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CFP > Investment > Flashcards

Investment Flashcards

1
Q

Covered call

A
  • investor owns underlying stock
  • offsets any loss associated with selling call
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2
Q

Which of the following option strategies would be considered the most risk?

A.Buying a call.
B.Buying a put.
C.Selling a covered call.
D.Selling a put.
A

D. Selling a put
- most risky as stock could fall to zero

  • Buying a put/call option limits investor’s loss to premium paid
  • Covered call is where investor owns underlying stock which offsets any loss associated with selling call
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3
Q

Bond Swap Types: Tax Swap

A
  • replaces bonds with offsetting capital gains and losses
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4
Q

Bond Swap Types: Substitution Swap

A
  • designed to take advantage of anticipated and potential yield differentials between bonds that are similar with regard to coupons, rating, maturities, and industry
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5
Q

Bond Swap Types: Rate Anticipation Swap

A
  • utilize forecasts of general interest rate changes
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6
Q

Bond Swap Types: Yield Pickup Swap

A
  • designed to alter the cash flow of the portfolio by exchanging similar bonds having different coupon rates
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7
Q

Put option

A
  • leveraged alternative to selling short
  • can be purchased on a stock that investor has no interest in
  • allows investor to sell shares at fixed price over period of time
  • experience gain upon downward movement of stock market
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8
Q

Tactical Asset Allocation

A
  • active management
  • rebalances % of assets in various categories
  • take advantage of market pricing anomalies or strong market sectors
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9
Q

Strategic Asset Allocation

A
  • buy and hold
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10
Q

Holding Period Return

A

= (Sold Price - Purchase Price +/- Cash Flow) × (1-TR) / Purchase Price

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11
Q

Capital Market Line (CML) uses what risk measurement?

A
  • standard deviation of market
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12
Q

Securities Investor Protection Act of 1970

A
  • is designed to protect individual investors from losses as a result of brokerage house failures
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13
Q

The Investment Advisers Act of 1940

A
  • requires that person or firms advising others about securities investment must register with the Securities and Exchange Commission
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14
Q

Payout Ratio (aka Dividend Payout Ratio)

A
  • portion of earnings which a company pays investors
  • dividend per share/earnings per share
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15
Q

Open-end investment company

A
  • both passively and actively managed
  • shares are traded with the fund, not on secondary market
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16
Q

Treasury Bills

A
  • varying maturities
  • up to 52 weeks max
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17
Q

Treasury Notes

A
  • maturity between 2-10years
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18
Q

Treasury Bonds maturity

A
  • maturity greater than 10 yrs (typically 30 years)
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19
Q

Odd Lot Theory

A
  • odd lot purchase levels indicate number of small investors in market
  • assumes small investors are always wrong
  • if purchases falling relative to sales = ‘little guy thinks market will fall’ (aka the opposite: a rally is coming)
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20
Q

Dow Theory

A
  • market moves in predictable patterns (uptrends, downtrends, sideways)
  • use Dow Jones Industrial Avg. (DJIA) and Dow Jones Transportation Avg (DJTA) to find trends
  • Averages discount everything
  • Trends continue until reversed
  • Volume confirms trends
  • Multiple avg confirms trends
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21
Q

Anchoring

A
  • results in buying securities that have fallen in value because it ‘must’ get back to that recent high
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22
Q

Hindsight Bias

A
  • overconfidence
  • investor’s belief they had predicted an event that they actually did not predict
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23
Q

Regret Avoidance

A
  • aka Disposition Effect
  • causes investors to take action/inaction in hopes of minimizing regret
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24
Q

Representativeness

A
  • belief that a good company is a good investment without regard to analysis in the investment
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25
Q

Jensen’s Alpha tells you the difference between funds ____

A
  • realized return and risk-adjusted return
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26
Q

Cognitive Dissonance

A
  • overconfidence
  • minimizing/forgetting past losses and exaggerating past gains
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27
Q

Intrinsic Value of Put

A

Strike - Stock price

  • cannot be less than $0
  • pay premium to sell stock at a strike price
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28
Q

Systematic Risk (non-diversifiable)

A

PRIME
- Purchasing power
- Reinvestment rate
- Interest rate
- Market risk
- Exchange rate

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29
Q

Unsystematic Risk (diversifiable)

A

ABCDEFG
- Accounting
- Business
- Country
- Default
- Executive
- Financial
- Government (regulation)

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30
Q

Standard Deviation measures what kind of risk?

A

Total risk
- includes systematic and nonsystematic

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31
Q

Capital Market Line (CML)

A
  • lined defined by every combination of risk free asset and market portfolio (total risk and return of total portfolio)
  • uses standard deviation
  • risk premium earn for taking on extra risk
  • defined by capital asset pricing model
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31
Q

Beta measures what kind of risk?

A
  • systematic risk
  • relationship between security’s return and market return
  • when plotting on graph, beta = slope (rise/run)
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32
Q

Security Market Line (SML)

A
  • uses beta (systematic risk)
  • derived from CML
  • relationship between a security’s expected return and its systematic risk
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33
Q

Capital Asset Pricing Model (CAPM)

A
  • equation of SML
  • investors should be rewarded for level of risk they take on
  • investors should earn at least risk free rate of return
  • investors should earn return on SML
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34
Q

Current Yield formula (income yield)

A
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35
Q

Holding Period Return formula

A

[(Sell Price - Purchase Price) +/- Cash Flows] / Purchase Price

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36
Q

Percentage Price change

A

(Sell Price - Purchase Price) / Purchase Price

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37
Q

Macaulay Duration

A
  • weighted average term to maturity of cash flows from bond
  • divide PV of cash flow by price to determine weight
  • used in immunization strategy
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38
Q

Tax Equivalent Yield

A
  • use the tax rates that you SAVE with tax equivalent security
    (tax exempt security) / (1 - investor’s marginal tax rate - state tax rate if applicable)
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39
Q

Short position means

A
  • you are borrowing item from someone else and selling it
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40
Q

Long a position means

A
  • give the right to buy the item from someone else at a pre-determined price
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41
Q

When using options as a safeguard: Calls are used when

A
  • one wants to buy in at a specified price
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42
Q

When using options as a safeguard: Puts are used when

A
  • one wants to get out of investment at a specified price
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43
Q

One buys (longs) a call for a __ market

A

bull market
- gain is unlimited
- max loss is the premium

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44
Q

One sells (shorts) a call for a __ market

A

bear market
- max loss unlimited
- max gain is premium

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45
Q

One buys (longs) a put for a __ market

A

bear market
- max gain is the strike price - premium
- max loss is the premium

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46
Q

One sells (shorts) a put for a __ market

A

bull market
- max gain is premium
- max loss is strike price - premium

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47
Q

Types of options

A
  • puts
  • calls
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48
Q

Options are considered to be ____ securities

A

derivative
- derive value from price behavior of an underlying real/financial asset

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49
Q

Call option description

A
  • gives the holder of call option the right, but no obligation, to BUY stock at predetermined price (strike/exercise price)
  • within predetermined time period
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50
Q

Put option description

A
  • gives holder of put option the right, not obligation, to SELL stock at predetermined price (strike/exercise price)
  • within predetermined time period
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51
Q

Long Call description

A
  • pay premium to BUY option
  • betting that underlying stock will rise in price
  • max gain = unlimited
  • max loss = premium
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52
Q

Long call: Stock price > strike price

A

= stock - strike - premium

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53
Q

Long call: Stock price < strike price

A
  • won’t exercise option
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54
Q

Short Call description

A
  • right to SELL option for specific price
  • collects premium
  • betting that underlying stock will fall in price
  • max gain = premium
  • max loss = unlimited
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55
Q

Short call: Stock > strike

A

= strike - stock + premium

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56
Q

Short call: Stock < strike

A

= won’t exercise option

  • profit is the premium paid
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57
Q

Long Put description

A
  • right to SELL for specific price
  • only valuable when stock price declines
  • max gain = strike price - premium
  • max loss = premium
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58
Q

Long put: Strike < stock

A
  • no exercise
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59
Q

Long put: Strike > stock

A

= strike - stock - premium

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60
Q

Short put: Strike > stock

A

= stock - strike + premium

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61
Q

Short put: Strike < stock

A
  • no exercise
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62
Q

Long position in a security means that

A
  • you own the security
  • expectation that the stock will rise in value in the future
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63
Q

Short position in a security means that

A
  • you sell a stock you do not own.
  • believe the price of the stock will decrease in value.
  • If the price drops, you can buy the stock at the lower price and make a profit
  • If the price of the stock rises and you buy it back later at the higher price, you will incur a loss
  • short selling is for the experienced investor
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64
Q

Neglected firm effect

A
  • one of the market anomalies
  • security in question is allowed greater potential for movement as result of lack of scrutiny by analysts
  • stock that has produced superior earnings and rates of return but has gone mostly unnoticed by securities analysts and is often considered underpriced
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65
Q

Preferred Stock

A
  • market fluctuations are greater than LT bond market fluctuations
  • it is more risky than bonds (bonds are a legal obligation and have a higher priority in bankruptcy proceedings)
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66
Q

Red herring

A
  • red lettering notifying prospective investors of its status as a prospectus without prices included
  • preliminary prospectus issued by managing house of an offering
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67
Q

Callable bond: Issues regarding asset

A
  • uncertainty about amount of payments to be made to bondholders
  • reinvestment risk faced by bond investor
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68
Q

Covered Call

A
  • generates income
  • sell/write call options against shares already owned
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69
Q

Best effort agreement

A
  • occurs when an underwriter agrees to sell what he or she can
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70
Q

Syndicated offering

A
  • underwriter forms a team of brokerage firms
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71
Q

Green shoe agreement

A
  • standby commitment
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72
Q

What does bullish mean?

A
  • you believe the stock will increase
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73
Q

What does bearish mean?

A
  • you believe the stock will decrease
74
Q

In the money: Call option

A

Stock > Strike

75
Q

In the money: Put option

A

Strike > Stock

76
Q

Out of the money: Call option

A

Stock < Strike

  • Intrinsic value = 0
77
Q

Out of the money: Put option

A

Strike < Stock

  • Intrinsic value = 0
78
Q

At the money: Call & Put option

A

Strike = Stock

  • Intrinsic value = 0
79
Q

Time Value of Options formula: Call Option

A

Premium = Fundamental value + Time Value

Fundamental Value = Stock - Strike

80
Q

Time Value of Options formula: Put Option

A

Premium = Fundamental value + Time Value

Fundamental Value = Strike - Stock

81
Q

Futures contract: Long position

A
  • BUY
  • buyer agrees today to pay for & take delivery of commodity on specific date in future
  • agrees on price, quality, quantity and delivery date today
  • legally binding obligation
  • if contract increases = buyer benefits (locked at lower price)
  • if contract decreases = buyer loses
82
Q

Futures contract: Short position

A
  • SELL
  • seller agrees to make delivery
  • legally binding obligation
  • if contract increases = seller loses (agreed to sell at lower price)
  • if contract decreases = seller wins
83
Q

All futures contracts are done on a ___ basis

A

margin

  • considerable leverage
84
Q

Futures Market: Hedgers

A
  • producers/processors
  • protect their own interests in underlying commodity/financial instrument
  • provide actual products sold
85
Q

Futures Market: Speculators

A
  • investors
  • trying to earn profit on expected swings in prices of futures contracts
  • long positions if $ increases
  • short positions if $ decreases
86
Q

Of the following indexes, which is the only one that uses the geometric average to compute its daily value?

A.NASDAQ Index.
B.Wilshire 5000 Index.
C.Value Line Average.
D.Dow Jones Industrial Average.
A
  • Value Line Average
87
Q

Of the following indexes, which is the only one that uses the value weighted average to compute its daily value?

A.NASDAQ Index.
B.Wilshire 5000 Index.
C.Value Line Average.
D.Dow Jones Industrial Average.
A
  • NASDAQ, NYSE Composite, and Wilshire 5000 Index
88
Q

Of the following indexes, which is the only one that uses the simple price weighted average to compute its daily value?

A.NASDAQ Index.
B.Wilshire 5000 Index.
C.Value Line Average.
D.Dow Jones Industrial Average.
89
Q

Margin Call formula

A

Loan / (1-Maintenance Margin)

90
Q

Short

A

Seller, Writer

91
Q

Long

A

Buyer, Holder

92
Q

Put Break even

A

Strike - Premium

93
Q

Call Break Even

A

Strike + Premium

94
Q

Short Put description

A
  • right to SELL for specific price
  • only valuable when stock price rises
  • max gain = premium
  • max loss = strike price - premium
95
Q

What is the P/E ratio?

A
  • price / earnings
  • market’s expectation of good pricing relative to forward earnings
96
Q

How to solve for an expected return with the P/E ratio?

A

(P/E ratio) / (relative P/E to S&P)

97
Q

Short selling

A
  • sell at higher price w/ hopes of purchasing stock back at lower price
  • margin account required
  • sale proceeds held by broker
  • no time limit to hold position
  • dividends paid by corp must be covered by short seller
98
Q

Initial Margin

A
  • amount equity an investor must contribute to enter margin transaction
  • can vary based on volatility of stock
  • Reg. T set at 50% (Fed Reserve)

1 - initial margin = loan

99
Q

Maintenance Margin

A
  • min amount of equity required before margin call
100
Q

Margin Purchase price includes ____ and ____

A
  • loan
  • equity
101
Q

Margin Position

A
  • current equity position of investor

= equity / FMV

102
Q

Margin Call Price (minimum price) formula

A

Loan / (1 - maintenance margin)

103
Q

To receive the dividend, you need to own/purchase prior to ___ date

A

ex-dividend date

104
Q

Qualified dividends receive ___ treatment

A

capital gains treatment

105
Q

Qualified Dividend: Stock

A
  • issues more shares and not taxable to shareholder
  • exposes more of the gains to be taxed over time
  • basis doesn’t change but # shares increase (basis/share decreases)
106
Q

Qualified Dividend: Cash

A
  • paid by US company or qualifying foreign company
  • not listed as dividend that doesn’t qualify by IRS
  • held stock > 60 days during 121 day period (begins 60 days before ex dividend date) 60 days before and after
107
Q

Stock Split: 3 for 2 example

A

(3 / 2) *shares

(2 / 3) * price

108
Q

Date of Record

A
  • 1 day after ex dividend date (T+1)
109
Q

Securities Act of 1933 (Paper Act)

A
  • regulates issuance of new securities
  • primary market
110
Q

Securities Act of 1934 (People Act)

A
  • regulates secondary market and trading of securities
  • created SEC
110
Q

Investment Company Act of 1940

A
  • authorized SEC to regulate investment companies
  • three types : open, closed, unite investment trusts
111
Q

Securities Investors Protection Act of 1970 (SIPC)

A
  • similar to FDIC insurance in banking
  • protects investors from losses from broker firm failures
  • regardless of citizenship
  • no protection from incompetence or bad investment decisions
  • losses limited to $500k ($250k cash)
112
Q

Commercial Paper

A
  • ST loans between corporations
  • matures 270 days or less
  • denominations of $100,000
113
Q

Bankers Acceptance

A
  • facilitates imports/emports
114
Q

Which of the following elements of risk in mortgage-backed securities can be difficult to determine?

I. Actual maturity is not known with certainty.
II. Mortgage rates vary between the different investment pools.
III. Actual cash flows are not known with certainty.
IV. Government guarantees make the determination of an appropriate discount rate for calculating their present value difficult.

A

I and III only

  • Lack of a definite maturity date (you won’t know if mortgages are paid off early ahead of time) and uncertain cash flows (due to possible early payoffs) are the elements of risk in mortgage-backed securities
115
Q

Dollar-Weighted Return

A
  • Investor’s cashflows
  • include dividends and any other purchases
116
Q

Time-Weighted Return

A
  • Investment’s cashflows
  • without regard to investors
117
Q

If required rate of return decreases, the stock price will ____.

118
Q

If required rate of return increases, the stock price will ____.

119
Q

If the dividend is expected to decrease, the stock price will ____.

120
Q

If the dividend is expected to increase, the stock price will ____.

121
Q

Efficient Market Hypothesis overview

A
  • Random Walk (stocks unpredictable but not arbitrary)
  • cannot predict with consistency/accuracy what response to given stimuli will be
  • prices are best incorporation of all available info & true reflection of value (in equilibrium)
122
Q

Efficient Market Hypothesis: Weak

A
  • reflects past prices & volume

Could help?
- fundamental analysis
- insider info

123
Q

Efficient Market Hypothesis: Semi-Strong

A
  • reflects all public info

Could help?
- insider info

124
Q

Efficient Market Hypothesis: Strong

A
  • reflect all public and private info

Could help?
- Diversify stocks

125
Q

Non-marketable US Treasury: Series E and Series EE Bond

A
  • pay fed income tax, NO state
  • sold at FV
  • doesn’t pay interest periodically (accrues interest)
126
Q

Non-marketable US Treasury: Series H and Series HH Bond

A
  • pays interest semiannually
  • matured from Series EE
  • no longer being made
127
Q

Non-marketable US Treasury: Series I Bond

A
  • inflation adjusted - coupon rate changes
  • pay fed income tax, NO state tax
  • fixed + variable rates
  • accrues interest
128
Q

Treasury Inflation Protected Securities (TIPS)

A
  • principal adjusts for inflation (apply coupon to new amount)
  • inflation & purchase power protection
  • coupon RATE doesn’t change
129
Q

STRIPS

A
  • separate trading of coupon payments and principal amount
  • essentially creates many zero coupon bonds
130
Q

What two have full faith and credit of US government (aka zero default risk)?

A
  • GNMA
  • US Treasuries
131
Q

Secured Bond: Mortgage Bonds overview

A
  • backed by pool of mortgages
  • payment consists of principal & interest
132
Q

Secured Bond: Collateralized Mortgage Obligations (CMO) overview

A
  • investors divided into ‘Tranches’ (A-Z)
  • investors in short term (A) receive principal before investors in long term (Z)
133
Q

Secured Bond: Mortgage Bonds Biggest Risk

A
  • Default risk
  • Prepayment risk
134
Q

Secured Bond: Collateral Trust Bonds overview

A
  • backed by asset that company owns
135
Q

Secured Bond: Collateralized Mortgage Obligations (CMO) means to mitigate ___ risk

A
  • prepayment risk
136
Q

Municipal Bond: General Obligation Bonds overview

A
  • backed by full faith, credit & taxing authority of municipality that issued bond
  • interest (aka income) NO fed income tax
137
Q

Municipal Bond: Revenue Bonds overview

A
  • backed by revenue of specific project
  • riskier than general obligation bonds
  • interest (aka income) NO fed income tax
138
Q

Municipal Bond: Private Activity Bonds overview

A
  • public/private
  • used to fund construction of stadiums
  • interest (aka income) NO fed income tax
139
Q

What are the two insured municipal bonds?

A
  • American Municipal Bond Assurance Corp (AMBAC)
  • Municipal Bond Insurance Association Corp (MBIA)
140
Q

Municipal bonds are/are not taxable at the federal, state and local level if you live in issuing state?

141
Q

Bonds issued by territories of the US (Puerto Rico) are/are not subject to taxes at federal, state and local level??

142
Q

Yield Summary: Premium (high to low)
Discount (low to high)

A

Coupon Rate - Current Yield - Yield to Maturity - Yield to Call

(CR - CY - YTM - YTC)

143
Q

Liquidity Preference Theory

A
  • lower yields for ST because investors prefer liquidity
  • willing to pay for liquidity in form of lower yield
144
Q

Market Segmentation Theory

A
  • yield curve depends on supply & demand at given maturity
145
Q

Expectations Theory

A
  • inflation expectations
  • since investors uncertain/believe inflation will be higher in future, LT yields are higher than ST
146
Q

Preferred Stock description: Equity features

A
  • price of bond may generally move with price of common stock
147
Q

Preferred Stock description: Debt features

A
  • stated par value
  • stated dividend rate as % of par (doesn’t fluctuate like common stock dividend)
  • no maturity date like a bond
148
Q

Preferred Stock Tax Advantage on Dividends received: Corp owns < 20% of other corp

A
  • tax deduction is 50%
149
Q

Preferred Stock Tax Advantage on Dividends received: Corp owns > 20% of other corp

A
  • tax deduction is 65%
150
Q

Closed Mutual Fund description

A
  • fixed initial market capitalization
  • shares trade on organized exchange
  • may trade at premium or discount to NAV
151
Q

Open Mutual Fund description

A
  • unlimited initial market capitalization
  • shares bought and redeemed directly from fund family
  • shares trade at NAV
152
Q

Unit Investment Trust description

A
  • passive, self-liquidating
  • can be equity or fixed income (typically fixed)
  • units, not shares
153
Q

Index Funds description

A
  • track performance of various market indexes
  • passive approach
154
Q

Growth Funds description

A
  • invests in equities with high P/E
  • generate capital appreciation
155
Q

Growth & Income Funds description

A
  • invests in equities and income producing assets
  • create capital appreciation and income
156
Q

Balanced Fund description

A
  • invests more in bonds than typical equity fund
157
Q

Global Fund description

A
  • invests in international and US securities
158
Q

International Fund description

A
  • invests in international securities but NOT US securities
159
Q

May be given client facts and asked to recommend portfolio of mutual funds. Always recommend ____________.

A

the most diversified portfolio of funds (all else being equal)

160
Q

A shares description

A
  • front end load
  • small 12b-1 fee
  • no redemption fee
161
Q

B shares description

A
  • redemption fee
  • max 12b-1 fee of 1%
  • no front end load
  • convert to A shares
  • many funds no longer offer B shares
162
Q

C shares description

A
  • no front end load
  • usually charge small back end load
  • max 12b-1 fees of 1%
163
Q

Exchange Traded Funds (ETF) description

A
  • portfolio represents index
  • tax efficient
  • traded on exchange similar to stocks
  • don’t have to buy & sell blindly (trade throughout day)
  • low cost of ownership
164
Q

Real Estate Investment Trusts (REITs) overview

A
  • low correlation to stock market
  • similar to closed end mutual fund
  • must distribute 90% of investment income to shareholder to maintain tax exempt status
165
Q

Real Estate Investment Trusts (REITs): Equity REIT description

A
  • invest in real estate for capital appreciation (own the real estate)
  • income generated from rental income and appreciation
166
Q

Real Estate Investment Trusts (REITs): Mortgage REIT description

A
  • invest mostly in mortgages and construction loans (own the real estate paper)
  • make spread between lending and borrowing rate
167
Q

Real Estate Investment Trusts (REITs): Hybrid REIT description

A
  • combo of both equity and mortgage
168
Q

American Depository Receipts (ADR) overview

A
  • do NOT eliminate exchange rate risk
  • represent foreign stock held in domestic bank’s foreign branch
  • entitled to dividends and capital gains (include currency fluctuations)
  • trade on US exchanges
169
Q

Cryptocurrencies overview

A
  • virtual currency
  • not associated with any country or bank
  • # of ‘coins’ are limited
  • not widely accepted form of payment
  • HIGH RISK investment
170
Q

Positive Outcomes for Bullish Scenario (think an asset will increase in value and you want to have a positive outcome) diagram

A
  • arrow points up
  • short the put
  • long the call/stock/futures
171
Q

Positive Outcomes for Bearish Scenario (think an asset will decrease in value and you want to have a positive outcome) diagram

A
  • arrow points down
  • long the put
  • short the call/stock/futures
172
Q

Options overview

A
  • derivative security
  • option depends on (derived from) value of underlying asset
  • contractual agreement between two parties
  • two sides to every transaction (buy & seller/writer)
  • handled through option clearing house
173
Q

Portfolio Insurance: What option works best?

A
  • own portfolio of stocks, worried that price will decrease (buy put on S&P)
  • use put options on index to ‘lock in’ gains
174
Q

Long Straddle description

A
  • buys put & call option
  • expects volatility, just not sure which direction
175
Q

Short Straddle description

A
  • sells put & call option
  • doesn’t expect volatility, hoping to keep premiums
176
Q

Black/Scholes Pricing Model

A
  • determine value of call option
  • InvEst (exercise price has inverse relationship to price of option) aka higher strike price = lower premium
  • all other variables have direct relationship to price of option
177
Q

Put/Call Parity

A
  • attempts to value PUT option based on value of call option
178
Q

Binomial Pricing Model

A
  • attempts to value option based on assumption that stock can only move in one of two directions
179
Q

Warrants

A
  • call options issued by corporation
  • written by investors
  • expiration period much longer than options (5-10 yrs vs 9 months or less)
  • terms NOT standardized
180
Q

What is Fundamental Analysis?

A
  • analyzing company’s financial statements (filings, website, use other platforms/broker research reports)
  • analyzing broader economic indicators to find intrinsic value (market, economic conditions)
  • quantify value of company and its shares to see if worth investing in
181
Q

What is Technical Analysis?

A
  • study historical price trends of stock to predict short term trends

CFP (9 decks)

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