • Bids are offers to buy
  • In dealer markets, bid price is the price at which the dealer is willing to buy
  • Investors “sell to bid”
55
Q

Bid Asked Spread

A

is the profit for making a market in a security

56
Q

Ask Price

A
  • Asked prices represent offers to sell
  • In dealer markets, asked price is price at which the dealer is willing to sell
  • Investors must pay asked price to buy the security
57
Q

Define Buying on Margin

A

is borrowing part of total purchase price of a position using a loan from a broker

margin= % or amount contributed by the investor
-Profit when the stock rises

58
Q

Initial Margin

A

is set by the Fed and is currently 50%

59
Q

Maintenance Margin

A
  • Minimum equity that must be kept in margin account
60
Q

Margin Call

A

If value of securities fall too much

  1. add money to margin account
  2. sell shares
61
Q

Purpose of Short Sales

A

profit from decline in price of a stock or security

62
Q

Short Sale Mechanics

A
  1. borrow stock through a dealer
  2. sell it and deposit proceeds and margin in an account
  3. Closing out the position: buy the stock and return it to the party from which it was borrowed
63
Q

Securities Act of 1933 (2)

A
  1. Registration of securities for sale: disclosure

2. Prevent fraud in sale of securities

64
Q

Securities Act of 1934 (4)

A
  1. Regulation of Exchanges (eventually nasdaq)
  2. Create Securities and Exchange Commission
  3. Required periodic disclosures
  4. Expanded anti- fraud laws (first insider trading prohibitions)
65
Q

Glass Steagall 1933

A

Separated commercial banks from investment banks

66
Q

Securities Investor Protection Act 1970

A

established the Securities Investor Protection Corporation (SIPC) to protect investors from losses if their brokerage firms fail

67
Q

Gramm-Leach-Bliley 1999 (3)

A
  1. Repealed Glass-Steagall
  2. Commercial banks could now engage in investment banking activities
  3. travelers/citibank was first in 1998
68
Q

Sarbanes Oxley Act 2003

A
  1. only applies to public firms, and dramatically increased the cost of being public
  2. Required more disclosure of both on and off balance sheet items
    - better auditor and internal governance controls
    - independence of compensation committees
    - restore confidence in public firms
69
Q

Dodd Frank Reform Act 2010 (6)

A
  1. mostly affected regulatory agencies as opposed to wall street
    - consolidation of regulatory agencies
    - more regulation for financial institutes (derivative/ hedge funds)
    - Consumer Protection reforms (no more predatory lending)
    - New rules and tools for dealing with crises (revision of “too big to fail” and Orderly Liquidations)
    - More coordination internationally
70
Q

Financial Asset Classes (6)

A
  1. Bond Market (debt, fixed income)
  2. Equity Market
  3. Derivative Market
  4. Commodity Markets
  5. Forex Markets
  6. Real Estate Markets (REITs)
71
Q

Active Management (3)

A
  1. Identification of undervalued investments
  2. Market Timing
  3. Role of Market Effieciency
72
Q

Passive Management (3)

A
  1. Indexing
  2. Holding an Efficient Frontier
  3. Intermediation Services (agglomeration, diversification)
73
Q

Systemic Risk

A

problems in one market spill over and disrupt other

-Contagion Effect

74
Q

Money Market (3) + Examples

A
  1. new issue
  2. issuer receives proceeds from the sale
  3. Short term, liquid, low risk
    Ex) T-Bills, CDs, CP
75
Q

Capital Markets (3) + Examples

A
  1. Existing owner sells to another party
  2. Issuing firm does not receive proceeds and is not directly involved
  3. Longer Term, Risker
    Ex) Treasury Notes, Bonds, Stocks, Derivatives
76
Q

Leading Indicators

A

Rise and fall in advance of the economy

Ex. New housing starts

77
Q

Coincident Indicators

A

Move with the market

Ex. GDP, industrial production

78
Q

Lagging Indicators

A

Change after market movements

Ex. Unemployment, CPI

79
Q

Primary Market

A

new issues of securities are offered to the public

80
Q

Secondary Market

A

Previously issued securities traded among themselves

Ex. OTC and Exchanges

FIN 333 (1 decks)

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