Investment Flashcards
What calculator keys are used to find the intrinsic valuation of a bond (today’s value compared to similar bonds)?
Bonds are paid semi-annually unless otherwise noted, therefore:
Time remaining to maturity is N (x 2)
Market rate of interest is I (/2)
Maturity value is FV ($1000 unless otherwise noted)
Coupon Payment is PMT X 5
PV = ?
PV will be a negative number because it’s the amount you’ll spend to purchase the bond
What does PMT represent in bond calculations?
Coupon Payment
What does I represent in bond calculations?
Market rate of interest
What are we solving for when finding intrinsic value of bonds?
PV
What is a “Collar” stock option strategy?
Call short (they call me short)
Long put
What is a “Collar” stock option strategy?
Hint: sometimes I wear a collar
Call short (they call me short)
Long put (opposite of what I am)
Own the stock (what I always do)
What is “Covered Call Writing”?
Long the stock (so the call is covered)
Short the call (so I don’t own twice as much)
What is a “Protective Put”?
Hint: always own/be long to protect yourself
Long the stock
Long the put
Useful when there is a significant % of one stock in a portfolio as insurance
What is a “Straddle”?
Straddling = wobbly, so remember this is done in a volatile market.
Same stock and same expiration date with a Long Put and Call!
What is a “Spread”?
Spread = smooth when you spread butter on toast, so remember this is done in a stable market.
Same stock, both buy and sell same type of contract (call or put)
Skewness refers to the extent to which a distribution is not symmetrical.
How are stock markets typically skewed?
Stock markets tend to be positively skewed.
Positively skewed distributions have many outliers in the upper, or right tail.
Also referred to being skewed right.
What is “kurtosis”?
A statistical measure that describes when a distribution curve is more or less peaked than a normal distribution.
Standard deviation (σ) is a measure of variance around that expected return.
The probability of a return falling within +/- 1of the average is ?%.
The probability of a return falling within +/- 2of the average is ?%.
The probability of a return falling within +/- 3of the average is ?%.
68-95-99
The probability of a return falling within +/- 1of the average is 68%.
The probability of a return falling within +/- 2of the average is 95%.
The probability of a return falling within +/- 3of the average is 99%.
What is the measure of systematic or non-diversifiable risks?
Hint: measure against the market (not the portfolio or stock)
Beta
How do you know whether to use Treynor or Sharpe Ratio by looking at the R2 of the funds being compared?
If higher than .7 - Treynor (T comes after S) - which uses Beta as the denominator
Tp on the formula sheet
If lower than .7 - Sharpe (S comes before T)
What is a normal distribution curve called?
mesokurtic curve
How to remember: what’s normal for my desk while studying for this test? a mess!
Alpha (Jensen’s performance index) is a measure that is used to evaluate the benefit of a portfolio manager
αp=rp−[rf+(rm−rf)βp]
Is it an absolute, comparative or relative value?
Absolute.
Alpha (Jensen’s performance index) is a measure that is used to evaluate the benefit of a portfolio manager
αp=rp−[rf+(rm−rf)βp]
Is it an absolute, comparative or relative value?
Absolute.
Diversification CAN reduce unsystematic risks.
Unsystematic risks are those that are NOT specific to the financial markets. What are they?
Sovereignty Risk
Regulation Risk
Default or Credit Risk
Business Risk
Financial Risk
Systematic risk is NOT diversifiable.
Systematic risk is a Beta statistic because Beta measures volatility compared to the market.
What are systematic risks (things that will always be there)?
Hint: PRIME
Purchasing Power Risk
Reinvestment Risk
Interest Rate Risk
Market Risk
Exchange Rate Risk
CAPM (Capital Asset Pricing Model) is used to determine what 3 things?
ri = rf + (rm - rf) Bi on CFPs formula sheet
CAPM is used to determine SML, expected and required return
r p - r f /Beta
Return of portfolio - Risk free rate/ Beta
Measures what?
Treynor Ratio
Used when greater than .7
How to remember?
Return of portfolio - Risk free rate/
is the same for both Treynor and Sharpe.
S comes before T - so Sharpe when less than .7; T when greater than .7
Sharpe is Standard (deviation)
Treynor is Beta (a trainer bets….)
r p - r f /Beta
Return of portfolio - Risk free rate/ Beta
Measures what?
Treynor Ratio
Used when greater than .7
How to remember?
Return of portfolio - Risk free rate/
is the same for both Treynor and Sharpe.
S comes before T - so Sharpe when less than .7; T when greater than .7
Sharpe is Standard (deviation)
Treynor is Beta (a trainer bets….)
r p - rf / Beta
Return of portfolio - Risk free rate / Beta
(can be found on formula sheet)
is what ratio?
r p - rf / Beta
Return of portfolio - Risk free rate / Beta
is the Treynor Ratio
How to remember:
A trainer Bets
It is used when greater than .7 (T comes after S)
r p - rf / Standard deviation
Return of portfolio - Risk free rate / Stnd deviation
r p - rf / standard deviation
Return of portfolio - Risk free rate / Stnd. deviation is the Sharpe Ratio
How to remember:
Sharpe Standard
It is used when less than .7 (S comes before T)
What is the formula for finding Alpha (comparison of portfolio to market results)?
Hint: found on formula sheet
αp= rp − [rf + (rm −rf)βp]
The Net Present Value (NPV) equation can be used to determine whether or not an investment is worthwhile. An investment is viewed favorably if its NPV is what?
Positive or neutral; it’s viewed unfavorably if its NPV is negative.
What is the useful life (for depreciation purposes) when the item is placed into service?
Purchase Price - Salvage Value / Useful life of the Asset
First year must take only 1/2 of the deduction in year 1 and 1/2 in the final year; EXCEPTION: real estate uses mid month
Hint: ACHORN
2 5s, 2 7s, 27.5
5
Autos
Computers
7
Heavy Machines
Office Furniture
27.5
Residential Real Estate
Non-residential (commercial) real estate - 39.5 years
When would you use MACRS - Modified Accelerated Cost Recovery System is used (based on tables to be provided) rather than straight-line method?
When you want to take larger deductions earlier in the useful life
What is Section 179?
Remember, although an extremely high threshold, real estate is not eligible.
Instead of capitalizing (taking depreciation) over a period of time, the full cost (up to $1,160,000) can expense it in the year of purchase.
The deduction taken is limited by Net Profit, and remaining can be applied the next year.
Both Section 179 and MACRS 7-year depreciation can be applied in the same year.
When loans are greater than $10,000 and up to and including $100,000, the imputed interest is the lesser of what?
If the borrower’s net investment income is equal to or less than what $ amount, imputed income will not apply?
imputed interest is the lesser of:
the AFR or
the borrower’s net investment income
If the borrower’s net investment income is $1,000 or less, imputed income will not apply.
