Formula's and Calculator Steps to Remember

Question 1

Maximum Contribution for Self-Employed

Answer 1

Maximum Self Employed Contribution Formula
* = (Emp. Contribution Rate) / (1 - Emp. Contribution Rate)

Maximum when no employee contributions are given in the question:
* (Annual Income) - (1/2 of Self-Employmet Tax) X 20%

General:
* Maximum Contribution for Self Employed: 20% Comp
* Maximum Contribution for Employee: 25% Comp

Question 2

Convertible Bonds Conversion Formula

Answer 2

Meaning:
* Conversion value is the value of the convertible Bond in terms of the stock into which it can be converted
* One of the benefits of convertible bonds is that even if the stock performs poorly, the investor has a floor built in

Conversion Value Formula:
C.V = [(Par) / (Conversion Price)] X (Price of stock)
* REMEMBER: Conversion Price = Strike Price)
* REMEMBER: Always choose the highest value

Question 3

Correlation (Correlation Coeficient)

Answer 3

Meaning:
* Correlation is the measure of movement of one stock RELATIVE to another
* How closely related are 2 different securities
* Diversification Begins when correlation is LESS THAN 1.0
* When adding new investments, look for lowest correlation to current portfolio
Formula:
* (Covariance of Stock A and B) / [(STDEV stock A) X (STDEV stock B)]
Outcome:
* -1: Perfectly negative correlation (move opposite of one another)
* 0: No correlation
* +1: Perfectly correlated to one another

Question 4

Coeficient of Variation Formula

Answer 4

Coefficient of Variation is used to determine which investment has more relative risk when invests have different average returns

The LOWER THE BETTER
* High coefficient of CV, the more risky an investment is per unit of return
* Lower CV = less risky an investment is per unit of return

Formula:
CV = Standard Deviation / Average Return

Question 5

Calculating Gain/ Loss on an Option

Answer 5

Call Option Gain or Loss:
* (Stock Price - Strike Price) +/- Premium = gain or loss
* REMEMBER: when buying call, MAX loss = premium

Put Option Gain or Loss:
* (Strike Price - Stock Price) +/- Premium = gain or loss
* REMEMBER: when buying a put, MAX loss = premium

Question 6

50/40 Test Calculation

Answer 6

50/40 Test:
* This is a Non-Discrimmination Test
* ONLY Defined Benefit (D.B) Plans are required to meet

50/40 Must Benefit the LESSER of:
1. 50 non-excludible (eligible) employees OR
2. 40% of non-excludible (eligible) employees

REMEMBER: People over %

Question 7

ADP and ACP Calculation Steps

Answer 7

Step 1: Find ADR or ACR of HCE and NHCE
* ADR of HCE = (deferal % of all HCE) / (# of HCE employees that are not excludible)
* ADR of NHCE = (Def % of all NHCE) / (# of NHCEs that are not excludible)

Step 2: Compare to Table
* If ADR or ACR for NHC is: 0%-2% HCE can be 2X NHCE
* If ADR or ACR for NHC is: 2% - 8% HCE can be 2% + NHCE
* If ADR or ACR for NHC is: Over 8% HCE can be 1.25X NHCE

General:
1. ADP DOES NOT impact catch up contributions

Question 8

Social Security Benefit Formulas:
1. Reduction
2. Increase
3. Taken While Working

Answer 8

Social Security REDUCTION (if taken before FRA):
1. Step 1: How many months early did recipient take Social Security (from FRA)
2. Step 2: For first 36 months early, multiply # months by 5/9 of 1%
3. Step 3: For remaining # of months early, multiply # by 5/12 of 1%
* MAXIMUM: 30%

Social Security INCREASE (if taken AFTER FRA):
1. Each year, add 8% Benefit
2. REMEMBER: Add in COLA too!
* Maximum Increase: 24% (not including COLA)

Reduction if receiving social security WHILE WORKING:
1. If Taken BEFORE FRA: $1 reduction for every $2 earned OVER $19,560
2. If Taken AFTER FRA: $1 reduction for every $3 earned OVER $19,560

Question 9

Failure to File and Failure to Pay Calculation

Answer 9

Failure to File Penalty:
* When you do not file tax return by April 1
* Penalty: 5% per month UP TO 25%
* Failure to File is reduced by Failure to Pay Penalty

Failure to Pay Penalty:
* When you do not pay outstanding tax liability
* Penalty: .5% per month UP TO 25%
* Failure to pay offsets failure to file

General:
1. Can ONLY be represented by CPA; Attorney; Enrolled Agent
2. Substantial Understatement = Greater than 10%

Question 10

Annuity Payment Exlusion Ratio (Exclusion From Taxes)

Answer 10

Formula for: Amount of PMT Excluded from Tax:
* (Investment in the Contract) / (Expected Total Return)

Remember: Investment Contract = How much did annuitant buy annuity for

Remember: Expected Total Return = (Annual Annuity Payment) X (Number of years)

Remember: Inclusion Ratio (amount that IS included in taxes) = 1 - Exclusion Ratio

Question 11

Net Asset Value Formula

Answer 11

Formula
* NAV= (Assets - Liabilities) / (Shares Outstanding)

Question 12

Net Operating Income

Answer 12

Formula:
* NOI= Revenue - COGS - Operating Expenses

Question 13

Return on Equity (ROE) Formula

Answer 13

Measures the overall profitability of the company

Formula
* (Net Operating Income) / (Shareholder’s Equity)
* NOI= Revenue-COGS-Operating expense
* Shareholders equity = T. Assets - T. Liabilities

Question 14

Earning Per Share (EPS)

Answer 14

Formula:
(Total Earnings) / (Total Outstanding Common-Stock)

Question 15

Price/ Earnings Ratio (P/E Ratio)

Answer 15

Meaning:
* Represents the number of dollars someone is willing to pay for each dollar of a company’s earning

Formula:
* (Price Per Share) / (Earnings Per Share)

Question 16

Dividend Discount Model

Answer 16

General:
Uses dividends to determine the value ofa company’s stock. Determines the per share value of the stock based on its dividends

Formula
* $ of Stock: (Next Dividend) / (req return - div growth rate)
* If next dividend not given: (D0) X (1+growth rate)
* Given on Sheet: V=(D1)/(r-g)

Question 17

Holding Period Return

Answer 17

Formula
* (Selling $ - Purchase $ + Cash Added) / (Initial $)

Question 18

Stock Split Formula

Answer 18

Solve for New Number of Shares:
* (Original # of Shares) X (Split ratio example: 3/2)

Solve for New Price of Shares
(Original Price Per Share) X (INVERSE split ratio example: ⅔)

Question 19

Initial Margin Requirement (Initial Equity Requirement)

Answer 19

General Assumption:
1. The initial margin reflect the amount of equity an investor must contribute to enter a margin transaction
2. Regulation T: MINUMUM initial margin must be 50% (assume 50% requirement)
3. the Federal Reserve sets the Margin Requirement

Formula
* Initial Margin $$$ = (# of Shares) X (Price Per Share) X (Margin Req. %)

Terminology:
1. Debit = Debt… Debit = loan amount
2. Credit = Ownership = Credit = amount put down

Question 20

Maintenance Margin Formula (When will you get a margin call)

Answer 20

At What Price does an Investor Receive a Margin Call
* Margin Call = (Margin Loan) / (1 - Maintenance Margin)

Question 21

Co-Insurance: How much will insurance company pay?

Answer 21

**How much will the INSURANCE COMPANY pay**
Step 1:
[(Amount of Insurance Carried) / (coinsurance % x real cost of house)] X (amount of loss)

Step 2:
(Step 1 Solution) - Deductible = Total Paid

Question 22

Internal Rate of Return (IRR)

Answer 22

Calculator
Step 1: Cost of investment (enter as a negative number); hit CFj0
Step 2: Enter all Cash payments/ receipts, after each, hit CFj
Step 3: DO NOT enter the required return rate…. No rates are needed for IRR
Step 4: [Shift]; [IRR]
Solution:
* If the IRR is GREATER than the listed rate of return, then the investment is good
* If the IRR is LESS than the stated rate of return, then the investment is not good

Question 23

Net Present Value

Answer 23

Caluclator Steps:
Step 1: Enter cost of investment CF0 (NEGATIVE #)
Step 2: Enter all cash flows CF#-CF#
Step 3: Enter your IR
Step 4: Enter NPV button

NPV is deterministic:
* If NPV is positive: MAKE THE INVESTMENT
* If NPV = 0: MAKE THE INVESTMENT
* If NPV is negative: DON’T MAKE THE INVESTMENT

Question 24

Capital Asset Pricing Model (CAPM)

Answer 24

1. financial model that calculates the expected rate of return for an asset or investment by using the risk free return or; market return; and Beta
   General:
2. Determines a RATE of return expected
3. Same thing as SML (Security Market Line)
4. ONLY considers systematic risk (BETA)
   Formula is provided: **ri = **
   When Looking at the SML (visual of CapM)
5. dots above the line are UNDERVALUED (Priced too low)
6. Dots below the line are overvalued (Priced too high)
7. Dots on the lone are priced correctly and performing as they should given their level of risk
   Variable Meaning:
   * ri = Expected Return
   * rf = Risk Free Rate
   * rm = Market Return
   * Bi = Beta

Question 25

Standard Deviation Calculator Steps

Answer 25

Calculator Steps
Step 1: Clear Stats by [Shift]; [CStat]
Step 2: Enter each data set variable followed by [E+]
Step 3: Do step 2 for each variable (entire opportunity set)
Step 4: [Shift]; [#8]

General Information:
1. standard deviation is absolute measure of risk
2. use standard deviation when portfolio IS NOT well diversified (if R-Squared is LESS THAN .7)

Question 26

RMD Information

Answer 26

RMD General
1. 1st RMD must be taken by April 1 of year following turning age 72 that applies to both Qualified Plans AND IRAs
2. All following RMDs taken by Dec. 31 of same year
3. Don’t have to take out of 401(k) if you are actively employed AT THAT COMPANY
4. You CAN aggregate all IRA RMDs out of a single IRA
5. You CANNOT aggregate all qualified plan RMDs out of a single qualified plan (each plan must take RMD)
Formula:
RMD to take = (Account balance on 12/31 of PRIOR YEAR) / (uniform life table of CURRET YEAR)
Penalty for RMDs NOT taken:
1. If RMD is NOT taken; there is a 50% excise penalty on amount that SHOULD HAVE been taken
2. Formula if Partial RMD Taken:
* [(Amount that should have been taken) - (amount taken)] X (50%)

Question 27

Top Heavy Testing (Formula)

Answer 27

1. When present value of the total accrued benefit of key employees in the defined benefit plan EXCEEDS 60% of total accrued benefit for Rank and File
2. When aggregate of the account balances of key employees in the plan EXCEEDS 60% of the aggregate account balances of all employees

Summary: if > 60% of contributions or balances is going to key employees, PLAN IS TOP HEAVY

Question 28

Social Security Taxation Formula

Answer 28

Social Security Formula
MAGI = AGI + 1/2 S.S Benefit + Non-tax interest + Foreign Earned Income
Social Security Tranches
1. 0% Tranch: $0-$25k (Single); $0-32K (MFJ)
2. 50% Tranch: $25k-$34k (Single); $32k-$44k (MFJ)
3. 85% Tranch: Over $34k (Single); Over $44k (MFJ)

Question 29

Dividend Payout Ratio

Answer 29

1. The relationship between the amount of earnings paid to shareholders in the form of a dividend relative to earnings per share
2. (Stock Dividend) / (Earnings Per Share)

Question 30

Sharpe Ratio Formula

Answer 30

On Formula Sheet = *IR=
(Portfolio Return - Risk free rate) / (Stdev)

General Information:
1. Pick Sharpe ratio if both Treynor and Alpha are given
2. Measure of OVERALL (systematic AND unsystematic risk)
3. Use this measure of an UNDIVERSIFIED Portfolio

Question 31

Treynor Ratio Formula

Answer 31

On Formula Sheet = Tp=
* (Portfolio Return - Risk Free Rate) / (Beta)

General Information:
1. Relative Measure of Risk
2. ONLY measures against systematic risk (unsystematic is not considered)
3. Use this measure ONLY if portfolio IS DIVERSIFIED

Question 32

Alpha (Jensen’s Alpha) Formula

Answer 32

Formulas:
* Formula IS on cheatsheet = Ap=
* Return - [Risk Free + (market return - Risk Free)XBeta)]
Outcome
(-) = Manager Underperformed
(+) = Manager Overperformed
General:
1. ABSOLUTE measure of return
2. Alpha is a measure that determines how much a portfolio exceeded required rate of return
3. Only measures against systematic risk (unsystematic risk is NOT considered)

Question 33

Current Ratio

Answer 33

The current ratio is a measure of a client’s ability to meet short-term obligations.

Formula
* (Current Assets) / (Current Liabilities)

Meaning
* the Higher the better

Question 34

Housing Ratio #1 and #2

Answer 34

Housing Ratio #1:
* House Payments ONLY
* Benchmark: 28%
* (P+I+T+I) / (Gross Income)

Housing Ratio #2:
* Housing Payments AND all other Debt Payments
* Benchmark: 36%
* (P+I+T+I+All Other Debt) / (Gross Income)

P: Principal
I: Interest
T: Taxes
I: Insurance (Homeowners)

Question 35

Savings Ratio

Answer 35

Meaning:
* the higher the better
* Benchmark is 10%-13%
* savings rate is higher as you get older

Formula:
(Annual Savings + Deferrals + Match) / Gross Income

Question 36

Lifetime Learning Credit Formula

Answer 36

General:
1. Credit that can be taken to offset education expenses for self or for children
2. Credit IS NOT refundable
3. Can be used for Undergrad; Graduate; or Professional skills
Formula:
* 20% up to $10,000
* Maximum Annual (Per Family) = $2,000
Income Limitation (phaseout):
Single: $80,000-$90,000
MFJ: $160,000-$180,000

Question 37

American Oportunity Tax Credit (AOTC)

Answer 37

General
1. A way for families/ students to reduce tax liability to offset qualified eductation expenses
2. AOTC ONLY applies to first 4 years of undergraduate education
Formula:
1. 100% of first $2,000
2. 25% of remaining $2,000
3. Maximum of $2,500 PER STUDENT
Income Limit (Phaseout):
1. Single: $80,000-$90,000
2. MFJ: $160,000-$180,000

Question 38

Option Premiums (I.V and TVM)

Answer 38

Intrinsic Value
* Call Option Intinsic Value = Stock Price - Strike Price
* Put Option Intrinsic Value = Strike Price - Stock Price
* CAN NEVER HAVE NEGATIVE INTRINSIC VALUE

Time Value
* Option Premium - Intrinsic Value

Question 39

Qualified Retirement Plan Tests
1. General Safe Harbor Test
2. Ratio Benefits Test
3. Average Benefits Test (2 tests)

Answer 39

Question 40

Geometric Mean (Calculator)

Answer 40

Steps to find Geometric Mean:
1. MULTIPLY (Dont Add) all variables together
2. Enter the number above in calculator
3. Enter: [Shift]; [y^x]
4. Enter: 1/# of variables in opportunity set (5 = 1/5 = .2)
5. Hit Enter

Question 41

Change In Bond Price from Interest Rate

Answer 41

Definition:
Used to determine how a change in interest rates will impact the price of a bond

Formula:
-Duration X (Change in I.R) / (1 + Change in I.R)

ON FORMULA SHEET
(^P)/P = -D X (^y) / (1+ ^y)

Question 42

AMT Formula

Answer 42

General:
1. AMT is a tax that applies to high-income individuals who otherwise might pay little or even no taxes due to breaks
2. Individual must pay AMT if the AMT is higher than ordinary income tax… AMT is MANDATORY and not a choice of the taxpayer
Forumla:
Regular Taxable Income
* PLUS OR LESS: Adjustments
* PLUS: Prefence Items (ALWAYS add these)
* LESS: Exemptions (Single: 75.9k; MFJ: 118.1k)
Tax Rates:
* 26%
* 28%
Adjustments (Can be Positive or Negative):
AMT Adjustments can be Positive OR Negative
1. Accelerated Depreciation
2. State and Local Taxes
3. ISOs (Exercise = ADD; Sale = SUBTRACT)
Preference Items (Can ONLY be POSITIVE):
1. Percentage Depletion (of resources)
2. Intangible Drilling Costs
3. Interest on Private Activity Bonds

Question 43

Traditional IRA Calculations
1. Basis Calculation
2. Deductible Amount of contribution when in phaseout range

Answer 43

Basis Calculation:
How Much is Tax Free:
Step 1: [(Basis) / (FMV of Account)]
Step 2: (Above Number) x (Distribution amount)
= Tax Free Portion!
How Much is Taxable:
Total Distribution - Tax Free Portion
Amount of Penalty:
Taxable Portion x 10%
Deductible Amount of contribution when in phaseout range
Step 1: (contribution) X [(AGI-bottom of phaseout range) / (range of phaseout)]
Step 2: (Contribution amount) - (Above Number) = deductible amount of contribution
Remember:
1. “Range of phaseout” = 10k if Single; 20k if MFJ

Question 44

Mortgage and Ammortization (Calculator)

Answer 44

Solving for:
1. Principal Paid
2. Interest Paid
3. Remaining Balance
Things to Remember:
1. ALWAYS set calculator in END MODE
Calculator Steps:
1. Solve For Monthly Payment: (Remember: N=# months; IR=/12 months; PV = cost - downpayment; FV = 0)
2. #1; [INPUT]
3. [# Months remaining in year]; [Shift]; [AMORT]
4. [=] to cycle through principal paid, interest paid; remain bal.

Question 45

Business Asset Sale (Depreciation Steps) (Not on Calculator)

Answer 45

How To Solve Problem
Step 1:Determine Adjusted Basis = Sell Price - Purchase Price - Total Depreciation Taken
Step 2: Determine Total Gain on Sale: Sale Price - Adjusted Basis (step 1 #)
Step 3: Split total gain into different gain types: First is OI Gain (gain from accelerated depreciation); Second is 25% Recapture (Straight line); Third is LTCG (1231)
Things to Remember:
1. Accelerated (additional) Depreciation is taxed at: Ordinary Income tax rate
2. Straight Line Depreciation is taxed at: 25%
3. 1231 Gain = Long Term Capital Gain (LTCG)
4. Only way to have 1231 (LTCG) is to sell asset for MORE than PURCHASE price
5. 5 year look back rule used to offset gain or loss taken
6. if an item is sold for more than adjusted basis but less than original cost, gain is O.I\
7. Always ADD: sales tax; set up costs; delivery costs to the basis of purchased item
8. REMEMBER: Assume straight line depreciation unless stated otherwise as accelerated

Question 46

Calculating Gift Tax

Answer 46

Calculating Gift NORMAL:
1. Carryover Basis and Hold Period
2. Gain is anything over Donor’s Basis

Exception 1: Gift of Loss Property
1. See Image Below
2. Dual Basis Treatment

Exception 2: Gift of Appreciated Property w/ Gift tax paid:
1. Carryover Basis and Holding Period
2. Basis Formula Below: Basis =
3. Basis + [(FMV - Basis)/(FMV)] x Gift Tax Paid

Gift Tax Rate
1. On Gifts Over 1 Million: ($345,000) + (40% X amount over 1M)

Gift of Property at a Loss (FMV LESS than Donor Basis)

Question 47

Net Unrealized Appreciation (Steps)

Answer 47

Steps To Solve NUA
Step 1: Determine: Basis; NUA; Over NUA
1. Basis = Value of Stock @ Contribution
2. NUA = (FMV @ DISTRIBUTION) - Basis
3. Over NUA: (FMV @ SALE) - NUA
Step 2: Tax Due at Date of Distribution
1. Basis: Taxed at Ordinary Income
Step 3: Tax Due at Date of Sale:
1. NUA: Taxed at LTCG ONLY
2. OVER NUA: Taxed at Long OR Short CG

Remember
1. Only tax due at distribution is O.I on Basis
2. Tax on Sale is NUA AND anything over NUA
3. Over NUA is SHORT term CG if sold Less than or equal to 1 year from distribution
4. If you distribute early, BASIS ONLY is taxed at 10%

Question 48

Qualified Incentive Stock Options (ISOs)

Answer 48

Qualified Incentive Stock Option Steps:
Step 1: Draw Grant; Excercise; Sale chart
Step 2: Determine Grant; Exercise; and Sale prices of the security
Step 3: For QUALIFIED ISO ONLY: Exercise + Sale - Grant = LTCG AT SALE (no tax on exercise or grant

Additional:
1. Qualified ISO means that sale is AT LEAST 2 years after Grant and 1 year after Exercise
2. AMT Adjustment Added on exercise and subtracted on sale for bargain element
3. AMT Adjustment = Exercise - Grant
4. Employer DOES NOT get a deduction on QUALIFIED ISOs only

Question 49

Non Qualified Incentive Stock Options (ISO)

Answer 49

Steps to calculate tax on nonqualified ISOs
Step 1: Draw grant; exercise; sale chart
Step 2: Determine grant; ex; sale price
Step 3: Find Ordinary Income tax = exercise price - grant price (paid @ SALE)
Step 4: Find STCG = Sale Price - Exercise Price (Paid @ SALE)

Additional Information:
1. Non-Qualified ISOs are NOT held 2 years after grant and 1 year after exercise
2. AMT Adjustment UP at Exercise
3. AMT Adjustment DOWN at Sale
4. Employer DOES get a deduction

Question 50

Portfolio Standard Deviation (formula on sheet)

Answer 50

Steps to solve Portfolio Standard Deviation:

1. Solve for Covariance ( formula provided) = (correlation)x(std stock 1)x(std stock 2)
2. Plug in Covariance (above) to Standard Deviation of Portfolio formula (provided)
3. Solve Portions under square root sign
4. [Enter number]; [shift]; [-]

Question 51

Education/ Retirement Funding

Answer 51

Progression of Full Calculation:
Step 1 (Begin Mode): Solve for Inflated Number Needed per year: Solve for FV when IR=Inflation; PV= cost of education or annual retirement need
Step 2 (Begin Mode): Find REAL RETURN: (1+investment return)/(1+Inflation)
Step 3 (Begin Mode): Find how much IN TOTAL is needed: Solve for PV when PMT= Step 1; IR= REAL return; FV=0; N=number of years needed
Step 4: (END MODE!: Find how much annual savings are needed to meet the goal: Solve for PMT when FV= above number; N= years to save; IR = NOMINAL return (not real); PV=0

Question 52

Dual Basis Treatment

Answer 52

When is Dual Basis Used:
1. SALE: to a known party (family)
2. GIFT: of loss property that has lost value

Formula Below

Question 53

How many Months to pay off loans (ex: car loans)

Answer 53

Calculator Steps (this is a TVM problem):
N= ???
IR = Rate of the loan/12
PV = Current Outstanding Loan Balance
PMT= Annual Payments/12 OR Monthly Payment
FV=0

Question 54

How Much Interest will be paid from a mortgage (TVM)

Answer 54

3 Steps to find how much Interest:

Step 1 Solve for PMT (TVM): Need to find monthly payment = N= Yrs X 12; IR = (%) / 12; PV = Cost of home - Downpayment; FV = 0
Step 2 How much paid over life: (Monthly Payment) X (Number of months to Pay)
Step 3: Find the difference = Total Amount Paid - Amount Financed

Question 55

Least Expensive ways to Buy a new car (TVM):

Answer 55

Steps To Determine Least Expensive Way to Pay for a Car (or any loan): Solve for Present Value When
1. N = Years of Loan X 12
2. IR = Rate% / 12
3. PV = ???
4. PMT = Monthly Payment
5. FV = 0 OR amount of final large payment
6. Remember, have to ADD Downpayment Back to the PV number you solved for = PV + Downpayment

Question 56

Estate Tax Formula

Answer 56

Gross Estate
* LESS: (medical expenses); (Admin); (Funeral); (debts of Dec); (losses during admin)
Equals: Adjusted Gross Estate
* LESS: (Unlimited Marital Deduction); (Unlimited Charitable Deduction); Death tax Deduction)
Equals: Taxable Estate
* LESS gifts of lifetime in excess of 12,060,000 (Credit of 4,760,000)

What goes in Gross Estate:
1. Stocks: Receive step up in basis at death (or AMV)
2. Rental Property: Step Up in Basis LESS MORTGAGE
3. Home: Stepped Up LESS MORTGAGE
4. Titling

Question 57

Basic Income Tax Formula

Answer 57

Question 58

Zero Coupon Bond Imputation

Answer 58

Steps to Calculate:
Step 1: (1000) / (1+IR)^N = Value at Purchase
Step 2: Value at year 2 = (1000) / (1+IR)^N-1
Step 3: (Value at Purchase) - (Value at Year 2) = amount taxable in year 2

Question 59

R-Squared: Coefficient of Determination

Answer 59

Formula:
1. R-Squared = Correlation ^2

Meaning
1. Best measure of how good your portfolio compares to or replicates an index
2. EXPLAINS VARIANCE in a model (SandP causes x% of variance in the portfolio)
If R^2 is GREATER than .7 (or 70%):
1. Portfolio IS DIVERSIFIED
2. Use Beta as measure of Risk
3. Use Treynor OR Alpha as performance measure
If R^2 is LESS than .7 (or 70%):
1. Portfolio is UNDIVERSIFIED
2. Use Standard Deviation as measure of Risk
3. Use Sharpe Ratio as performance measure

Question 60

Muni Bond and Treasury Security Yields

Answer 60

Muni Bond Tax Equivalent Yield:
1. (Muni Yield) / (1 - Fed Tax - State Tax)
2. Tax Free at BOTH Federal and State IF bond is from same state as individual
3. Tax Free at Federal ONLY if from outside state

Treasury Security Tax Equivalent Yield:
1. (Treasury Yield) / (1 - State Tax)
2. Tax Free at STATE level ONLY

Question 61

Capital Gain on Dollar Cost Averaging

Answer 61

Steps to Solve
1. Determine Initial # of Shares = (Initial Investment / Share Price)
2. Determine # of Shares purchased for each subsequent investment (Investment Amount) / (Share price at time of investment) will need to repeat this step
3. Find gain or loss on each Investment = (# Shares Purchased) X (Sale Price - Purchase Price) Repeat several times
4. Add entire gain up

Question 62

Types of Real Return:
1. Inflation Adjusted Real Return
2. Real Return

Answer 62

Inflation Adjusted Real Return
1. Formula = (Nominal Return) / (Inflation)
2. This type IS USED in EDUCATION/ RETIREMENT funding

Real Return:
1. Formula: (Nominal Return) - (Consumer Price Index)

Question 63

Information Ratio

Answer 63

General:
* a measurement of portfolio returns beyond the returns of a benchmark, usually an index, compared to the volatility of those returns. The benchmark used is typically an index that represents the market or a particular sector or industry.

Formula:
(Portfolio Return - Benchmark) / (Tracking Error)