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CFP > INVESTMENT PLANNING > Flashcards

INVESTMENT PLANNING Flashcards

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1
Q

TIME VALUE

A

FV = PV (1 + r)^n

PV = Present value of inv. today
r = req'd rate of return
FV = Future value
n = # of periods

***After Tax Return = Rate (1 - tax rate)

Bond: Face Value - FV; compute PV

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2
Q

RATES OF RETURNS (9 TYPES)

1) HPR

A

HOLDING PERIOD RETURN (HPR) = sale proceeds - purchase price + cash flow / purchase price

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3
Q

REAL RATE OF RETURN

A

r = Nominal pre-tax return - inflation
————————————————
1 + inflation rate (expressed as decimal)

REAL AFTER -TAX RATE OF RETURN =
After tax return - inflation / 1 + inflation (expressed as decimal)

Total return=
(Sales proceeds - purchase price + all net cash flows + reimbursement income) / purchase price

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4
Q

ARITHMETIC MEAN RETURN
GEOMETRIC MEAN RETURN
TIME WEIGHTED RATE OF RETURN

A

ARITHMETIC MEAN RETURN = Sum of observations / Number of observations

GEOMETRIC MEAN RETURN =
1+r = (1+r)(1+r)(1+r) ^ 1/n
r = {(1+r)(1+r)(1+r) ^ 1/n} - 1

alternatively:  
PV = -1
FV = (1+r)(1+r)
PMT = 0
N = number of years reporting 
Solve for I/Y
***FUND MANAGERS MUST REPORT GEOMETRIC RETURNS
TIME-WEIGHTED RATE OF RETURN
PV = +-1
FV = 1 x (1+r)(1xr)(1xr)
N= number of periods
PMT = 0
I/Y = ?
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5
Q

IRR - INTERNAL RATE OF RETURN

A 
CF 2nd CLR WORK
CF 100000 +- ENTER 
down arrow 0 ENTER
down arrow (2) 0 ENTER
down arrow (2) 0 ENTER 
down arrow (2) balance ENTER
IRR CPT = %
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6
Q

EFFECTIVE ANNUAL RATE OF RETURN

A

e= (1+r)^m -1

Step 1: Convert annual rate to period rate (quarterly = /4)
Step 2: $1.00 invested for the period (months) would grow

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7
Q

RETURN ON A FOREIGN INVESTMENT IN CDN DOLLARS

A

{Sale proceeds(FC) x Exchange Rate} - Purchase cost (FC) x Exchange Rate)

% Return = {Profit (Loss) Cdn $ / Purchase Cost Cdn $}x 100

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8
Q

GOVERNMENT REGULATORS OF FIs

A
  • OFSI: sets capital requirements, conduct audits, montiors activities of FIs.
  • SECURITIES ACT: protects the investors
  • CIPF (Canadian Investor Protection Fund): LIKE CDI FOR credit unions: coverage $1MM: protects clients again bankruptcy of FI; 180 calendar days to make a claim
  • ASSURIS: in event of insolvency of a member insurance company;
    a) covers greater of $200K or 85% of promised benefit;
    b) greater of $60K for cash value portion of 85%;
    c) up to $100K fro non-reg accumulation plans, RSP, RRIF, pension policies
    d) greater of $2000/month or 85% for annuities, disability income, LTC
    e) seg funds and CI: greater of $60K or 85% of promised benefit
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9
Q

ECONOMICS

A

GDP: focueses on what’s been produced “in Canada”.
GNP: focuses on what’s been produced “by Canadians”.

2 Methods of obtaining GDP:
i) Expenditure Approach: consumption (personal), investmnet (businesses), government, net exports

ii) Income Approach: profits, employee compensation, rent/mtg pmts, taxes, interest

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10
Q

REAL GDP

A

REAL GDP = Nominal GDP / 1+ inflation rate

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11
Q

CPI

A

Inflation
Deflation
Disinflation: prices are rising at a declining rate year over year
Stagflation: High unemployment, high inflation

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12
Q

Business Cycle

A
  • Trough (low)
  • Expansion
  • Peak
  • Contraction

Economic conditions

1) Employment
2) Inflation
3) Interest rates
4) Consumer and Business confidence
5) Inventory levels
6) Capacity Utilization

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13
Q

EMPLOYMENT

A

3 TYPES OF UNEMPLOYMENT

1) Frictional unemployment: found (haven’t found anything yet)
2) Structural unemployment: skills (outdated)
3) Cyclical unemployment: eConomic factors

4) Natural unemployment = frictional and structural combined

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14
Q

Economics OBJECTIVES of the Gov’t

A
  • low unemployment
  • stable economic growth
  • low inflation
  • preserving currency value
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15
Q

ECONOMIC POLICIES

A

Fiscal: Taxation and Spending

Monetary: money suply and credit conditions of BoC

interest rates; inverse relationship with bonds and money supply

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16
Q

Economic Indicators

A 
"Leading": 
S stock prices 
H housing 
M money supply
M manufactuere's new orders 
A avg hrs worked per week
C commodity (goods) prices 
"Coincient": At the same time
G GDP
R retail sales
I industrial productions
P personal income 
Lagging: turned after 
U unemployment rate
I inventory levels
I interest rates 
I inflation 
L labour costs 
P private sector spending
17
Q

ASSET ALLOCATION

A

1) STRATEGIC: long-term AA (regular asset mix)
- 2 approaches:
i) efficient/frontier approach: risk tolerance/objectives
ii) age approach (5% cash; 100-age Equity)

*** 5% got most investors and 10% cash for very conservative investors.

2) DYNAMIC: rebalancing on a regular basis to get back to strategic mix; prevents market drift by portfolio monitoring.
3) TACTICAL: tilt from regular asset mix to take adv. of short-term opportunities

18
Q

FIXED INCOME and EQUITIES

A

F/I:

  • ** Term Deposits
  • preferred shares, bonds, mortgage backed securities, debentures,

EQUITIES:
- income trusts, derivatives (warrants, rights, calls, puts)

19
Q

DETERMINING A YIELD FOR T-BILL

A

Annualized Yield: {(Face Value - Price)/ price x (365 days/no of days to maturity)} x 100

*** Calculating purchase price:
Face Value of bond x Price/100

*** Annualized Yield:
($100 - Purchase Price / Purchase price) x (365/days until maturity) x 100

*** Interest income:
Face Value - Purchase price

20
Q

CURRENT YIELD BOND

A

Current Yield of Bond = Annual Interest Income in $ / Purchase price x 100

21
Q

YIELD TO MATURITY

** Always assume that bond pays semi-annual interest

A 
FV = FUTURE VALUE / FACE VALUE 
PV = Purchase price / market price 
PMT = % of bond (annual)/2 b/c semi-annual 
N = # of years x 2 b/c semi-annual periods
I/Y = ? x 2 b/c semi-annual

*** WHEN STRIP BOND; PMT = 0

22
Q

INTEREST RATE RISK

A

Macaulay duration = interest rate risk on a bond.

  • measures how lont it takes to get cash back on investment
  • Macaulay duration increaes with the term to maturity

Highest risk bond: 3 Ls
longest term
lowest coupon rate
lowest yield to maturity

23
Q

MODIFIED DURATION PREDICTS A % PRICE CHANGE IN BOND

A

Modified Duration - Macaulay duration / 1 + semi annual YTM (in decimals)

if yields change 1%, the modified duration will change %of price. e.g. of modified duration is 12, then 12% per 1% yield change

24
Q

S&P RATINGS

A

Money Market = R2 or higher

Bonds = BBB or higher (Bonds below are junk bonds)

Preferred Shares = P3 or higher

25
Q

CONVERTIBLE BONDS

A
26
Q

SEG FUNDS

A
  • insurance contracts that provide 2 guarantees
    1) Maturity guarantee
  • guarantee 75%-100% of original investmeent
  • guarantee cannot come into effect for at lest 10 yrs of purchase date

2) Death benefit guarantee)
- guarantees beneficiary 75-100% ; no time limit with guarantee

27
Q

INCOME TRUSTS (2 TYPES)

A
  • Trusts that distribute a min. 90-95% of their free cash flow to unitholders. Free cash flow is cash flow after deducting mandatory expenses to keep business going.
    1) REITS
    2) Business Trust
28
Q

LABOUR SPONSORED VENTURE CAPITAL COPORATIONS

A
  • designed to attract to invest in small growing companies with aim to stimulate local empoyment and regional growth
  • no annual contribution limit
    max. federal tax credit is $5000 for provinically sponsored
  • minimum holding period is 8 years
29
Q

PREFERRED SHARE CALCULATIONS

A

Market price of P/S - Annual Dividend income / yield (expressed as decimal)
*** Annual dividend = $ PAR price x % of share (decimal)

Yield = Annual Dividend income / Purchase price of P/S x 100

30
Q

DERIVATIVE SECURITIES

A
  • security where its price is related to another security

1) WARRANTS: as part of offering to buy more securities/issues; sweetner
2) RIGHTS: offered to existing common shareholders to buy additional C/S

3) CALL OPTIONS: private deal b/n two parties: right to “buy” stock/ obligated to “sell”
4) PUT OPTIONS: private deal b/n two parties: right to “sell” sotck/obligate to “buy”

5) Forward contracts: private deals b/n two parties (no premiums)
6) Future contracts: Entered into and traded on exchanges (no premiums)

31
Q

Warrants

A
  • as part of offering to buy new securities/issues
    1) intrinsic value = market price of “stock” - exercise price of warrant
    2) Time value of warrant = markt price of :warrant” - intrinsic value
    3) Break even price - exercise price of warrant + “cost” of warrant
32
Q

CALL/ PUTS

A

Motives for Buying Call Options

i) leverage: invest hoping to make a return
ii) to fix a future price on the stock
iii) hedge againast a short sale

Motives for Writing Covered Call Options

i) premium
ii) partial protection agains the stock dropping

33
Q

PORTFOLIO MANAGEMENT - MARKOWITZ PORTFOLIO THEORY

A
  • Expected Return: average weighted expected return based on realized historical results
  • Total Risk: standard deviation (total risk); can be systematic or unsystematic

a) Systematic Risk: market risk
- Beta: volatility of stock, asset, portfolio

b) Unsystematic risk: unique risk specific to the company
- Alpha: unique to company eg. manufacturing

  • Efficient Frontier: line that connects the portfolios w/ the highest expected returns for the amount of risk taken
34
Q

CALCULATING STANDARD DEVIATION (TOTAL RISK)

A

STEP 1: Calcalate Realized/Arithmetic Return (i.e. total returns / number of years

STEP 2: Calculate the Variance (i.e. sum of (Return minus realized return) / number of years: Take the SD of variance

35
Q

COVARIANCE and CORRELATION

A
  • If stocks move together on avg, the covariance is positive; if reverse then it’s negative.
  • Correlation measure strenght of the relationshp b/n two stocks
  • ** There is no risk reduction when correlation is +1.0
  • ** There is BEST risk reduction is when correlation is -1.0
36
Q

SHARPE RATIO: highest sharpe, most diversified( better.)

A

SHARPE RATIO = Rp - Rf / SD

RP = Return or expected return of portfolio
RF = Risk free rate (T-Bill rate)
37
Q

CAPM

Alpha; the higher, the better stock selection

A
  • William Sharpe
  • AA model b/n a risk free investment (T-bill) and a risky portfolio (market portfolio.)
  • uses concept of Beta which is systematic risk

CAPM
STEP 1:
Expected Return = RF + B (RM - RF)

STEP 2: ALPHA = Actual Return - Expected Return

38
Q

Investment risk

A 
Principal
Inflation
Liquidity 
Interest 
Systemic (market)
Unsystematic (company)
Foreign currency 
Political

CFP (6 decks)

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