Final Exams Flashcards
If a firm are to comply with GIPS, can it present data, in addition to the 5-year compliant data, in non-compliant form
Non compliant data can be presented, but no non-compliant data after January 1, 2000 can be presented
Is making preparation to be a competitive practice allowed for members?
Yes, as long as it does not interfere with current employment duties
Can candidate begin an independent competitive business while under employment?
Yes, but need to receive the employer’s consent
Under GIPS, should firm alter historical composite returns for relevant changes in form reorganization?
No
If two company signs a collusive agreement, under Nash Equilbrium, will they both comply or cheat?
Cheat.
If A comply, then it depends on whether B comply, however comply is not the interest for B. Same for B.
Real exchange rate (A/B)
(Forward rate - Spot rate) ÷ Spot rate = (rfc - rdc) ÷ (1 + rdc)
What should one do to fight inflation according to quantity of money?
MV = PY
Decrease either M or V will decrease inflation.
However, velocity is not affected by monetary policy. Thus should decrease money supply
Net realizable value
Expected sales price less estimated selling costs and completion costs
If net realizable value is less than balance sheet value -> write down to net realizable value, loss recognized in income statement.
If subsequently recovers, it can be “Written up” and the gain is recognized in income statement by reducing COGS. Since it is valued at lower of cost or net realizable value, cannot written up by more than previously written down.
What happen to ROE when there’s a loss in other comprehensive income?
Loss in other comprehensive income reduce equity but not affect net income, thus increase ROE
What happens to accumulated depreciation when asset is sold or disposed of?
Original cost and accumulated depreciation are removed from the balance sheet.
What data should be used to estimate WACC?
Ideally, use target structure.
If not available, use current capital structure.
Alternatively, use industry average capital structure.
Does take over defense benefit or harm the shareholders?
Takeover defenses typically reduce shareholder value.
Diversification ratio
Standard deviation of an equally weighted portfolio’s return divided by the average standard deviation of returns of the security in the portfolio.
Adding a security with standard deviation equal to the average will decrease portfolio standard deviation as long as the added security’s return are not perfectly correlated.
Multi-factor returns generating model
Often use fundamental and macroeconomics factors.
Drawback of using book value
It may not accurately reflect a company’s asset and equity’s market price
Call market
A type of market in which each transaction takes place at predetermined intervals and where all of the bid and ask orders are aggregated and transacted at once. The exchange determines the market clearing price based on the number of bid and ask orders.
Revenue bonds
Municipal bonds that will be repaid from revenues generated from a specific project (toll road)
Quasi-government entities
Agencies created by sovereign government
Which embedded option will make convexity negative?
Call option
Does spread reflect liquidity, credit quality or both?
Only liquidity
Treasury Inflation Protected Security(TIIT)
Fixed coupon rate
Par value adjusted for inflation (thus coupon payment is adjusted)
Coupon rate is the real rate. (because it is the rate investors receive above inflation rate)
Which private equity must follow regular section in GIPS instead of private equity section?
Open-end or evergreen funds
Where is the loss/gain of repurchase of debt reported?
Reported on income statement
What is the standard on receiving gifts from customer?
Member may not accept gift that may compromise their independence and objectivity
What should one do if he “suspects” illegal action on client account
Report to supervisor and check with compliance department
Time-period bias
Presented when a study covers either too short a period (proposed relationship might only hold during that time), or too long (proposed relationship might have changed)
Will company understate or overstate earnings if it is negotiating new contract with unionized employees?
Understate
If a firm reclassifies a long-lived asset from held for use to held for sale, what would happen
It is no longer depreciated or amortized.
Must be tested for impairment.
Asset if impaired if carrying value exceeds its net realizable value (fair value less selling costs)
If impaired, asset is written down to net realizable value and loss recognized in income statement
Capital rationing
Prioritizing projects to maximize the increase in company value
Project sequencing
More than one project sequenced over time
Capital preservation
Investment return objective that involves an investment return at least equal to the inflation rate with minimal chance of loss
Retained earning calculation
The percentage of net earnings not paid out as dividends
RE = Beginning RE + Net income - dividend paid
Greenmail
Repurchasing shares at a premium to their market value by direct negotiation with a potential acquirer of the firm
Net operating cycle
Operating cycle = Days of inventory on hand + Days of sales outstanding
Net operating cycle = Days of inventory on hand + Days of sales outstanding - Number of days payables
How is DJIA weighted
Price weighted index
How is S&P 500 weighted?
Market capitalization weighted index
Industry rotation
An active management strategy of overweighting or underweighting industries, compared to their strategic allocation weights, based on business cycle
2 x 8 FRA
In 60 days (2months), one will borrow money based on 6 month libor
Convenience yield
The value of a physical commodity being available for use over period of a future contract
Which real estate company does GIPS real estate section apply to
Apply to most real estate investments, regardless of the degree of leverage or the degree of management by the firm
If a candidate goes for a new job and contacts previous client using information on her personal computer, does she violate standard?
Yes, one may only contact former clients based on public information.
If a candidate writes to the director of a fund saying that he will act in his best interest, does he violate standard?
Yes, violates the loyalty. Candidate should be loyal to the beneficiary of the fund
Impulse wave
five smaller waves (in the prevailing trend)
Elliott wave theory
Corrective wave
Three smaller waves (against the prevailing trend)
Elliott wave theory
Ordinal scale
Data can be ordered
Nominal scale
Place data into categories that have no particular order
Ratio scale
Differences in data values are meaning ful
Cash flow earnings index
Operating cash flow divided by net income.
If it is consistently less than 1.0 Company is reporting higher earnings than are likely to be supportable by its operating income
D/E , D/A ratio under operating lease v.s. finance lease
Under operating lease, D/E is lower.
Since finance lease will increse debt.
Impairment of goodwill
Good will is impaired if carrying value of the company is larger than the fair value
Income tax expense and taxes payable
Income tax expense = tax payable + delta_DTL - delta_DTA
Externalities
Acceptance of a project may have effect on other firm cash flows
Enterprise value
Market value of a firm’s common stock and debt, minus its cash and short term securities.
It is the amount that would be needed to take over a firm.
Are private equity firm focus more on long-term performance ?
Yes, because they do not face pressure from public shareholders to produce positive short-term results
Which factor is held constant when using IS-LM model to generate aggregate demand curve?
Nominal money supply
Which factor is held constant in each LM curve?
Real money supply
Short coming of elastic approach
Considers trade flows yet ignores capital flows
Absorption approach
depreciation of the domestic currency will improve the balance of the trade if it increases domestic savings
IASB
IOSCO
SEC
IASB is standard-setting body
IOSCO and SEC are regulatory authorities
Free Cash flow to equity
FCFE = CFO - fixed capital investment + net borrowing
FCFE vs FCFF
FCFF = CFO + interest *(1-t) - fixed investment FCFE = CFO - fixed capital investment + net borrowing
Kurtosis and skewness of major asset classes
Negative skewness and positive excess kurtosis
Cumulative share
WIll receive previous missed dividend before common share
Waterfall structure
Bonds are issued in tranches with varying levels of seniority. Loss in the underlying asset are absorbed first by the tranches with lowest seniority
Structured notes
Medium-term notes that are combined with derivatives
Corporate bond and government bond day count
Corporate bond, 30/360 day count
Government bond, actual day count
Paired comparison tests
For two dependent group of populations.
Component depreciation
Depreciate the component of an asset separately
Required by IFRS
Allowed but not required under GAAP
Interest incurred during the construction of long-lived asset
Should be capitalized under both IFRS and GAAP.
Bid and ask
The bid price represents the maximum price that a buyer or buyers are willing to pay for a security. The ask price represents the minimum price that a seller or sellers are willing to receive for the security.
Draw down period
The period of time during which a private equity fund will select investments and direct committed capital to them.
Should change in recommendation be made to all clients?
No, just to the ones who have previously indicated interest
Under GIPS, can firm present firm-specific information?
Yes
If a candidate works as a contractor, should he disclose other work info to the employer?
Not necessarily
Chi square
Lower bound = 0
Can only measure normal distributed samples
Will technical analysis bounded by accounting standard that distort results?
No
Does change in accounting standard require retrospective or prospective change?
Retrospective, change all past records
Current liability, is it in 1 year or 1 operating cycle
Whichever longer
NPV Profile
A plot of relationship between the NPV and the cost of capital of a project
Markowitz framework
Assumes that all investors view risk as the variability of returns
Will increase in ROE definitely increase market value of book value
No , ROE could increase because equity falls more than earnings. In this case, market value will fall
Quoted margin
In Floating rate notes, quoted margin is added to the reference rate to calculate coupon payment
Require margin
In floating rate notes, require margin is added to the reference rate to get the par value.
Market neutral strategy
Hedge funds maintain approximately equal values in long and short equity positions so that stock selection, rather than market exposure, determines their investment performance
What does downside risk better measure
Hedge funds, since they have leptokurtic and negatively skewed return distributions
Under GIPS, how should firm present itself when it has multiple locations
GIPS compliant firm definition must be the corporation that holds itself out to the client as a specific business entity.
Investment properties
Only distinguished in IFRS, in GAAP it is same as other long lived assets.
The asset is investment property if it collects rental income, earn capital appreciation
Sale of long lived asset, how is it reported
Difference between the sale proceeds and carrying value is reported on income statement as gain or loss
Wrap fee accounts
Separately managed accounts
Core-satellite approach
A majority of the assets are invested passively. A smaller proportion is actively managed.
Reduce the likelihood of excessive trading and offsetting active positions
In informational efficient market, will manager outperform index or underperform?
Will be same performance, however, since transaction fee is included, it will be less return than the passive index.
Contingent convertible bonds
Converted automatically to common stock if a certain event take place
