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Certified Financial Planner Exam 2021 > Investing > Flashcards

Investing Flashcards

1
Q

Margin call formula

A

Loan / 1 - maintenance margin

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2
Q

Type of average for Dow Jones Industrial Average

A
  • price-weighted average

- doesn’t incorporate market capitalization

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3
Q

Type of average for S&P 500

A
  • Value-weighted index

- Incorporates market capitalization of individual stocks into the average

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4
Q

Coefficient of variation formula

A

CV = standard deviation / mean (average) return

  • compare two assets
  • higher CV = riskier investment
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5
Q

What is arbitrage pricing theory?

A
  • multi-factor model
  • takes advantage of price imbalances
  • inputs are factors (f) such as inflation and expected returns and their sensitivity (b) to those factors
  • standard deviation and beta are NOT inputs
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6
Q

Dollar-weighted return

A
  • measures a result from a client

- IRR using investor’s cash flows

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7
Q

Time-weighted return

A
  • IRR using the security’s cash flow
  • ignores investor’s cash flow (focuses on decisions made by manager)
  • mutual funds report on time-weighted basis
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8
Q

Price-earnings (P/E) ratio

A

Earnings per share x P/E multiplier = expected price per share

  • # of $ an investor will pay for each $ of company earnings
  • good for stocks with no dividend
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9
Q

Dividend payout ratio

A

Common stock dividend / earnings per share

  • measure manager’s decision to payout earnings as dividend
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10
Q

Return on equity (ROE)

A

Earnings per share / stockholders equity per share

  • how much profit the company provides against every dollar of investment equity
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11
Q

Dividend yield

A

Dividend per share / stock price

  • measures cash flows
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12
Q

Efficient market hypothesis: weak form

A
  • historical information will not investors achieve above average market returns
  • rejects technical analysis
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13
Q

Efficient market hypothesis: semi-strong form

A
  • historical and public information will not help investors achieve above average market returns
  • rejects technical and fundamental analysis
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14
Q

Efficient market hypothesis: strong form

A

Historical, public and private information will not help investors achieve above market returns

  • rejects technical, fundamental and insider information
  • index investing
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15
Q

Series E and EE bonds

A
  • Sold at face value
  • Non-marketable
  • Non-transferable
  • Do not pay interest periodically
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16
Q

Series H bonds

A
  • no longer available

- pay interest semi-annually

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17
Q

Series I bonds

A
  • inflation protected with fixed rate + variable rate

- do not pay interest periodically

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18
Q

Treasury bills

A

< 1 year maturity

  • marketable
  • denominations of $100
  • tax-free at state and local level
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19
Q

Treasury notes

A

2-10 year maturity

  • marketable
  • tax-free at state and local level
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20
Q

Treasury bonds

A

> 10 year maturity

  • marketable
  • tax-free at state and local level
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21
Q

Treasury inflation protected securities (TIPS)

A
  • principal adjusts for inflation

- coupon rate doesn’t change (unlike I bonds)

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22
Q

Coupon rate

A

Annual $ payment / par value

23
Q

Current yield

A

Annual $ payment / current price of bond

24
Q

Original issue discount

A

Discount value a bond for which a bond is sold

  • bond holder pays phantom income
25
Q

Conversion value formula

A

(Par / conversion price) x price per share

26
Q

Closed investment company

A
  • fixed initial market capitalization
  • shares trade on organized exchange
  • trade at premium or discount to NAV
27
Q

Open investment company

A
  • unlimited initial market capitalization
  • shares bought and redeemed directly from fund family
  • shares trade at NAV

Ex. mutual fund

28
Q

Unit investment trust

A
  • equity or fixed income (usually fixed income)
  • self-liquidating
  • passive management, no trading assets in trust
  • units, not shares
29
Q

Long straddle

A
  • buy a put and call

- expects volatility, not sure what direction

30
Q

Short straddle

A
  • sells put and call option

- investor doesn’t expect volatility, wants to keep the premiums

31
Q

Black / Scholes model

A
  • determines value of a call option
  • variables (IVEST) - direct relationship on price of option
    • price of underlying asset
    • time upon expiration
    • risk-free rate of return
    • volatility of underlying asset
  • inverse relationship for strike (exercise) price
32
Q

Regulation T for initial margin from Federal Reserve

A

50%

33
Q

Value line reports

A

Ranks stocks

1-5 (one is highest)

34
Q

Morningstar reports

A

Ranks mutual funds, stocks, bonds, ETFs

1-5 ranking (five is highest)

35
Q

What is last day to receive dividend?

A

Two days before date of record

36
Q

Commercial paper

A

Short-term loan between corporations

  • Maturities of 270 days or less
  • denominations of $100,000
37
Q

Bankers acceptance

A

Facilitates imports and exports

38
Q

Ginnie Mae

A

Government National Mortgage Association (GNMA)

  • backed by U.S. government
  • no default risk / as safe as treasuries
39
Q

Municipal bonds

A

Tax-free at federal, state, local level if you live in issuing state

40
Q

Relationship between bond duration and volatility

A

Higher duration = more volatile price

41
Q

Relationship between bond maturity and bond duration

A

Longer maturity = higher duration

42
Q

Relationship between bond coupon and bond duration

A

Higher coupon = shorter duration

43
Q

Relationship between yield to maturity (YTM) and duration

A

Higher YTM = shorter duration

44
Q

Preferred stock

A

Debt / equity features

Debt

  • par value
  • dividend rate as % or par

Equity
- bond price moves with price of common stock

  • Dividend doesn’t fluctuate (like stock)
  • No maturity date (like bond)
45
Q

Growth fund

A

Low dividend payout ratio

  • invests in stocks with high P/E
  • goal is capital appreciation
46
Q

Balanced fund

A
  • more bonds than typical stock fund

- moderate volatility

47
Q

Global fund

A

International and U.S. stocks

48
Q

International fund

A

International stocks only (no U.S.)

49
Q

A shares

A
  • front end load
  • small 12b-1 fee
  • no redemption fee
50
Q

B shares

A
  • no longer available
  • redemption fee
  • max 12b-1 fee of 1%
  • no front end load
  • convert to A shares
51
Q

C shares

A
  • level expense charges
  • no front end load
  • small back end load
  • max 12b-1 fee of 1% - companies convert C to A after expense
52
Q

American depository receipts (ADRs)

A
  • foreign stock in domestic bank’s foreign branch
  • trade / dividends in USD
  • does not eliminate exchange rate risk
53
Q

Warrants

A

Call options issued by corporations

  • 5-10 year expiration period (vs 9 months or less for options)
  • not standardized (options are standardized)
  • always out of the money

Certified Financial Planner Exam 2021 (6 decks)

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