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CFP > Investment > Flashcards

Investment Flashcards

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CFP® flashcards
1
Q

Multi stage dividend discount model

A
  1. Calculate the end of year dividend for X number of years at the dividend growth rate.
  2. Calculate the stock valuation in the last year based on the new constant dividend rate using the intrinsic value formula.
  3. 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
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2
Q

Who sets the minimum equity standards for the initial purchase and for monitoring ongoing equity levels for margin?

A

The federal reserve

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3
Q

Minimum federal stock initial margin requirement

A

50%

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4
Q

Minimum federal maintenance margin requirement

A

25%

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5
Q

What is the formula for a margin call?

A

1-IM/1-MM x PS

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6
Q

The short end of the yield curve is reflective of:

A

Fed policy

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7
Q

What can you do to immunize an investors bond portfolio?

A

Match the duration to an investor time horizon

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8
Q

How is R squared calculated?

A

It’s the correlation coefficient multiplied by itself

If the correlation coefficient is 70%, then R squared is 70% times 70% equals 49%

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9
Q

What does the Treynor ratio measure?

A

Relative risk adjusted performance

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10
Q

What does the sharpe ratio measure?

A

Relative risk adjusted performance in terms of standard deviation, only appropriate when R squared is below .7. Comparative value.

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11
Q

What does alpha measure?

A

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

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12
Q

What is the foundation for all modern portfolio theory?

A

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

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13
Q

Spread

A

Involves purchasing and selling the same type of contract

Benefit from stability / minimum moves in the underlying stock

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14
Q

Straddle

A

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

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15
Q

Total premium for options

A

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.

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16
Q

Anyone anyone who is long futures needs a:

A

Short hedge

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17
Q

Anyone who is short futures needs a

A

Long hedge

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18
Q

Spot price

A

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

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19
Q

What is a futures contract?

A

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

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20
Q

Holding period return

A

Profit / cost
Price at end-price at beg + income/price at beg
Can be separated into capital appreciation and income components

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21
Q

What does holding period return assume?

A

That dividends are not reinvested

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22
Q

Time weighted return measures

A

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

23
Q

Dollar weighted return accounts for

A

When and what price level investments are made, and when withdrawals occur.

To calculate you use the cash flow keys CF0, CFj etc

24
Q

Systematic risk is quantified using

A

Beta

25
Q

Factors that influence an investors capacity for risk

A
  • Time horizon
  • Liquidity needs
  • Total investable assets
26
Q

Anomalies to the EMT, that cannot be explained away by EMT believers

A
  • low PE effect
  • small firm effect
  • neglected firm effect
  • January effect
  • value line phenomenon
27
Q

If you are uncertain about the reliability of the R squared, what should you do?

A

When in doubt, be sharpe

28
Q

Bond valuation is a function of:

A
  • the bonds coupon payments
  • the market rate of interest for comparable bonds
  • the amount of time remaining to maturity
  • the maturity value

All of these variables will be input into the calculator in the time value money keys to achieve the intrinsic value

29
Q

What’s durations relationship with interest rates?

A

Duration moves inversely with interest rates: as rates rise, duration shortens; as rates fall, duration lengthens.

30
Q

What is the maintenance margin set by the Fed?

A

25%

31
Q

P/E Ratio

A

Price of stock/earnings per share

32
Q

ROE

A

EPS/stockholder equity per share

If you need to calculate stockholder equity per share you take the total equity and divide by shares outstanding

Shareholder equity = total assets - total liabilities

33
Q

Earnings per share

A

Earnings available for common

34
Q

Dividend payout ratio

A

Common dividends paid/EPS

35
Q

Stock yield

A

Dividend per share/stock price per share

36
Q

TEY

A

Tax exempt yield/1-marginal tax rate

*to find equivalent yield from muni bond rate to taxable rate

37
Q

Properties intrinsic value

A

Net operating income / cap rate

38
Q

Cap rate

A

A function of many factors including the type, location, age of the property, and quality of the property properties tenants

39
Q

Tax exempt yield

A

Taxable yield x 1-marginal tax rate

*to find equivalent tax free muni bond yield from taxable yield

40
Q

How is the effective annual rate used (EAR)

A

Formula listed on the formula sheet and is used when there is intra-year compounding.

For example if an investment has a stated rate of 10% annual rate compounded monthly you can calculate the effective annual rate by plugging in 10% for I and 12 months for n to the formula and achieve a result of 10.48%, which shows you that the effective annual rate is higher than the stated nominal rate of 10% due to more frequent compounding.

41
Q

What does the information ratio tell you?

A

The information ratio measures return above benchmark divided by the standard deviation. When comparing multiple managers, the manager with the highest information ratio provided the highest risk adjusted return. The information ratio is a risk adjusted comparative value.

42
Q

Accounts receivable turnover

A

Sales/avg accts rec

43
Q

Receivable collection period

A

365/accts rec turnover

44
Q

Gross profit margin

A

Gross profit/sales

45
Q

The market risk premium is

A

The rate of return required for investors to take market risk

46
Q

As the market risk premium increases, the value of investment assets should

A

Fall

As risk increases in the market, investors adjust downward return expectations which then depresses the value of common stock. As a result, stock prices go down.

47
Q

Is artwork prepared for a taxpayer a capital asset?

A

NO

48
Q

Accredited investor

A

NW over $1MM excluding primary residence or
Income over $200k (single) or $300k (with partner)

Investment professionals (series 65, 7, 82)
Directors, executive officers, or GP of the co selling the securities
Knowledgeable employees of a private fund
Any family client of a family office

49
Q

For companies raising capital, what determines who is in their pool of potential investors

A

Accredited investor status

50
Q

Leading indicators

A

CRIBS
C - consumer confidence index
R - retails sales
I - IR spreads (Yield curve) + initial claims for unemployment
B - building permits
S - stock market

51
Q

REITs must distribute ___ of their taxable income to shareholders annually so that the income is tax free for the REIT

A

90%

52
Q

At least __ of a REITs assets and income must be derived from real estate equity or mortgages

A

75%

53
Q

Dividend payout ratio

A

Common stock dividend / earnings per share

CFP (10 decks)

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