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CFP > Investment Planning > Flashcards

Investment Planning Flashcards

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CFP® flashcards
1
Q

Taxation of futures

A

60% long term and 40% short term cap gains

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2
Q

option premium

A

the purchase price of an option contract, the amount the seller receives IV + TV = premium

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3
Q

intrinsic value of an option

A

minimum price that option will trade call option = market price - exercise price (COME) put option = exercise price - market price (POEM)

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4
Q

maximum gain/loss when buying a call

A

gain: unlimited
loss: amount of premium

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5
Q

max gain/loss when writing a call

A

gain: premium received
loss: unlimited

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6
Q

max gain/loss when buying a put

A

gain: exercise price - premium
loss: premium paid

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7
Q

max gain/loss when writing a put

A

gain: premium paid
loss: exercise price - premium

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8
Q

time value of an option

A

amount by which the trading value of the option exceeds its intrinsic value

greater time to expiration = greater time value

greater volatility (of security) = greater time value

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9
Q

in the money for a put and call

A

call: exercise price below the market price
put: exercise price above the market price

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10
Q

out of the money put and call

A

call: exercise price above the market price
put: exercise price below the market price

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11
Q

zero cost collar

A

used to protect the long position of a stock

long stock position, long put option and short call option

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12
Q

correlation coefficient (R)

A

extent to which two securities are related

  • if movement is identical = +1*
  • if move in opposite directions = -1 range between +1 and -1*
  • not correlated = 0*
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13
Q

covariance (COV)

A

extent two variables move together positively or negatively

COV = ρσσ

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14
Q

Beta

A

relative measure of systematic risk

market beta = 1

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15
Q

coefficient of determination (R²)

A

% of variability of the dependent variable that is explained by changes in the independent variable

ex: if R² =70%, then 70% of the stocks movement is price can be explained by changes in the market

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16
Q

coefficient of variation (CV)

A

CV=σ/return

measures for each % of return how much risk you are taking on want this number to be low

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17
Q

standard deviation

A

measure of total risk

measure of variability of returns around the mean

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18
Q

z statistic

A

measures the number of standard deviations a particular value is from the mean

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19
Q

leptokurtic

A

peaked curve, more observations around the mean investors want this if they want less volatility

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20
Q

platykurtic

A

flatter curve, observations with large deviations from the mean

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21
Q

semi variance

A

only considers the downside volatility of an investment

22
Q

Sharpe Ratio

A

relative measure of risk adjusted performance based on total risk

23
Q

Jensens Alpha

A

measures risk adjusted value added by a portfolio manager positive number means that the manager added value,

negative number means underperformance absolute measure of performance

24
Q

information ratio

A

measure consistency a manger beats a benchmark

25
Q

Treynor Ratio

A

relative measure of risk adjusted performance based on systematic risk

beta must be reliable = .70 or more

26
Q

speculative bonds (junk)

A

BB or below (bad bond)

27
Q

duration of zero coupon bonds

A

= to maturity

28
Q

Macaulay duration

A

absolute measure of interest rate sensitivity of a bond

29
Q

convexity

A

degree to which duration changes as a result of changes in YTM

30
Q

convexity is greatest with what kinds of bonds?

A

low coupon longer maturity low YTM

31
Q

conversion ratio

A

par value/conversion price

32
Q

income capitalization approach

A

net operating income/discount rate

33
Q

net operating income

A

gross rental receipts

+ non rental income

= potential gross income (PGI)

  • vacancy collection losses

= Effective gross income (EGI)

  • operating expenses

= net operating income (NOI)

34
Q

time weighted return

A

geometric annual rate of return preferred for analyzing performance of a portfolio manger

35
Q

dollar weighed return

A

compound annual rate of return (IRR) better assessment of investoR’s actual performance

36
Q

steps to immunize a portfolio

A

goal: protect bonds from interest rate risk and reinvestment risk

  1. choose time horizon equal to goal
  2. purchase bonds of various maturities with a duration equal to the time horizon
  3. rebalance every 6 most- yr and duration should change based on time to goal (ex started at 10, 6 months would to go 9.5)
37
Q

greater the duration, the greater the

A

volatility

38
Q

types of systematic risk

A

Purchasing Power Risk: Loss of purchacing power through inflation.

Reinvestment Risk: Risk that proceeds available for reinvestment must be reinvested at a lower interest rate than the instrument that generated the proceeds.

Interest Rate Risk: The risk that a change in interest rates will cause the market value of the fixed income security to fall.

Market Risk: Risk of the overall market

Exchange Rate Risk: Risk associated with changed in the value of the currency.

Study Hint: Remember P.R.I.M.E.

39
Q

fluctuations in bond prices

A

The smaller the coupon, the greater the Relative Price Fluctuation

The longer the term to maturity, the greater the Price Fluctuation

The lower the market interest rate, the greater the Relative Price Fluctuation

40
Q

unsystematic risk

A

Known as Diversifiable Risk, may alslo be referred to a Non-systematic Risk.

Business Risk: Refers to the nature of the firm’s operations (i.e., possibility of loss due to new technology)

Financial Risk: Refers to how the firm finances its assets (i.e., the possibility of loss due to heavy debt financing)

41
Q

Reg D accredited investor

A

Accredited (Unlimited):

Net worth of $1 million or,

Individual with income of $200,000 or,

Couple with income of $300,000

Non-Accredited Issue:

sold to a maximum of 35 investors Must use a purchaser representative if not “sophisticated”

42
Q

using duration to manage bond portfolios

A

If interest rates are expected to rise, shorten duration (Interest rates up, shorten Duration)

Remember: UPS: UP for “up” and S for “shorten”

If interest rates are expected to fall, lengthen duration. Buy low coupon bonds with long maturities. Interest rates fall → lengthen duration.

Remember: FALLEN - FAL for “fall” and LEN for “Lengthen.”

43
Q

treasury securities

A

OIDs: issued at discount from par value. Each year a portion of the discount is “earned” and taxable (phantom)

Bills/Notes/Bonds: marketable securities, there is no state or loval income tax on interest. Bills are quoted in terms of discount to yield.

STRIPS: zero-coupon, direct obligation of fed. discount is treated as taxable income, earned annually (phantom)

TIPS: Face value is adjusted semiannually to keep pace with inflation. taxed annually on the interest payment (phantom) plus appreciation in face value.

44
Q

options taxation

A

At the Time of Purchase: Non-deductible Capital Expenditure

To the Writer Due to Lapse: Premium received is a short-term gain

To the Writer Due to Exercise: Premium received is added to sale price (can be long term gain if underlying security was held more than 12 months, otherwise short term).

Covered Call. To the Holder: If the option is NOT exercised, then the option is considered sold (it expires) and it is a short-term loss. The option period is 9 months or less.

45
Q

strategies to deal with concentrated portfolios

A

ESOP

Charitable remainder trust

Put options

Exchange funds

46
Q

Margin call

A

margin call = debit balance/(1-maintenance margin)

debit balance = amount owed to broker

47
Q

how much money is needed to satisfy a margin call?

A
  1. current stock price X maintenance margin % = required equity
  2. current stock price - debit balance = current equity
  3. required - current = amount owed
48
Q

HPR

A

(ending value - beginning value +/- cash flows)/Beginning value

49
Q

risks of corporate and muni bonds

A

Default: A creditor may seize the collateral and sell it to recoup the principal

Reinvestment: As payments are received from an investment, interest rates may fall. When the funds are reinvested the investor receives a lower yield.

Interest Rate: Rising interest rates may cause bond prices to fall

Purchasing Power: Inflation may lower the value of bond interest payments and principal repayment, thereby forcing bond prices to fall.

Study Hint: Remember: D.R.I.P.

50
Q

what are the market values to define market capitalization of companies?

A

Large: > $10 billion

Mid: $2-10 billion

Small: < $2 billion

Micro: < $300 million

51
Q

ROE

A

ROE = Earnings Available for Common (EPS) / Common Equity (net worth or book value)

52
Q

Zero coupon bonds

A

Duration equal to Maturity

No coupon interest, yet produces “phantom” income

No reinvestment rate risk

Sold at deep discounts to PAR Fluctuate more than coupon bond with the same maturities

CFP (7 decks)

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