Investment Planning Flashcards
What is the ranking of the 6 types of creditors (least safe to safest)?
- Mortgage liabilities and ABS.
- Secured debt.
- Unsecured debt.
- Capital securities.
- Preferred shares.
- Common shares.
What is the taxation of income paid on fixed income securities?
- Interest income is 100% taxable.
Why might someone invest in real estate?
- Offers capital appreciation (growth).
- Provides income.
- Hedge against inflation.
Why might someone want bonds in their investment portfolio?
- Reduce risk.
2. Produce income.
Why might someone invest in alternative investments?
- increase returns more than risk (and vice versa).
2. increase portfolio’s absolute return (resilience to capital erosion in market downturns).
What are the types of alternative investments?
- Hedge funds.
- Private equity.
- Commodities - futures on physical goods (e.g. wheat)
- Collectibles.
- Crypto.
What are a few different types of bonds?
- Strip - bought at a discount and mature at par value.
- Callable - issuer has right to redeem bond prior to maturity.
- Real return - bond price is indexed for inflation by adjusting face value.
- Puttable - gives holder option to redeem bond for par value before maturity.
What is the rule of thumb for how much equities an investor should have in their portfolio?
- 100 - investor age = equity weighting (e.g. I’m 27, 100-27 = 73% weighted to equities. Balance can be fixed income and cash).
- Life cycle approach - adjust allocations based on where investor is in life (e.g. retirement = more fixed income and less equity).
What are some advantageous features of ETFs over mutual funds?
- Lower costs - passively managed, smaller MER.
- Transparency - holdings are released daily.
- Tax efficiency - less trading, thus fewer taxable events.
- Liquidity - trading done via exchange during market hours.
What are the rules around Labour-Sponsored Venture Capital Funds?
- Investors receive 15% federal tax credit up to an investment amount of $5,000 ($750 credit).
- Some provinces also have 15% credit, thus 30% total credit.
- Qualified for RRSP.
- Minimum holding period of 8 years.
What are the type of asset allocation strategies?
- Strategic - benchmark asset mix designed to achieve client’s long-term goals.
- Tactical - take short-term positions to profit from market conditions (e.g. selling equities after market rally).
- Dynamic - allocation continually adjusted to minimize downside risk and maximize returns for investor.
What type of investment(s) should be held in registered accounts?
- Fixed income - has interest income which has least favourable tax treatment.
- REITs - cash flow is passed to investors, attractive for those seeking income.
What type of investment(s) should be held in non-registered accounts?
- Canadian stocks - dividends and realized capital gains are the most favourably taxed kinds of investment income.
- Foreign stocks (with low/no dividends) - similar to above, just not the case for foreign dividends.
- Preferred shares - payouts are eligible for dividend tax credit
What are the type approaches to fundamental investing?
- Top-down - fund managers identify macro trends, then specific sectors, then specific securities in those industries.
- Bottom-up - starts by analyzing individual companies, then prospects for the industry, then general economic environment.
What is technical investing?
- Study of historical stock prices and market behaviour to identify recurring patterns in data.
What is the formula for measuring portfolio returns?
- Rp = [MVE – MVB – Con’t + Withdrawals] / [MVB + Con’t]
What is true about a bond’s term, coupon, yield and modified duration?
- The lower the yield, the greater the modified duration.
- The longer the term to maturity, the greater the modified duration.
- The lower the coupon rate, the greater the modified duration.
What does a bond’s duration measure?
- A bond’s price sensitivity to changes in interest rates.
- The longer the term to maturity, the greater the modified duration.
- The lower the coupon rate, the greater the modified duration.
- The lower the yield, the greater the modified duration.
- Modified duration is always less than the term to maturity.
What is the formula to calculate modified duration?
- MD = Macaulay Duration / [1 + y/k]
2. y = yield, k = # of coupon payments per year.
What is bond immunization?
- A strategy used to minimize interest rate risk of bonds by adjusting the portfolio duration to match investor’s time horizon.
- Goal is have investor receive specific rate of return regardless of what happens to interest rates.
What is the formula for a bond’s current yield?
- Current yield = (annual cash flow/current market price) x 100.
How do you calculate the Yield To Maturity (YTM)?
- YTM = (interest income +/- price per compounding period) / (purchase price + par value)/2) x 100.
What does the Correlation Coefficient determine?
- Whether two securities have a negatively or positively correlated relationship.
- Ultimate diversification occurs when securities are perfectly negatively correlated (p = -1).
What is the Capital Asset Pricing Model (CAPM) formula?
- E(Rf) = Rp + Bi x [E(Rm) - Rp].
- E(Rf) = expected return on asset.
- Rf = risk-free return.
- Bi = asset’s beta.
- E(Rm) = expected return on market portfolio.
What does Beta measure and tell us?
- Measures sensitivity of asset’s return to the return on the market portfolio (aka systematic risk).
- B > 1, systematic risk of asset > market.
- B < 1, systematic risk of asset < market.
What is systematic and unsystematic risk?
- Systematic - Risk inherent to entire market (undiversifiable/ market risk) and is impossible to completely avoid.
- Unsystematic - Risk inherent in each investment that can be reduced via diversification.
What does Alpha tell us?
- Measures performance on a risk adjusted basis (unsystematic risk).
- A positive alpha reflects positively on a PM (and vice versa).
What does Jensen’s Alpha capture?
- Quantifies the degree to which a PM has added value.
- If positive, PM has produced more return than predicted.
- Jp = Rp - [Rf + Bp (Rm - Rf)].
What does Treynor Index capture?
- Measures performance of one specific portfolio while holding assets in another.
- Tp = (Rp - Rf) / Bp.
What does Sharpe Ratio capture?
- Measures excess average return per unit of total risk.
2. Sp = (Rp - Rf)/σp.
What is fiscal policy?
- Use of gov’t taxing and spending powers to manage behaviour of economy.
What is monetary policy?
- Management of money supply within country via central bank.
- Goal is to preserve value of money by keeping inflation low, stable, predictable.
- Done via:
- Overnight rate - FI’s lend to each other.
- Bank rate - BoC lends money to chartered banks.
- Open market ops - BoC buys govt’s bonds to inject money into economic or sells them to remove money.
