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Investment Planning > Fundamentals of Investments (Lesson 1) > Flashcards

Fundamentals of Investments (Lesson 1) Flashcards

1
Q

What is the best efforts from of underwriting

A
  • Underwriter agrees to sell as much of the offering as possible
  • Risk of not selling resides with the firm because any shares not sold are returned
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2
Q

What is the firm commitment for underwriting

A
  • underwriter agrees to buy the entire issuance of the stock from the company
  • the risk of a stock now selling resides with the underwriter
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3
Q

What does the prospectus do

A
  • outlines the risks, management team, business operations, fees and expenses
  • must be issued by an investment company prior to selling shares to an investor
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4
Q

What is a red herring document

A
  • Preliminary prospectus issued before the SEC approval and is used to determine investors interest in the security
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5
Q

What is a 10K

A
  • is an annual report of financial statements filed with the SEC
  • 10K is audited
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6
Q

What is a 10Q

A
  • is a quarterly report that is filed with the SEC
  • 10Q is not audited
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7
Q

What is an annual report

A
  • contains a message from the Chairman of the board on the progress in the past year and outlook for the coming year
  • sent directly to shareholders
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8
Q

What is liquidity

A
  • how quickly something can be turned into cash with little to no price concession
  • Stocks, bonds, stock mutual funds, and stock bond funds are not considered liquid
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9
Q

What is marketability

A
  • exists when there is a ready made market for something
  • real estate is marketable but not very liquid
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10
Q

What is a market order

A
  • timing and speed of execution are more important than price
  • most appropriate for stocks that are not thinly traded
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11
Q

What is a Limit order

A
  • The price at which the trade is executed is more important than the timing
  • Limit order is most appropriate for stocks that are extremely volatile and are not frequently traded
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12
Q

What is a stop order

A
  • price hits a certain level and turns to a market order
  • a stop order to sell means that once the stop order price is reached the stock is sold at the price or possibly less because it becomes a market order
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13
Q

What is a Stop limit or stop loss limit order

A
  • the investor sets two prices
  • first price is the stop loss price once this price is met the order turns to a limit order
  • second price is the limit price. investor will not sell below this price
  • Risk is that the market is moving quickly the order may not be filled and the investor will be left with the stock at a significantly lower price
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14
Q

When is a stop limit or stop loss limit order appropriate

A
  • for investors with a significant gain built into the stock but may want to sell the stock during a period of significant volatility
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15
Q

What is short selling

A
  • Investor makes a profit if the price decreases in value
  • Investor must have a margin account to protect against any price appreciation of the stock
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16
Q

What happens to the dividends during a short sell

A
  • they must be covered by the short seller
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17
Q

What is an initial margin

A
  • reflects the amount of equity an investor must contribute to enter a margin transaction
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18
Q

What did regulation T set the initial margin requirement at

A
  • 50% and was established by the federal reserve
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19
Q

What is the maintenance margin

A
  • the minimum amount of equity required before a margin call
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20
Q

What is the margin position

A
  • represents the current equity position of the investor
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21
Q

What is the formula for margin position

A

MP = Equity / FMV

Equity = Stock price - Loan

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22
Q

What is the formula for Margin call

A

MC = Loan / (1 - Maintenance Margin)

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23
Q

Where must an investor restore their equity to in a position

A
  • to the maintenance margin
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24
Q

What does value line rank and how does it rank them

A
  • Stocks on a scale of 1 to 5 for timeliness and safety
  • 1 is highest rank (buy signal)
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25
Q

What does Morningstar rank and how does it rank them

A
  • Mutual funds, stocks, and bonds using 1 to 5 stars
  • 1 star is lowest rating
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26
Q

Who declares dividends paid

A
  • by board of directors and paid quarterly
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27
Q

What is the ex dividend date

A
  • Date the stock trades without the dividend
  • If sell on the ex dividend date then you will receive the dividend
  • if you buy on the ex dividend date then you will NOT receive the dividend
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28
Q

When is the ex dividend date

A
  • one day before the date of record
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29
Q

What is the date of record

A
  • the date on which you must be a registered shareholder in order to receive the dividend
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30
Q

When is the date of record

A
  • one business day after the ex dividend date
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31
Q

Does an investor that purchases the stock two business days prior to the date of record receive a dividend

A
  • Yes
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32
Q

Will an investor receive a dividend if it is purchased on the ex dividend date

A
  • No
33
Q

When is a stock dividend taxed

A
  • Not taxable until the stock is sold
34
Q

What did the Securities Act of 1933 do

A
  • Regulates the issuance of new securities
  • Requires new issues are accompanied with a prospectus before being purchased
35
Q

What did the Securities Act of 1934 do

A
  • regulates the secondary market and trading of securities
  • Created the SEC to enforce compliance with security regulations and laws
36
Q

What did the Investment Company Act of 1940 do

A
  • Authorized the SEC to regulate investment companies
  • three types of investment companies: Open, Closed, Unit Investment Trusts
37
Q

What did the Investment Advisor Act of 1940 do

A
  • Required investment advisors to register with the SEC or state
38
Q

What did the Securities Investors Protection Act of 1970 do

A
  • Established the SIPC to protect investors for losses resulting from brokerage firm failures
  • Does not protect against bad investments
  • Protects accounts member firms open for clients regardless of the clients citizenship
39
Q

What did the insider trading and securities fraud enforcement act of 1988 do

A
  • Defines an insider as anyone with information that is not available to the public
  • Insiders cannot trade on that information
40
Q

What are treasury bills

A
  • Issued in varying maturities up to 52 weeks
  • denominations in $100 increments through Treasury direct up to $5 million per auction
41
Q

What are commercial paper

A
  • Short term loans between corporations
  • Maturities of 270 days or less and it does not have to register with SEC
  • Denominations of $100,000 and are sold at a discount
42
Q

What is bankers acceptance

A
  • Facilitates imports/exports
  • Maturities of 9 months or less
  • Can be held until maturity or traded
43
Q

What are Eurodollars

A
  • deposits in foreign banks that are denominated in US dollars
44
Q

What does a IPS establish

A
  • Client objectives
  • Limitations on investment manager
45
Q

Does the IPS include investment selections

A

No

46
Q

What does the IPS establish

A
  • RR TTLLU
  • Risk
  • Return
  • Taxes
  • Time line
  • Liquidity
  • Legal
  • Unique Circumstances
47
Q

What is a critical step in developing the IPS

A
  • Assessing the clients rick tolerance
48
Q

What is the Dow Jones Industrial Average

A
  • Simple price weighted average
  • DJIA does not incorporate market capitalization
49
Q

What is the S&P 500

A
  • Value weighted index
  • incorporates market capitalization of individual stocks into the average
50
Q

What is the Russell 2000

A
  • Value weighted index
  • smallest market capitalization stocks in the Russell 3000
51
Q

What is the Wilshire 5000

A
  • value weighted index
  • broadest of index
  • measures the performance of over 3,000 stocks
52
Q

What is the EAFE

A
  • value weighted index
  • tracks stocks in Europe, Australia, Asia, and the Far East
53
Q

What are the four basic premises of Behavioral finance

A
  • Investors are Rational
  • Markets are efficient
  • Mean variance Portfolio theory governs
  • Returns are determined by risk (CAPM)
54
Q

(Behavioral Finance Assumption)

What does the assumption investors are normal mean

A
  • Normal investors have wants and desires but may commit cognitive errors through biases or otherwise
  • Normal investors may be misled by emotions while they are trying to achieve their wants
55
Q

(Behavioral Finance Assumption)

What does Markets are not efficient mean

A
  • There can be deviations in price from fundamental value so that there are opportunities to buy at a discount or sell at a premium
  • Markets are tough to beat but are not efficient
56
Q

(Behavioral Finance Assumption)

What does Behavioral Portfolio Theory Governs

A
  • Investors are segregate their memory into various mental accounting layers
  • occurs when people compartmentalize certain goals to be accomplished in different categories based on risk rather than using the entire portfolio as a whole
57
Q

(Behavioral Finance Assumption)

What does risk alone does not determine returns

A
  • the behavioral asset pricing model determines the expected return of a stock using:
  • Beta
  • Book to market cap ratios
  • momentum
  • investor likes or dislikes about the stock or company
  • social responsibility factors
58
Q

What is the difference between a rational investor and a normal one

A
  • Normal investors are prone to making cognitive mistakes due to their beliefs or cognitive biases
59
Q

What is affect heuristic

A
  • deals with judging something whether it is good or bad
  • Like or dislike based on non financial issues
60
Q

What is anchoring

A
  • Attaching or anchoring ones thoughts to a reference point even though there may be no logical relevance or is not pertinent to the issue in question
  • also known as conservatism or belief perseverance
61
Q

What is availability heuristic

A
  • decision maker relies upon knowledge that is a readily available in his or her memory
  • Overweight recent events or patterns while paying little attention to longer term trends
62
Q

What is bound rationality

A
  • rational is limited by available information
  • Seeks a satisfactory solution rather than a optimal one
  • Cannot consider significant information
63
Q

What is confirmation bias

A
  • people tend to filter information and focus on information supporting their opinions
64
Q

What is cognitive dissonance

A
  • tendency to misinterpret information that is contrary to an existing opinion or only pay attention to information that supports existing opinion
65
Q

What is disposition effect

A
  • regret avoidance or fault framing
  • normal investors do not mark their stocks to market prices
66
Q

What is familiarity bias

A
  • investors tend to overestimate/underestimate the risk of investments with which they are unfamiliar/familiar
67
Q

What is gamblers fallacy

A
  • investors often have incorrect understanding of probabilities which can lead to faulty predictions
68
Q

What is herding

A
  • People tend to follow the masses or the herd
69
Q

What is hindsight bias

A
  • looking back after the fact is known and assuming they can predict the future as readily as they can explain the past
70
Q

What is illusion of control bias

A
  • tendency for people to overestimate their ability to control events
71
Q

What is overconfidence bias

A
  • listens mostly to himself or herself, overconfident investors mostly rely on their skills and capabilities to do their own homework or make their own decisions
72
Q

What is overrcation

A
  • common emotion towards the receipt of news or information
73
Q

What is prospect theory

A
  • people values gains and losses differently and will base their decisions on perceived gains rather then perceived losses
  • Investors are loss adverse and have an asymmetric attitude to gains and losses
74
Q

What is recency

A
  • giving to much weight to recent observations or stimuli
  • focusing on short term past performance
75
Q

What is similarity heuristic

A
  • decision or judgment is made when an apparently similar situation occurs even though the situations may have very different outcomes
76
Q

What is naïve diversification

A
  • Investing in every option available to the investor
  • Common in 401k or employer sponsored plans
77
Q

What is representativeness

A
  • thinking that a good company is a good investment without regard to an analysis of the investment
78
Q

What is familiarity

A
  • causes investment in companies that are familiar such as the employer
79
Q

What is loss aversion

A
  • investors avoid losing more than experiencing gains
  • Feel more pain from losses

Investment Planning (8 decks)

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