Investment Flashcards
Multi stage dividend discount model
- Calculate the end of year dividend for X number of years at the dividend growth rate.
- Calculate the stock valuation in the last year based on the new constant dividend rate using the intrinsic value formula.
- Solve for the net present value. Use required rate of return for interest. Enter cash flows (CF zero will be zero, input your cash flows from step one and make sure to add your intrinsic value to your last year) then solve for NPV
Who sets the minimum equity standards for the initial purchase and for monitoring ongoing equity levels for margin?
The federal reserve
Minimum federal stock initial margin requirement
50%
Minimum federal maintenance margin requirement
25%
What is the formula for a margin call?
1-IM/1-MM x PS
The short end of the yield curve is reflective of:
Fed policy
What can you do to immunize an investors bond portfolio?
Match the duration to an investor time horizon
How is R squared calculated?
It’s the correlation coefficient multiplied by itself
If the correlation coefficient is 70%, then R squared is 70% times 70% equals 49%
What does the Treynor ratio measure?
Relative risk adjusted performance
What does the sharpe ratio measure?
Relative risk adjusted performance in terms of standard deviation, only appropriate when R squared is below .7. Comparative value.
What does alpha measure?
The benefit of a portfolio manager
If alpha is above zero that equates to better than expected performance
If Alpha equals zero that is good or expected performance
If alpha is below zero that is bad or less than expected performance
What is the foundation for all modern portfolio theory?
CAPM. Used to qualify the investors required rate of return & used to plot the Security market line.
Market premium = (rm-rf)
Stock premium = (rm-rf)B
Spread
Involves purchasing and selling the same type of contract
Benefit from stability / minimum moves in the underlying stock
Straddle
Long a put and a call on the same underlying stock with the same expiration date, and strike price
Used only to capitalize on volatility, regardless of direction
Total premium for options
Intrinsic value + time premium
The time premium is highest at the creation of the contract and approaches 0 at expiration.
Intrinsic value can never be less than zero.
Anyone anyone who is long futures needs a:
Short hedge
Anyone who is short futures needs a
Long hedge
Spot price
Current market value of the item in today’s market
The future’s contract allows, both speculation and hedging on the spot price at some point in the future
What is a futures contract?
Agreement to buy or sell a specific amount of a commodity, currency, or a financial interest at a particular price on a stipulated future date
Holding period return
Profit / cost
Price at end-price at beg + income/price at beg
Can be separated into capital appreciation and income components
What does holding period return assume?
That dividends are not reinvested
Time weighted return measures
The appreciation or depreciation of the portfolio from period to period.
TVM calculation:
N= # of returns
PV=-1
FV=(1 +/- return)x(1+/- return)x….
Solve for I/yr
Standard for fund managers
AKA geometric return
Dollar weighted return accounts for
When and what price level investments are made, and when withdrawals occur.
To calculate you use the cash flow keys CF0, CFj etc
Systematic risk is quantified using
Beta
