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Investment Planning > Investment Planning > Flashcards

Investment Planning Flashcards

1
Q

Coefficient of Variation

A

CV = std dev /avg return
The higher the coefficient of variation the more risky an investment per unit of return.

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2
Q

Kurtosis

A

Leptokurtic= high peak and fat tails (higher chances of extreme events)
Platykurtic=low peak and thin tails (lower chance of extreme events)

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3
Q

Covariance

A

Measure of relative risk
Cov=std dev asset A times std dev asset B times correlation coefficient of Assets A and B

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4
Q

Correlation coefficient

A

Correlation ranges -1 to +1
Cor coefficient = covariance of Assets A and B/(std dev A* std dev B)
- correlation of +1, positively correlated
- correlation of 0, uncorrelated
- correlation of -1, negative correlation

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5
Q

Beta coefficient

A

-Is a measure of individual security’s volatility relative to mkt
-The greater the Beta, the greater the systemic risk of that security.
- equals security risk premium/market risk premium

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6
Q

Standard deviation

A
  • measure of total risk
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7
Q

Coefficient of determination or r2

A

= is a measure of how much return is due to market
-If r 2 is >70% use beta
-If r 2 is <70% use std dev

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8
Q

Market risk premium

A

Return of the market rm minus Risk free rate of return Rx

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9
Q

Security Market Line vs Capital Market Line

A

-SML uses beta as it’s measure of risk
-CML uses std dev as its measure of risk
-If port provides a return above the SML, security is undervalued and should be purchased
-If port provides a return below the SML, security is overvalued and should NOT be purchased

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10
Q

Optimal Portfolio

A

Is the point at which an investor’s indifference curve is tangent to the efficient frontier

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11
Q

Holding Period Return

A

= (Selling price - purchase price)+/- cash flows divided by purchase price or equity invested

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12
Q

Internal Rate of Return

A

-NPV = PV of cash flows - Initial Cost
-If NPV is positive, then IRR>Discount rate
-If NPV is zero, then IRR = Discount rate
-If NPV is negative, then IRR<Discount rate

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13
Q

Mutual funds report returns

A

-on a time weighted basis. Investors are concerned about dollar weighted returns.

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14
Q

Expected Rate of return

A

r = D1/P +g

Where:

r = The required rate of return.
g = The dividend growth rate.
D1 = Next period’s dividend.
P = is market price

If D1 is not provided, you can use D0, which is this year’s dividend multiplied by the growth rate provided. D(1+g).
-If the required rate of return decreases, the stock price will increase
-If the dividend is expected to increase, the stock price will increase
-If the required rate of return increases, the stock price will decrease
-If the dividend is expected to decrease, the stock price will decrease

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15
Q

Dividend Payout Ratio

A

DPR = common stock dividend/Earnings per share

Determines percentage of earnings paid out in dividends to shareholders.

-the higher the dividend payout ratio, the more mature the company
-a high dividend payout ratio may also indicate the possibility of a dividend being reduced
-a low dividend payout ratio may indicate that the dividend may increase, thereby increasing the stock price

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16
Q

Return on Equity Formula

A

ROE = Earnings per share/ Stockholders equity per share

17
Q

Dividend Yield Formula

A

Div Yield = Dividend/Stock Price

-formula states annual dividend as a percentage off the stock price

18
Q

GNMA Bonds

A

are backed by the full faith and credit of the US government

19
Q

Corporate bond risk vs US Government bond risk

A

US government bonds are not subject to default risk. Municipal bonds can be considered to have default risk unless they are insured.

20
Q

Coupon rate of bond formula

A

Coupon rate = coupon payment /par value

21
Q

Current Yield of bond formula

A

Current yield = coupon payment/mkt price of bond

22
Q

Bond compounding

A

On CFP exam, always assume semiannual compounding UNLESS told otherwise in the question.

23
Q

Bond Yield Ladder Summary

A

When shopping, if you see a Discount, Call Mom’s Cell Now - Discounts from highest to lowest is YTC, YTM, CY and Nominal Yield
- for a Premium it would be opposite

24
Q

Bond Duration

A
  • The bigger the duration, the more price sensitive or volatile the bond is to interest rate changes
    -Duration is the moment in time the investor is immunized from interest rate risk and reinvestment rate risk
    -Modified duration is a bond’s price sensitivity to changes in interest rates
    -A bond portfolio should have a duration equal to the investor’s time horizon to be effectively immunized.
25
Q

Convertible bond conversion formula

A

CV = Par Value/Conversion Price * Price of Common Stock

26
Q

Unit Investment Trust

A
  • can be equity or fixed income, typically fixed income trust
  • are self liquidating and passively managed
  • issues “units” not shares
27
Q

Net Asset Value

A

= (Assets - Liabilities)/Shares Outstanding

28
Q

3 Types of Investment Companies

A
  • Closed End (fixed capitalization that may trade at a premium or discount on an organized exchange)
  • Open End (unlimited number of shares and trade at NAV)
  • Unit Investment Trust (UIT)
29
Q

Index Finds

A
  • Passive investment strategy that is tax efficient
  • Tracks performance of various market indices
  • Low turnover rates minimizing cap gain distributions
30
Q

Sector Funds

A
  • not well diversified and have a low r2 (0.50 - 0.60)
31
Q

International vs Global Funds

A
  • Global invests in both international and US securities
  • International EXCLUDED US securities
32
Q

Exchange Traded Funds

A
  • low cost of ownership
  • typically a passive investment
  • tracks an index
33
Q

American Depository Receipts (ADRs)

A
  • Foreign stock held in domestic branch banks’ foreign branch
  • Trade on US exchange denominated in US dollars
  • Do NOT eliminate exchange risk
34
Q

Taxability of Options

A
  • If contract lapses (or expires) premium paid is a short term loss and premium received is short term gain
  • If contract is exercised, the premium is added to the stock price to increase the basis in the underlying stock. If stock held >12 mos, long term gain or loss. If held < 12 mos, short term gain or loss
35
Q

Futures Contract

A
  • primary players are hedgers and speculators
  • futures contract are “marked to market”, gains/losses are credited/debited to your account daily
36
Q

Education and Retirement Funding Questions

A
  • Two step process
  • 1st, determine the NPV of the cash flow stream at time period zero (always use inflation adjusted interest rate)
    -2nd, determine the savings required (determine if the savings will occur at the beginning or ending of the time period). Use BEGIN or END on calc

Investment Planning (1 decks)

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