Flashcards
(153 cards)
1
Q
Primary Market - L1
A
business/gov raise capital
ownership/equity via selling stock
borrow $ by issuing debt (bonds)
2
Q
Secondary Market - L1
A
subsequent sale & purchase of securities
allows/provides liquidity
3
Q
Going Public Advantages (3) - L1
A
raising capital (cash)
creating currency & liquidity by creating stock
creating awareness & credibility
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
5
Q
Underwriting - L1
A
help issuing firm determine its financial needs & how to best raise needed funds
6
Q
Best Efforts - L1
A
investment bank sells securities to investors; any unsold shares returned to issuer
7
Q
Firm Commitment - L1
A
investment bank purchases all securities from firm & sells securities to public; most common
8
Q
Market Participants (4) - L1
A
Individual Advisors
SROs
Securities Exchanges
Broker Dealers
9
Q
OTC - L1
A
trade unlisted securities over the counter
10
Q
Broker Dealers - L1
A
individuals/firms that buy/sell securities either for clients or for themselves; FINRA & SEC registration required
11
Q
3rd Market - L1
A
exchange listed securities traded OTC
12
Q
4th Market - L1
A
huge blocks b/t institutional investors via electronic communications network ECN
13
Q
Markowitz - L1
A
market efficiency based on risk only
14
Q
Sharpe - L1
A
systematic & diversifiable unsystematic risk - Capital Asset Pricing Model - Beta (B)
15
Q
Modern Portfolio Theory MPT - L1
A
risk averse investors are rational & make decisions that maximize their well being
16
Q
Efficient Market Hypothesis (5) - L1
A
- Financial markets informationally efficient (prices reflect relevant info)
- Investors form rational expectations regarding future price movements
- Security prices follow random walk (price changes = random/unpredictable)
- Changes in relevant info will instantaneously be reflected in price changes
- Price changes are virtually impossible to predict
17
Q
3 Levels of Informational Efficiency - L1
A
Weak Form Market Efficiency
Semi Strong Efficiency
Strong Form Efficiency
18
Q
Weak Form Market Efficiency - L1
A
technical analysis = useless
beat w/ fundamental analysis & insider trading
asset prices reflect hx pricing & volume information
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
20
Q
Strong Form Efficiency - L1
A
everything = useless; not even beat by insider trading
asset prices reflect all relevant info, including private information
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
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
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
24
Q
Cash & Money Market Securities (3) - L1
A
liquid/marketable
ST maturities 12 months or less
low risk/volatility
25
Fixed-Income Securities (3) - L1
bonds = form of debt
diversify portfolio
provide income stream to investor
26
Equity Securities (3) - L1
common stock = ownership
more risk
potential more return
27
Asset Classes (3) - L1
Cash & Money Market Securities
Fixed Income Securities
Equity Securities
28
Skewness - L2
measures lack of symmetry in bell curve;
skewed left has negative skewness
29
Skew Right - L2
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
30
Kurtosis - L2
measures thickness of the tails of a distribution (height of tails)
31
Leptokurtic - L2
increased/positive kurtosis = data peaked at mean, more observations in tails
equities returns tend to be leptokurtic d/t increased volatility
32
Platykurtic - L2
low/negative kurtosis
33
Risk Tolerance is a function of....(6) - L3
1. loss/risk aversion
2. available liquidity, savings & insurance programs
3. time horizon
4. goals
5. investor's place in life cycle
6. psychology
34
Diversification - L3
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)
35
Perfect Hedge - L3
two assets r = -1 combined; provides expected return no higher than risk free rate
36
Coefficient of Determination - L3
= 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
37
The Efficient Frontier - L3
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
38
Optimal Portfolio - L3
point at which investor's highest indifference curve is tangent to the efficient frontier
39
MPT - L3
addition of a risk free ROR to the efficient frontier framework creates the capital market line
40
Capital Asset Pricing Model (CAPM) - L3
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
41
Asset Allocation Decision - L3
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
42
Strategic Asset Allocation - L3
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
43
Tactical Asset Allocation - L3
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
44
Discounted Cash Flow Technique & Intrinsic Value - L4
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
45
Relative Valuation w/ Multipliers - L4
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
46
Technical Analysis - L4
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
47
Indexing - L4
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
48
Benchmark Portfolio - L4
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
49
Active Portfolio Management - L4
skilled fund managers, broad mix, +- based on performance
requires WEAK form market efficiency
research suggests advisors cannot consistently identify high performing funds
50
Passive Portfolio Management - L4
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)
51
Core and Satellite Portfolio Management - L4
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
Buy & Hold Strategy Portfolio Rebalancing Techniques - L4
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
53
Constant Weighting Allocation Portfolio Rebalancing Techniques - L4
investors initially decide on strategic allocation
target weights fluctuate in narrow range
54
Fixed Income Securities F.I.S. - L5
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
55
Money Market Deposit Accounts MMDAs FIS - L5
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
56
Coupon Rate - L5
annual rate of interest paid on face value (par value) of the bond
higher cpn rate, more interest paid; often paid semiannually
57
Corporate Bonds - L5
subject fed & state taxation
corporations sell bonds to finance operations
rated to reflect default risk associated w/ a bond
ratings affect overall yield
58
Secured Bonds - L5
bonds backed by collateral
most bonds are unsecured (debentures)
59
Zero Coupon Bond - L5
no regular interest pmts
purchased @ discount
matures @ face value
60
Call Provision - L5
allows issuer to call bond prior to maturity
61
Puttable Bond - L5
allows bond owner to sell (put) bond back to issuer at a predetermined price and time
advantageous when interest increases
62
Serial Bond - L5
multiple maturity dates; allows issuer to partially retire the bond issue at dates specified in the bond
63
Treasury Strips - L5
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
TIPS: Treasury Inflation Protected Securities - L5
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
US Savings Bonds - L5
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
Municipal Bonds - L5
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
Collateralized Mortgage Obligations CMOs - L5
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
Risks Associated w/ Fixed Income Investments (7) - L6
```
Credit Risk
Call Risk
Reinvestment Rate Risk
Purchasing Power Risk
Exchange Rate Risk
Liquidity Risk
Interest Rate Risk
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69
Duration - L6
R
Maturity
YTM
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
Immunization - L6
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
Passive Bond Portfolio Management - L6
generally involves indexing; replicate index by purchasing all bonds making up that index
advantages = diversification, lower management costs, lower transaction costs, better performance
72
Swapping - L6
sell one bond & replace it w/ another
73
Equities - L7
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
Straight Voting - L7 Equities
one vote per share common stock; most common form
75
Cumulative Voting - L7 Equities
one vote per share times # seats on BOD
76
Proxy Voting - L7 Equities
sending written authorization to an agent to cast vote for shareholder
77
Preemptive Right - L7 Equities
some companies permit owners to maintain ownership % in event of any new offering of its stock
78
Liability & Liquidation - L7 Equities
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
Dividends - L7 Equities
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
Dividend Reinvestment Plans (DRIPs) - L7
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
Stock Split - L7
increase # issued & outstanding shares of stock, decreases par value (price of stock)
82
Reverse Split - L7
decreases # issued & outstanding shares of stock, increases price of stock
83
Large Cap - L7
market cap at least $10 billion
84
Mid Cap - L7
market cap $2-10 billion
85
Small Cap - L7
market cap $300 million - $2 billion
86
Micro Cap - L7
market cap up to $300 million
87
Defensive Equity - L7
unaffected by economic fluctuations
necessary everyday life
demand = inelastic (price changes unaffect demand)
steady/slow growth
88
Cyclical Equity - L7
follow economic cycle
typically higher betas (measure of systematic risk = unavoidable through diversification risk)
high fixed costs
cars, airlines, steel
89
Blue Chip Equity - L7
issued by highly regarded investment quality companies
Home Depot, Exxon mobile
consistent dividend payout even in low performing years
90
Income Equity - L7
large dividend payments
mature phase
ex utility companies
91
Interest Sensitive Equity - L7
permanence significantly affected by interest rate changes
ex housing industry
92
Value/Trade Stocks Equity - L7
trade @ prices that are low based on historical earnings & current asset value
low price to earnings ratio
historically outperformed growth stocks
93
Tech Stocks Equity - L7
risky for large growth
94
Common Stock Classes - L7
different classes = different voting rights, same economic benefits
95
Preferred Stock - L7
characteristics F.I.S. & equity securities
96
Participating Preferred - L7
preferred shareholders share in profits of corporation via dividend
97
Cumulative Preferred - L7
firm must pay any unpaid preferred dividends from prior quarters before paying dividend to common shareholders
98
International Securities - L7
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
American Depository Receipts ADRs - L7
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
Price Weighted Index - L7
based on prices of companies involved in index
does not incorporate market cap
101
Dow Jones Industrial Average DJIA - L7
price weighted avg of 30 leading industrial stocks
measure status of equity market
consists of widely held/traded blue chip companies
102
Market Cap Weighted Index - L7
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
Equal Weighted Indexes - L7
each company in index has equal weight regardless of company size
NASDAQ 100
104
MSCI EAFE - L7
track performance large & mid cap securities from Europe, Asia, and the Far East
105
Wilshire 5000 - L7
broad measure market performance
106
Russell U.S. - L7
market cap weighted
used by institutional investors as benchmark
107
Barron's 400 - L7
index fundamentally sound companies
108
Long Position - L7
purchase of assets in hopes of appreciation over time
109
Short Sale - L7
investor profits from asset's declining value
110
Initial Margin - L7
50% (set by Fed) or $2,000?
111
Maintenance Margin - L7
equities position must equal or exceed; min 25% set by Fed
112
Round Lot - L7
typically 100 shares, commissions lower, typically purchased by institutional investors
113
Odd Lot - L7
any trade less than 100 shares, non institutional investors
114
Bid Price - L7
price a security dealer will pay for security
115
Ask Price - L7
price a security dealer will sell a security
116
Bid Ask Spread - L7
difference between two prices
generally less for liquid securities
spread = compensation to dealer
117
Features of Investment Companies - L8
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
Open End Companies (Mutual Funds) - L8
Investment Company
most common type to gain equity exposure
shares sold not limited
prices based on NAV
119
Unit Investment Trusts (UITs) - L8
Investment Company
registered investment company, passively managed
investors purchase units, hold until maturity, receive distributions principal & interest until all principal returned to investor
120
Closed End Companies (think NYSE) - L8
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
Exchange Traded Funds (ETFs) - L8
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
Mutual Funds Fees/Expenses - L8
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
Money Market Mutual Funds - L8
competitive money market returns w/ ease of access & liquidity
ex. TBills, Commercial Paper, Negotiable CDs, Repurchase Agreements, ST Municipal Debt
124
Hybrid/Balanced Funds - L8
cash, FIS, & equities
125
Mutual Funds Advantages (9) - L8
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
Mutual Funds Disadvantages (7) - L8
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
Alternative Investments - L8
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
Benefits Alternative Investments (4) - L8
1. returns
2. diversification
3. tax benefits
4. inflation hedge
129
Risks Alternative Investments (8) - L8
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
Commodities - L8
Alternative Investment
created by nature, energy products, agriculture
physical commodities either primary or secondary
131
Primary Commodities - L8
Alternative Investment
originate from mines/wells/farms; extracted directly from natural resources
unaltered from original state
crude oil
132
Secondary Commodities - L8
Alternative Investment
produced from primary sources for consumption by individuals or businesses
crude oil refined to make gasoline
133
Private Equity - L8
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
Venture Capital (VC) - L8
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
Art/Collectibles - L8
Alternative Investment
fast growing asset class d/t search for diversification & ability to derive some enjoyment from consuming an investment
136
Hedge Funds - L8
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
Real Estate Investments - L8
investors seek income, appreciation & diversification
138
Categories Real Estate Investments (5) - L8
1. Residential
2. Commercial
3. Industrial
4. Retail
5. Mixed Use
139
Real Estate Investment Trusts REITs - L8
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
Derivative - L9
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
Forward Contract - L9
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
Futures Contract - L9
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
Long Position - L9
purchasing a contract, increases in value if underlying increases
144
Short Position - L9
selling contract, increase value if underlying decreases
145
Calls - L9
"Call Up"
buyer = right to exercise, purchase stock for strike price
146
Puts - L9
"Put Down"
buyer = right to exercise, sell stock for strike price
147
Options Buyer - L9
right to exercise
pays premium
148
Options Seller - L9
obligation to fulfill order if exercised
receives premium
149
Warrants - L9
Embedded Option
essentially call option issued by offering company (bond w/ warrants attached), lower cost of capital, LT (2-10 years
150
Convertible Bonds - L9
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
Arithmetic Mean Return - L2 F
simple avg return, does not account for compounding
E+ key and orange down shift (7) on calculator
152
Time Weighted Return - L2 F
= GMR
ignores $ volume & timing
buy/hold approach (mutual funds)
CF for 1 share @ end of period
153
Accrued Interest Bonds - L5
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
