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Beth CFP 2020 Final Deck > Investment > Flashcards

Investment Flashcards

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CFP® flashcards
1
Q

Unsystematic/Nonsystematic risk is…

A

diversifiable (can be diversified)- risk minimized by owning securities in different industries with LOW positive correlations

not system wide, let’s avoid- business, financial risk.

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2
Q

Systematic risk is…

A

nondiversifiable.

system wide, can’t be avoided.

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3
Q

brokered CD risk? (vs. normal CD)

A

brokered CDs have (extra) Interest rate risk (that CDs don’t have)

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4
Q

T-bills, T-notes, T-bonds interest taxation

A

no state or local income tax on interest

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5
Q

EE bonds for education- taxation

A

UGMA/UTMA- child owns, so doesn’t qualify for education expense

parent ownership qualifies it for edu- tax free if AGI less than phaseout

option of having interest taxed each year or at maturity- federal only

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6
Q

municipal bonds (what to sell, keep?)

A

always keep safer GOs and insured bonds! (sell UNinsured revenue bonds, etc)

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7
Q

CMOs (mortgage-backed pools) ; (A to) Z tranches

A

classes of securities (A-fast pay, M-medium, Y-slow)

Z tranche- issue that bears no coupon (most risk) because cash flow comes from anything remaining after A-Y are paid…you’ll get a lot if everyone pays mortgages, but nothing if everyone defaults

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8
Q

put bonds

think put on sale, call to buy

A

for selling back to issuer- if interest rates went up and price of bond goes down, exercise it (put bond buyer sacrifices some yield for this privilege)

  • can be used as protection to preserve gains should the stock go down
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9
Q

ADR (American Depositary Receipt)

A

best way to buy a foreign security with US Dollar

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10
Q

(open-end) mutual funds

A

open-end investment companies- sell share to investors after the initial offering of shares

  • non-negotiable, not marketable…but redeemable
  • future return projections are NOT allowed, only prior returns are allowed.
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11
Q

GIC (Guaranteed Investment Contracts)

A

like CDs but issued by insurance companies (value depends on financial strength of the issuer)

insurance co takes all market, credit and interest rate risks on GICs

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12
Q

GNMA

FNMA/FHLMC?

A

Mortgage-backed securities:

  • GNMA (Ginnie Mae)-guaranteed by fed govt but not by US Treasury
  • FNMA/FHLMC (Fannie Mae/Freddie Mac)- not guaranteed

-also called pass-through security

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13
Q

how does short-selling work

A

investor thinks that price of a security will go down but doesn’t own it…buy put (most you’ll lose is the premium) or sell short- selling short is riskier, since you sell borrowed (margin) security and repurchase when the price is lower, then return the security.

ex:
shorts $100,000 of stock and closes position at $55,000 ($45,000 gain). stock paid $2,000–>subtract, need to make up for it!

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14
Q

LEAP options (Long-Term Equity AncitiPation

A

LEAP option- publicly traded options contracts with expiration dates that are longer than one year- cheaper than stocks bc it’s option contract

hold for more than 1 yr and 1 day- long term rate. (exercise to sale)

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15
Q

Coefficient of variation (CV)

A

standard deviation/average return

higher=riskier

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16
Q

Standard deviation (1 sd, 2sd…%)

A

1: 68%; 2: 95%; 3: 99%

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17
Q

negative beta? (how does it move to market)

A

moves OPPOSITE to market

less than 1- fluctuates less than market

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18
Q

calculate risk-adjusted return (when return and beta given)

A

annual return/beta= risk-adjusted return (%)

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19
Q

negative real return possible?

A

yes when inflation is higher than return!

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20
Q

Geometric mean (time-weighted return) (calculator)- to evaluate performance of portfolio manager

A
  1. multiply all annual returns (30% as 1.3 and -20% as 0.8) [no change would be 1 because 0+1]
  2. answer is FV, -1 PV, N (number of years), solve for i
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21
Q

YTM (calculator)- effective yield

A

always assume SEMI annual compounding (unless it says annual)

SEMI for zeroes as well

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22
Q

TEY (NYC municipal example)

A

federal (ex: 37%), NY state (7%), and city (3%), making the marginal tax rate 47% instead of normal 37% only

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23
Q

basis points (ex: 4% plus 600 basis points)

A

600 basis points=6%!!!! so 4%+6%=10% total

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24
Q

R^2 (when to choose highest alpha, Treynor, Sharpe?

A

all high, then highest alpha, then Treynor
all low, then highest Sharpe
MIXED- highest Sharpe

alpha measures contribution of portfolio manager

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25
Q

stock split (how to calculate)

A

example:
5:2 split of 100 stocks is:
5/2 x 100 stocks=250 (new total number)
[quesitons may ask how many are issued in 5:2 split?-> 150]
-if it was $10 pre-split, 2/5 of $10= $4

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26
Q

ex-dividend date

A

to get cash dividend, stock must be purchased BEFORE (not on that date) ex-dividend date, which is 1 day before date of record for corporation (July 4th example: ex-div date July 5, record date July 6)

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27
Q

bonds: 10 points from par is how $?

price of 98.76 is?

A

$100

$987.6

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28
Q

TIPS

A

T=treasury security! can’t default, so only RIP risk (not DRIP)

  • denominations of $1000
  • fixed interest rate*
  • semiannual variable interest payment as principal adjusted
  • obligations of the federal govt

ex: $1000 TIPS that has paid $180 in interest and grown $300 in principal is sold for $1400. what amount is reported to the IRS?
- basis is $1000 + $300=$1300, so $100 gain is reported

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29
Q

UIT (fixed Unit Investment Trusts)

A

passive, UNITS, not shares

income distributed to UNIT holders

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30
Q

REITs

A 
ordinary dividend (not qualified)
not redeemable
negotiable and trade on exchanges

don’t put REITs in taxable accounts. tax-deferred accounts like SEP -good.

publicly-traded reits (equity, mortgage, construction)- marketable, but nonpublic reits are illiquid/not marketable

31
Q

phantom income (zero-coupon bond) is current income?

A

yes, CURRENT, not cap gain

32
Q

beta of .60 means how volatile? %

A

60% as volatile as average stock

33
Q

duration of a bond- don’t do formula…so how?

A

when bond pays coupon, pick next lower number under years of maturity

ex: 8 yr maturity, 6% coupon, selling for $110 when comparable bonds are paying 5%
so. ..not 8.00…6.63 is the answer

34
Q

NAV (Net Asset Value)

No load fund

A

Open end: At the end of each trading day, the funds reprice based on the number of shares bought and sold. Their price is based on the total value of the fund or the net asset value (NAV).

no load fund- no sales, charge, so you can buy at NAV

35
Q

qualified (commercial) deferred annuity

A

purchased with pretax dollars

joint and survivor basis- replacement cost of a single life annuity on survivor is included in first decedent’s estate

36
Q

T-bills, T-notes, T-bonds

A

T-bills ($100 denominations; 3, 6, 12 months
T-notes ($1000+, 1 to 10 years)
T-bonds ($1000+, 10 to 30 years)

37
Q

maintenance call

A

100 @ $75 with 50% margin= $3750, maintenance 30%
stock drops to $40

*60% initial margin would mean you pay that much and borrow 40%

maintenance call:
30% of current value ($40 x 100=$4000) required
=$1200
$4000-$3750=$250 (the equity you have left)

Maintenance call=$1200 - $250= $950

38
Q

blue chip bonds

A

Blue chips generally sell high-quality, widely accepted products and services. Blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and reliable growth

39
Q

ETFs

A

may be open or closed-end, traded on major exchange, non-liquid

can be bought on margin, sold short, traded thruout the day, can do stop-loss and limit orders

40
Q

buying stocks and options with margin

A

the stock purchase can be margined but NOT the option, so if you bough $7000 worth of stock, $3500 is margined, and $400 wouldn’t

41
Q

immunization- what do you do

A

a portfolio is said to be immunized (neutralized) if the duration of the portfolio is made equal to a pre-selected time horizon for the portfolio. (offsets interest rate and reinvestment rate risk)

questions like: “he has a four-year time horizon”

(zero coupon bond’s duration = maturity)

42
Q

sinking fund

A
  • to reduce default risk
  • may allow issuer to retire a portion of debt each year until maturity
  • periodic payments required to fund it are generally same each period
  • funds used to retire bonds at maturity or to retire a portion of issue each year after a specified date
43
Q

4 probability distributions

A

normal, triangular, uniform, lognormal

44
Q

Dow Theory

A

contradicts Modern Portfolio Theory and EMH, identifies the top of bull market and bottom of bear market

  • technical analysis, active
  • support and resistance levels
  • Dow Jones Industrial Index and Dow Jones Transportation Index
45
Q

REMIC

A

(Real estate mortgage investment conduits)

pass-through income

46
Q

time-weighted (geometric)

dollar-weighted (IRR)

A

time-weighted to evaluate portfolio manager performance

47
Q

EEs and I bonds- taxation

A

interest deferred unless owner can chose to be taxed each year

48
Q

Black-Scholes option valuation

A

values option of non-dividend paying stock

49
Q

wash sale

A

no loss deduction allowed- disallowed loss added to cost basis of the shares re-purchased
[can’t purchase identical stock 30 days before/after date of SALE]

ex: $25 basis, sold at $10, then purchased for $20 within 30 days

cost basis is now $20 + $15 loss= $35

50
Q

HH bonds

A

taxed yearly

non-marketable with interest not subject to state and local taxes (like EE)

no longer issued or traded

51
Q

protective put (out of the money puts?)

A

insures gain if stock falls in value

cost of the put is covered if the stock continues to go up

52
Q

yield curve

A

positive- get t bills!

negative- short term better

53
Q

1 option is how many shares?

“what’s the intrinsic value of the puts?”

A

1 option= 100 shares!

$2 put option, own 5 puts. EP is $50 and strike is $47

$50-$47=$3 intrinsic value
$3 x 100 shares x 5 options=$1500 is the answer

54
Q

bonds

$1,000 par bond quoted at 110 means?

A

it’s selling at a premium of 10 points ($100 over par)

55
Q

call option taxability (holder and writer)

A
  • if you purchase 100 stocks @ $50 (held 13 mon) and call option for $3 premium for $40 strike price; sell stock for $45 and option for $6:
    • $500 LTCL on the stock and $300 STCG on the option (NETTED $200 LTCL)
  • if you purchase 100 stocks @ $50 (held one year) and call option for $300 at $60 strike price; sell stock for $65 and option for $500:
    • $1500 LTCG for stock and $200 STCG for option (gains and gains cannot be netted)
  • if you purchase 100 stocks @ $50 (held 1 year) and WRITE a call option for $60 strike for premium of $5, and it is exercised:
    • $10 LT gain + $5 premium also becomes LT gain=$15 LTCG per share
56
Q

stop-limit order

A

limit order and stop order combined:
Ex: “sell 100 GM 70 stop-limit” – once the stock sells at or below $70, it becomes a limit order to sell 100 shares at $70

57
Q

what’s true if you buy a stock on margin?

A

the downside risk is amplified- for example, if the stock goes down by 30%, the rate of return can be -69%, whereas the potential upside gain would’ve been 51%.

58
Q

US Treasury bonds taxed federally, state, local?

A

taxed federally, exempt from state and local

zero treasury bonds have phantom income (taxed)

59
Q

current yield and bond price

A

if bond prices went up (due to demand etc), current yield would decrease because:

current yield= annual cash inflow/ market price

60
Q

real rate of return problem example

A

Tom invested $25,000 and sold it for $40,000 5 years later. He’s in 15% tax bracket and inflation increased by 3.5%. Did he achieve “real rate of return” of 5%?

25,000 PV, $40,000 FV, 5 N, i=?
i=9.856%
(inflation adjust by dividing 1.09856 by 1.035, minus 1, x 100)

61
Q

duration is used for…?

A

compare the price VOLATILITY of bonds with equal coupons but different terms on the basis on time

risk averse investors prefer low duration bonds, and aggressive investors prefer high duration only when they think interests will decline

62
Q

zero coupon bonds

A

more interest rate sensitive, volatile (bc if rates increased, since there’s no income attached to it, you’d have to drop the price to sell)

63
Q

R^2

A

Coefficient of determination (square of correlation coefficient)

64
Q

Correlation +1 means?

A

Perfectly correlated. -1 is perfectly negative (moves opposite)

0 means no relation in movement

65
Q

Marketable and non marketable assets

A

Marketable: brokered CDs, closed end funds, ETF

Non marketable: open end mutual funds (redeemed instead)

66
Q

type of investment- maximum leverage and hedge against inflation?

A

improved land

stocks lose value during inflationary times
-mortgage REITs are highly leveraged but do poorly as well

67
Q

naked call

naked put

A

naked call- unlimited loss potential

naked put- can’t go below zero…limited loss potential

68
Q

covariance

correlation coefficient

coefficient of variation

risk adjusted return

A

covariance:
-how price mvt of (2) securities relate to each other

correlation coefficient:
+1.0 to -1.0 (perfectly correlated to perfectly negatively correlated)

coefficient of variation:
relative variability to compare investments with varying return and standard dev [=sd/mean]; larger=riskier

risk adjusted return: to standardize funds for risk [=return/beta] (higher=better)

69
Q

what yield is generally most important to bond investor?

A

YTM (total return from a bond “effective yield”)

70
Q

Yankee bond

A

Dollar denominated bond issued in US by foreign banks

71
Q

STRIPS

A

normally purchased by pension plans- phantom income

?

72
Q

Modern portfolio theory

A

Active.

Selecting an optimal combo of assets to secure the highest return for a given level of risk

73
Q

Increased exercise price

A

Decreased call value (black scholes)

74
Q

Increased exercise price

A

all the rest move the same way (the inverse only is the decreased call value)

Beth CFP 2020 Final Deck (7 decks)

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