Flashcards

1
Q

Primary Market - L1

A

business/gov raise capital

ownership/equity via selling stock

borrow $ by issuing debt (bonds)

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2
Q

Secondary Market - L1

A

subsequent sale & purchase of securities

allows/provides liquidity

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3
Q

Going Public Advantages (3) - L1

A

raising capital (cash)

creating currency & liquidity by creating stock

creating awareness & credibility

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4
Q

Going Public Disadvantages (3) - L1

A

exposure - high SEC registration costs

stock prices & shareholder value create pressure to increase stock price

loss of control via selling ownership

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5
Q

Underwriting - L1

A

help issuing firm determine its financial needs & how to best raise needed funds

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6
Q

Best Efforts - L1

A

investment bank sells securities to investors; any unsold shares returned to issuer

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7
Q

Firm Commitment - L1

A

investment bank purchases all securities from firm & sells securities to public; most common

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8
Q

Market Participants (4) - L1

A

Individual Advisors

SROs

Securities Exchanges

Broker Dealers

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9
Q

OTC - L1

A

trade unlisted securities over the counter

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10
Q

Broker Dealers - L1

A

individuals/firms that buy/sell securities either for clients or for themselves; FINRA & SEC registration required

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11
Q

3rd Market - L1

A

exchange listed securities traded OTC

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12
Q

4th Market - L1

A

huge blocks b/t institutional investors via electronic communications network ECN

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13
Q

Markowitz - L1

A

market efficiency based on risk only

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14
Q

Sharpe - L1

A

systematic & diversifiable unsystematic risk - Capital Asset Pricing Model - Beta (B)

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15
Q

Modern Portfolio Theory MPT - L1

A

risk averse investors are rational & make decisions that maximize their well being

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16
Q

Efficient Market Hypothesis (5) - L1

A
  1. Financial markets informationally efficient (prices reflect relevant info)
  2. Investors form rational expectations regarding future price movements
  3. Security prices follow random walk (price changes = random/unpredictable)
  4. Changes in relevant info will instantaneously be reflected in price changes
  5. Price changes are virtually impossible to predict
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17
Q

3 Levels of Informational Efficiency - L1

A

Weak Form Market Efficiency

Semi Strong Efficiency

Strong Form Efficiency

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18
Q

Weak Form Market Efficiency - L1

A

technical analysis = useless
beat w/ fundamental analysis & insider trading

asset prices reflect hx pricing & volume information

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19
Q

Semi Strong Efficiency - L1

A

technical/fundamental analysis = useless; only beat w insider trading

asset prices reflect all publicly available info; investors cannot use publicly available info to generate an excess return

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20
Q

Strong Form Efficiency - L1

A

everything = useless; not even beat by insider trading

asset prices reflect all relevant info, including private information

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21
Q

SEC - L1

A

Regulatory oversight = transparency, integrity, accuracy in financial reporting & decision making

GOAL = protect investors, maintain fair orderly & efficient markets & facilitate capital formation

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22
Q

Investment Advisors Act 1940 (ABC Rule) - L1

A

supports investor protection

any person/firm engaged in business of providing advice to others or issuing reports or analyzes regarding securities

ABC Rule:
Advice, Business, Compensation

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23
Q

SROs - L1

A

FINRA

private non governmental organizations w/ limited authority to enforce ethical & fair standards among businesses operating in the financial services industry

promote trust, protect investors, improve efficiency

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24
Q

Cash & Money Market Securities (3) - L1

A

liquid/marketable

ST maturities 12 months or less

low risk/volatility

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25
Q

Fixed-Income Securities (3) - L1

A

bonds = form of debt

diversify portfolio

provide income stream to investor

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26
Q

Equity Securities (3) - L1

A

common stock = ownership

more risk

potential more return

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27
Q

Asset Classes (3) - L1

A

Cash & Money Market Securities

Fixed Income Securities

Equity Securities

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28
Q

Skewness - L2

A

measures lack of symmetry in bell curve;

skewed left has negative skewness

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29
Q

Skew Right - L2

A

high peak far left side; long tail decreasing in level on right side

mode > median > mean

Ex. TBills positively skewed right since returns cannot be negative

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30
Q

Kurtosis - L2

A

measures thickness of the tails of a distribution (height of tails)

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31
Q

Leptokurtic - L2

A

increased/positive kurtosis = data peaked at mean, more observations in tails

equities returns tend to be leptokurtic d/t increased volatility

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32
Q

Platykurtic - L2

A

low/negative kurtosis

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33
Q

Risk Tolerance is a function of….(6) - L3

A
  1. loss/risk aversion
  2. available liquidity, savings & insurance programs
  3. time horizon
  4. goals
  5. investor’s place in life cycle
  6. psychology
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34
Q

Diversification - L3

A

including a # of different investments in a portfolio to reduce the portfolio’s unsystematic risk

better achieved by combining two assets that are not perfectly correlated (r<1)

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35
Q

Perfect Hedge - L3

A

two assets r = -1 combined; provides expected return no higher than risk free rate

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36
Q

Coefficient of Determination - L3

A

= R^2

tells us how much the variability of one asset can be explained w/ variability in the other

calculated by squaring the correlation coefficient

R^2 = 100% = perfectly mirrors

R^2 = 0% = totally independent of market

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37
Q

The Efficient Frontier - L3

A

identifies efficient frontier from all possible combinations of assets

diversification helps minimize portfolio risk

incorporating both E[r] and risk into the analysis assists in decision making

Indifference Curve = representation line consisting of portfolios an investor would be willing to hold based on tradeoff of risk/return

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38
Q

Optimal Portfolio - L3

A

point at which investor’s highest indifference curve is tangent to the efficient frontier

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39
Q

MPT - L3

A

addition of a risk free ROR to the efficient frontier framework creates the capital market line

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40
Q

Capital Asset Pricing Model (CAPM) - L3

A

theoretical & difficult to apply in practical setting

a) MPT combines CMline w/ efficient frontier strategy; incorporates beta
b) combination of risk free asset, market return, & beta form security market line (SML), model = CAPM

CAPM = a portfolio’s expected ROR is based on the risk free rate plus a premium based on the portfolio systematic risk

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41
Q

Asset Allocation Decision - L3

A

portfolio weights assigned to to reflect investor’s risk profile weights: (4)

expected returns

volatility

market expectations

measure of risk tolerance

two common approaches: strategic asset allocation and tactical asset allocation

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42
Q

Strategic Asset Allocation - L3

A

think NYSE

developing appropriate diversification strategy across broad set of asset classes

minimize probability significant losses that would impact overall portfolio

Factors (4):
LT expected return on equities

fixed income & real assets

LT goals

risk tolerance

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43
Q

Tactical Asset Allocation - L3

A

think crypto

outperform market over shorter periods of time by investing in asset classes the investor expects will outperform market returns over the period

requires active management

market timing, anticipate future market movements

less effective in more efficient markets

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44
Q

Discounted Cash Flow Technique & Intrinsic Value - L4

A

fundamental analysis; firm’s value = ability generate cash for investors

IV = PV expected cash flows

IV > P(market); security is undervalued

IV < P(market); security is overvalued

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45
Q

Relative Valuation w/ Multipliers - L4

A

fundamental analysis; valuing a company by comparing it to value of its competition

Benefits: requires far fewer assumptions, simpler to understand, more realistic estimations

Challenges: many many firms to choose from, should be based on historical evidence of improved portfolio performance

Relative Measures: PE ratio, Price to book ratio (PB), price to sales ratio (PS), price to cash flow (PCF), enterprise to earnings

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46
Q

Technical Analysis - L4

A

use of historical pricing & volume data to make asset selection decisions

multiple ineficienciencies

uses S&D conditions to locate trends in asset prices

T.A. relies on market not being completely efficient

two common patterns: resistance levels & support levels

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47
Q

Indexing - L4

A

select financial instruments track collection of investment securities w/ no effort spent on individual security evaluation

no benefit in paying more for active management; assumes efficient market w/ fair price

lower expense ratios then active strategies

capture asset classes, NOT security selection

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48
Q

Benchmark Portfolio - L4

A

evaluating portfolio performance w/ out comparing that performance to similarly constructed portfolios ignores the systematic risk influence that affect all portfolios

popular indexes used for benchmarks: S&P500, Wilshire 5000 Index

more complex way is to select securities w/ high correlations w/ securities in portfolio

= customized portfolio containing securities in universe the manager typically holds, weighted as the manager would typically weight portfolio

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49
Q

Active Portfolio Management - L4

A

skilled fund managers, broad mix, +- based on performance

requires WEAK form market efficiency

research suggests advisors cannot consistently identify high performing funds

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50
Q

Passive Portfolio Management - L4

A

index ETFs or mutual funds, whichever more tax efficient

use passive ETFs that may capture opportunities to earn returns w/ positive historical Jensen’s Alpha

Examples: value, small size, momentum, low volatility (also known as research based investing)

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51
Q

Core and Satellite Portfolio Management - L4

A

allocate majority of wealth to low cost index ETFs or MFs to capture beta

other portion to capture other benefits:
active alpha
risk hedging (inflation protection)
unique diversification opportunities
satisfy client's desire to hold an allocation of individual firms or sectors
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52
Q

Buy & Hold Strategy Portfolio Rebalancing Techniques - L4

A

investor does nothing to rebalance portfolio weights

lower transaction costs

investors comfortable w/ allowing rising/falling markets to change their original allocations

over time, allocation could be drastically different = creates significantly different return and risk profiles than @ inception

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53
Q

Constant Weighting Allocation Portfolio Rebalancing Techniques - L4

A

investors initially decide on strategic allocation

target weights fluctuate in narrow range

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54
Q

Fixed Income Securities F.I.S. - L5

A

debt instrument, issuer promises to pay interest on face value of instrument for period of time, then repay face value @ maturity, wide variety of issuers

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55
Q

Money Market Deposit Accounts MMDAs FIS - L5

A

allow investors earn interest on funds not currently invested in stocks & other investments

invest in MM securities indirectly

ST var rate, issued by banks & MF companies

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56
Q

Coupon Rate - L5

A

annual rate of interest paid on face value (par value) of the bond

higher cpn rate, more interest paid; often paid semiannually

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57
Q

Corporate Bonds - L5

A

subject fed & state taxation

corporations sell bonds to finance operations

rated to reflect default risk associated w/ a bond

ratings affect overall yield

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58
Q

Secured Bonds - L5

A

bonds backed by collateral

most bonds are unsecured (debentures)

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59
Q

Zero Coupon Bond - L5

A

no regular interest pmts

purchased @ discount

matures @ face value

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60
Q

Call Provision - L5

A

allows issuer to call bond prior to maturity

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61
Q

Puttable Bond - L5

A

allows bond owner to sell (put) bond back to issuer at a predetermined price and time

advantageous when interest increases

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62
Q

Serial Bond - L5

A

multiple maturity dates; allows issuer to partially retire the bond issue at dates specified in the bond

63
Q

Treasury Strips - L5

A

US Gov FIS

separate trading of registered interest and principal of security

treasury, fin institutions & gov bonds “strip” each cpn & principal pmt out of a Bond or Note & sells these strips to investors as a series of 0cpn bonds

64
Q

TIPS: Treasury Inflation Protected Securities - L5

A

US Gov FIS

protects investors from purchasing power risk

pay interest at find rate

maturities 5,10,30 years; increments of $100

principal increases w/ inflation

65
Q

US Savings Bonds - L5

A

US Gov FIS

Two types: EE and I bonds

permit smaller investors to acquire an interest in gov debt instruments & in some cases achieve favorable tax benefits

66
Q

Municipal Bonds - L5

A

municipalities (states, counties, parishes, cities, towns) issue bonds for operations or finance public projects

fed income tax free; state tax free if in same state

lower yield

67
Q

Collateralized Mortgage Obligations CMOs - L5

A

private investment firms create CMOs, backed (collateralized) by pool of underlying mortgages

Great Recession, very risky, particularly for lower tranche investors

Major risks:
interest rate risk
default risk
prepayment risk

68
Q

Risks Associated w/ Fixed Income Investments (7) - L6

A
Credit Risk
Call Risk
Reinvestment Rate Risk
Purchasing Power Risk
Exchange Rate Risk
Liquidity Risk
Interest Rate Risk
69
Q

Duration - L6

R

Maturity

YTM

A

time weighted measure of fixed income security’s CFs in terms of payback

  1. provides measure of volatility
  2. estimating price change of bond based on changes in interest rates
  3. immunizing a bond/bond portfolio against interest rate risk

R:
inverse relationship; cpn rate decreases means increased price fluctuations

Maturity:
direct relationship

YTM:
general inversely related (unless 0 cpn bond)

70
Q

Immunization - L6

A

goal = protect the bond portfolio from interest rate fluctuations & reinvestment rate risk

price offsets reinvestment rate risk

immunized if duration matches investor’s time horizon

bond portfolio immunized when constructed

71
Q

Passive Bond Portfolio Management - L6

A

generally involves indexing; replicate index by purchasing all bonds making up that index

advantages = diversification, lower management costs, lower transaction costs, better performance

72
Q

Swapping - L6

A

sell one bond & replace it w/ another

73
Q

Equities - L7

A

significantly higher returns, two sources dividend yield and capital appreciation

receive dividends, vote on corporate issues, limited liability, ultimate distribution of assets in event of liquidation

also have claim on income generated by assets of the company

74
Q

Straight Voting - L7 Equities

A

one vote per share common stock; most common form

75
Q

Cumulative Voting - L7 Equities

A

one vote per share times # seats on BOD

76
Q

Proxy Voting - L7 Equities

A

sending written authorization to an agent to cast vote for shareholder

77
Q

Preemptive Right - L7 Equities

A

some companies permit owners to maintain ownership % in event of any new offering of its stock

78
Q

Liability & Liquidation - L7 Equities

A

corporations are separate legal entities responsible for all debts & claims

shareholders protected from personal liability

receive assets on prorated basis, based on ownership interest

79
Q

Dividends - L7 Equities

A

two choices regarding any positive net income:

  1. reinvest into new/existing projects (only do so if able to earn higher returns than shareholders could earn on their own)
  2. payout net income to shareholders in form of dividends
80
Q

Dividend Reinvestment Plans (DRIPs) - L7

A

offered by companies that allow investors to receive dividends in cash or automatically reinvest dividends in company’s stock

shares accumulate over time

reinvested dividends taxable as ordinary income in year they are distributed to shareholders

81
Q

Stock Split - L7

A

increase # issued & outstanding shares of stock, decreases par value (price of stock)

82
Q

Reverse Split - L7

A

decreases # issued & outstanding shares of stock, increases price of stock

83
Q

Large Cap - L7

A

market cap at least $10 billion

84
Q

Mid Cap - L7

A

market cap $2-10 billion

85
Q

Small Cap - L7

A

market cap $300 million - $2 billion

86
Q

Micro Cap - L7

A

market cap up to $300 million

87
Q

Defensive Equity - L7

A

unaffected by economic fluctuations

necessary everyday life

demand = inelastic (price changes unaffect demand)

steady/slow growth

88
Q

Cyclical Equity - L7

A

follow economic cycle

typically higher betas (measure of systematic risk = unavoidable through diversification risk)

high fixed costs

cars, airlines, steel

89
Q

Blue Chip Equity - L7

A

issued by highly regarded investment quality companies

Home Depot, Exxon mobile

consistent dividend payout even in low performing years

90
Q

Income Equity - L7

A

large dividend payments

mature phase

ex utility companies

91
Q

Interest Sensitive Equity - L7

A

permanence significantly affected by interest rate changes

ex housing industry

92
Q

Value/Trade Stocks Equity - L7

A

trade @ prices that are low based on historical earnings & current asset value

low price to earnings ratio

historically outperformed growth stocks

93
Q

Tech Stocks Equity - L7

A

risky for large growth

94
Q

Common Stock Classes - L7

A

different classes = different voting rights, same economic benefits

95
Q

Preferred Stock - L7

A

characteristics F.I.S. & equity securities

96
Q

Participating Preferred - L7

A

preferred shareholders share in profits of corporation via dividend

97
Q

Cumulative Preferred - L7

A

firm must pay any unpaid preferred dividends from prior quarters before paying dividend to common shareholders

98
Q

International Securities - L7

A

substantial return potential, increased risk

includes ADRs, International MFs & ETFs (invest internationally) and Foreign Closed end Funds (CEFs) (strictly outside U.S.)

trades execute in local currency

99
Q

American Depository Receipts ADRs - L7

A

certificates issued by U.S. banks represent ownership of foreign company stock; foreign shares held in bank in firm’s home country, affected by changes in currency rates

trade as normal domestic shares would

100
Q

Price Weighted Index - L7

A

based on prices of companies involved in index

does not incorporate market cap

101
Q

Dow Jones Industrial Average DJIA - L7

A

price weighted avg of 30 leading industrial stocks

measure status of equity market

consists of widely held/traded blue chip companies

102
Q

Market Cap Weighted Index - L7

A

reflects changes in the value (stock price times # of shares) of component companies

larger firms have greater impact than smaller firms

S&P500 = widely used market cap weighted index

103
Q

Equal Weighted Indexes - L7

A

each company in index has equal weight regardless of company size

NASDAQ 100

104
Q

MSCI EAFE - L7

A

track performance large & mid cap securities from Europe, Asia, and the Far East

105
Q

Wilshire 5000 - L7

A

broad measure market performance

106
Q

Russell U.S. - L7

A

market cap weighted

used by institutional investors as benchmark

107
Q

Barron’s 400 - L7

A

index fundamentally sound companies

108
Q

Long Position - L7

A

purchase of assets in hopes of appreciation over time

109
Q

Short Sale - L7

A

investor profits from asset’s declining value

110
Q

Initial Margin - L7

A

50% (set by Fed) or $2,000?

111
Q

Maintenance Margin - L7

A

equities position must equal or exceed; min 25% set by Fed

112
Q

Round Lot - L7

A

typically 100 shares, commissions lower, typically purchased by institutional investors

113
Q

Odd Lot - L7

A

any trade less than 100 shares, non institutional investors

114
Q

Bid Price - L7

A

price a security dealer will pay for security

115
Q

Ask Price - L7

A

price a security dealer will sell a security

116
Q

Bid Ask Spread - L7

A

difference between two prices

generally less for liquid securities

spread = compensation to dealer

117
Q

Features of Investment Companies - L8

A

provide investors w/ easy access to capital markets, both individual & institutional investors

investors share in profits & losses of company proportionally

performing based on underlying securities/asset performance

ongoing management fee, sometimes other commissions/fees as well

118
Q

Open End Companies (Mutual Funds) - L8

A

Investment Company

most common type to gain equity exposure

shares sold not limited

prices based on NAV

119
Q

Unit Investment Trusts (UITs) - L8

A

Investment Company

registered investment company, passively managed

investors purchase units, hold until maturity, receive distributions principal & interest until all principal returned to investor

120
Q

Closed End Companies (think NYSE) - L8

A

Investment Company

shares trade like stock in secondary market

prices determined by S&D, trade @ discount/premium relative to NAV

tiny market, focus on less liquid high yield bond investments

more availability in terms of available investment options

121
Q

Exchange Traded Funds (ETFs) - L8

A

Investment Company

portfolios/baskets of securities traded on an exchange

lower expense ratio than MFs, lower taxable distributions, no hold of uninvested cash (from new contributions or cash maintained for redemptions)

122
Q

Mutual Funds Fees/Expenses - L8

A

no load = MF w/ no sales charge

12b-1 fees pays for marketing//distribution expenses directly from funds asset

max = 0.75% per yr, additional 0.25% can be charged for service fee

must be less than or equal to 0.25% to be considered “no load”

123
Q

Money Market Mutual Funds - L8

A

competitive money market returns w/ ease of access & liquidity

ex. TBills, Commercial Paper, Negotiable CDs, Repurchase Agreements, ST Municipal Debt

124
Q

Hybrid/Balanced Funds - L8

A

cash, FIS, & equities

125
Q

Mutual Funds Advantages (9) - L8

A
  1. low initial investment amounts
  2. diversification
  3. ease of access
  4. professional management
  5. tax efficiency of management fees
  6. liquidity
  7. transaction cost efficiency
  8. variety of MFs
  9. services
126
Q

Mutual Funds Disadvantages (7) - L8

A
  1. performance (actively managed funds)
  2. fees/loads/expenses (reduce growth)
  3. no insurance
  4. market impact
  5. choice of many funds
  6. classification system
  7. built in gains
127
Q

Alternative Investments - L8

A

provide exposure to financial assets/management styles possible quite different from publicly traded traditional stocks/bonds

ex. commodities, derivative securities, hedge funds, private equity, collectibles, venture capital

128
Q

Benefits Alternative Investments (4) - L8

A
  1. returns
  2. diversification
  3. tax benefits
  4. inflation hedge
129
Q

Risks Alternative Investments (8) - L8

A
  1. poor liquidity
  2. high research costs
  3. performance appraisal issues
  4. high expenses, fees & minimum investment requirements
  5. principal risk
  6. lack of expertise
  7. volatility
  8. scarcity of regular CF distributions
130
Q

Commodities - L8

A

Alternative Investment

created by nature, energy products, agriculture

physical commodities either primary or secondary

131
Q

Primary Commodities - L8

A

Alternative Investment

originate from mines/wells/farms; extracted directly from natural resources

unaltered from original state

crude oil

132
Q

Secondary Commodities - L8

A

Alternative Investment

produced from primary sources for consumption by individuals or businesses

crude oil refined to make gasoline

133
Q

Private Equity - L8

A

Alternative Investment

organizations that raise capital & take ownership in businesses that are not traded on a public exchange

locate undervalued firms, transform firms into successful businesses, perform duties of general business partners

RISKS:
funding, liquidity, market, exit risk

134
Q

Venture Capital (VC) - L8

A

Alternative Investment

method of financing for startup companies or small businesses

typically creates limited partnership

very risk, early stage failure quite common, includes legal, regulatory & liquidity risks

135
Q

Art/Collectibles - L8

A

Alternative Investment

fast growing asset class d/t search for diversification & ability to derive some enjoyment from consuming an investment

136
Q

Hedge Funds - L8

A

Alternative Investment

investment companies that manage capital for investors; manager acts as a general partner

minimum income/asset requirements

$250K or more

very illiquid, LT asset prospect

137
Q

Real Estate Investments - L8

A

investors seek income, appreciation & diversification

138
Q

Categories Real Estate Investments (5) - L8

A
  1. Residential
  2. Commercial
  3. Industrial
  4. Retail
  5. Mixed Use
139
Q

Real Estate Investment Trusts REITs - L8

A

investors who wish for diversified exposure to real estate at affordable price; organized exchanges, must pay back 90% of income

RISKS:
market, liquidity, default, political, environmental, replacement cost risk

140
Q

Derivative - L9

A

financial security who’s value is derived from the value of an underlying security or asset (ex. coffee, oil)

contracts/agreements b/t two parties

RISKY: potential large gains/losses, unsuitable for unsophisticated investors d/t high potential risk

Primary Purpose = transfer risk among market participants

futures & options contracts

141
Q

Forward Contract - L9

A

agreement b/t two parties buy/sell specific asset @ specified future time, agreed to today

not standardized, not traded on exchanges, private negotiated agreements

142
Q

Futures Contract - L9

A

agreement buy/sell specified amount of an asset @ predetermined price on expiration date of contract

prices constantly change, traded on exchanges, standardized

spot price = price commodity/asset to be delivered today

futures price = price at some point in future as deliver date draws near, futures price converges w/ spot price

143
Q

Long Position - L9

A

purchasing a contract, increases in value if underlying increases

144
Q

Short Position - L9

A

selling contract, increase value if underlying decreases

145
Q

Calls - L9

A

“Call Up”

buyer = right to exercise, purchase stock for strike price

146
Q

Puts - L9

A

“Put Down”

buyer = right to exercise, sell stock for strike price

147
Q

Options Buyer - L9

A

right to exercise

pays premium

148
Q

Options Seller - L9

A

obligation to fulfill order if exercised

receives premium

149
Q

Warrants - L9

A

Embedded Option

essentially call option issued by offering company (bond w/ warrants attached), lower cost of capital, LT (2-10 years

150
Q

Convertible Bonds - L9

A

Embedded Option

bondholder may exchange bond for stated # shares of issuing company common stock

when purchased, embedded option is OTM by an amount equal to the conversion premium

151
Q

Arithmetic Mean Return - L2 F

A

simple avg return, does not account for compounding

E+ key and orange down shift (7) on calculator

152
Q

Time Weighted Return - L2 F

A

= GMR

ignores $ volume & timing

buy/hold approach (mutual funds)

CF for 1 share @ end of period

153
Q

Accrued Interest Bonds - L5

A

from last cpn pmt to settlement date, interest earned by seller = accrued interest

from next cpn date back to settlement date, interest earned by buyer