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CFP CARDS > Investment Planning > Flashcards

Investment Planning Flashcards

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1
Q

If a project has a negative NPV of 93.25 should the project be taken?

A

No

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2
Q

What is IRR?

A

This it the break even rate required for the NPV of a project to equal 0.

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3
Q

If the IRR is greater than or equal to the discount rate of a project, should the project be taken?

A

Yes

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4
Q

If the IRR is less than the discount rate, should the project be taken?

A

No. If the project is taken investors will lose wealth.

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5
Q

What is the formula for real rate of return?

A

1+Return divided by 1+inflation, -1 and x100

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6
Q

What is the securities act of 1933

A

Regulation of new public offerings in the primary market. Prospectus now required

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7
Q

What is the securities act of 1934

A

Regulates THE SECONDARY MARKET. The sec is now born

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8
Q

What’s the investment company act of 1940

A

Authorized the sec to regulate investment companies. Open, closed and unit investment trusts.

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9
Q

What is the adviser act of 1940

A

Required advisers to be registered with the sec or the state.

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10
Q

What is the security investors protection act of 1970

A

Protects investors from losses resulting in brokerage firm failures.

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11
Q

What is a treasury bill

A

Short term. Issued in varying maturities up to 52 weeks. Can be from 100 dollars to five million.

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12
Q

What is commercial paper

A

Short term loans between corporations. Matures in 270 days or less and does not have to be registered with the SEC. Denominations is 100k and sold at a discount.

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13
Q

What is bankers acceptance

A

Facilitates imports and exports. Matures in 9 months or less. Can be held to maturity or traded.

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14
Q

What are Eurodollars

A

Deposits in foreign banks that are in US dollars

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15
Q

What is the maintenance margin

A

Minimum amount of equity required to be in the position

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16
Q

What price does an investor receive a margin call price

A

Loan divided by 1-maintenance margin

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17
Q

As it relates to dividends, what is the date of record

A

the date the dividend pays. The day before that is the ex dividend date. If you want a dividend, you have to purchase the stock the day before the ex dividend date.

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18
Q

Is high risk a high standard deviation or low standard deviation

A

High standard deviation equals high risk

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19
Q

What is the formula for coeffecient variation

A

standard deviation divided by expected return

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20
Q

What are the differences between correlation

A

correlation ranges from -1 to 1. 0 means no correlation. Positive 1 means they move together. -1 correlation means they do the exact opposite

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21
Q

When is R squared a good measure of risk, and when isn’t it.

A

If R Squared is greater than or equal to .7, then use Beta. If it’s less than that, you must use standard deviation

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22
Q

What does R Squared measure

A

what percentage of the return of an investment is from the market (S&P)

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23
Q

What is systematic risk

A

Risk that cannot be diversified away. This is market risk. Economy based risk.

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24
Q

What is unsystematic risk.

A

This is diversifiable risk. Company specific or unique risk.

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25
Q

what is the formula for the capital asset pricing model

A

expected ROR = rise free return + ((market return - risk free return)*Beta)

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26
Q

What is the one thing you need to know about the arbitrage pricing theory formula?

A

Standard Deviation and Beta are not inputs to the formula

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27
Q

What is the formula for the dividend discount model

A

value = Next dividend / (required return - expected return)

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28
Q

What is the PE Ratio formula

A

Price divided by earnings per share

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29
Q

What is the dividend payout ratio

A

dividend payout ratio = common stock dividend / earnings per share

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30
Q

What is the return on equity formula

A

ROE = earnings per share / stockholders equity per share

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31
Q

What is the formula for dividend yield

A

dividend yield = dividend per share / stock price

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32
Q

What is efficient market hypothesis

A

Price of stocks are unpredictable, just get an index fund

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33
Q

What are the three levels of efficient market hypothesis

A

the weak, semi strong, and strong form. The strong form says markets are so efficient that you don’t stand a chance at individual stock investing. Just buy an index fund. Weak and semi strong simply state that historical and public information isn’t going to help you stock pick either.

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34
Q

What is the difference between a secured and unsecured bond

A

Secured has some sort of asset that backs the bond. Unsecured bonds have nothing backing them and are more risky.

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35
Q

What are general obligation bonds

A

Muni bond back by the municipality that issued the bond

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36
Q

What are revenue bonds

A

Backed by the revenue of a specific project. Toll roads. Municipal bond example

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37
Q

What are private activity bonds

A

Used to fund construction of stadiums

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38
Q

what is the duration of a 10 year zero coupon bond

A

It is 10 years. If there are coupon payments coming before the 10 years is up, then the duration is less than 10 years.

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39
Q

What is a closed investment company

A

Fixed initial market cap. Shares trade on an organized exchange. May trade at a premium or discount to NPV

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40
Q

What is an open investment company

A

Unlimited market cap. Shares are bought and redeemed directly from fund family. Shares trade at NAV

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41
Q

What is a unit investment trust company

A

Can typically be equity or fixed income unit investment trust. Typically fixed income trust. Self liquidating. Shares and NOT units.

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42
Q

What is a global fund

A

Invests in international and US securities

43
Q

What are international funds

A

Only invest in international and NOT US.

44
Q

What is Black and Shoales

A

Model used to determine the value of a call option.

45
Q

What are warrants

A

Warrants are essentially call options issued by a corporation. Warrants are not standardized, where call options are. Usually these are 5-10 years.

46
Q

What does kurtosis measure

A

The variation of returns. If there’s a high peak and little variation in returns, there will be positive Kurtosis. If the peak is low and has a lot of variation, there will be negative kurtosis.

47
Q

What does covariants measure and what’s the formula

A

Measures the combined risk of two securities. Both standard deviation multiplied by each other, then multiply by correlation number.

48
Q

What’s the correlation formula

A

Covariance divided by (stand dev of asset a X standard dev of asset b)

49
Q

What does beta measure

A

Risk relative to the market

50
Q

What does R Squared measure

A

How much of a securities return is due to the market. Correlation squared

51
Q

What measure of risk does the capital market line use

A

Standard deviation

52
Q

What measure of risk does the securities market line use

A

Beta. The intersection at the y axis is the risk free ROR

53
Q

What does Jensen’s alpha measure

A

How well you did given the amount of risk you took on. Positive alpha means you got more return than you should’ve for risk taken on. Negative alpha means you didn’t get enough return for amount of risk taken on.

54
Q

What is arbitrage pricing theory

A

Asserts the pricing Imbalances cannot exist for any significant period of time. Multi factor model that attempts to explain return based on factors. Does not use beta or standard dev.

55
Q

What is the PE ratio formula

A

Price / EPS

56
Q

What is the dividend payout ratio formula

A

Common stock Dividend / EPS ….. the higher the payout ratio the more mature the company. Also greater risk the dividend will decrease.

57
Q

What is the ROE return on equity formula

A

EPS / Stockholders equity per share

58
Q

What is the dividend yield formula

A

Dividend / stock price

59
Q

What’s the difference between weak, semi strong, and strong forms of market hypothesis

A

Weak rejects technical analysis but says you can outperform market with fundamental analysis. Semi strong says fundamental and technical knowledge won’t help, but insider knowledge can help you out perform. Strong says markets are completely efficient and up to date. You can’t out perform them.

60
Q

What’s the important stuff to know about series EE bonds

A

They’re non marketable and are not taxed at the state or local level.

61
Q

What are the matures for treasury bills, notes and bonds

A

Bills are less than 1 year. Notes are 2-10 years. Bonds are 10+ years.

62
Q

What is original issue discount

A

Bond is sold at a deep discount. Like zero coupon bonds. Even though you receive no coupon, you have to pay taxes each year before maturity. Phantom tax.

63
Q

What are the only types of bonds backed by the full credit and faith of the US gov

A

Ginny Mae bonds

64
Q

What are secured corporate bond examples

A

Mortgage back securities and collateral trust bonds

65
Q

What are collateralized mortgage obligations

A

Mortgages divided into traunches A-Z. Ranging from fastest paid off to slowest.

66
Q

What are the three types of muni bonds

A

General obligation bond, revenue bonds, private activity bonds. Only general obligation bond is backed by the full faith and credit of the municipality.

67
Q

What is yield to maturity measuring

A

Total return of a bond over the course of time you hold it.

68
Q

What’s the difference between current yield and coupon rate

A

Current yield is what the bond is paying based on the current price of the bond. Coupon rate is measuring what percentage of the par value is being paid out.

69
Q

What is yield to call measuring

A

The ROR earned by an investor over the period of time up until the issuer calls the bond.

70
Q

What is accrued interest

A

It’s the interest you receive for a bond that wasn’t yours yet. For example if a bond pays interest at the end of the year, and you bought it from someone else halfway through the year, you have to pay them the interest they’re owed. This phantom income will show up on your taxes, but you can deduct it.

71
Q

Yield curve theories- what is liquidity preference theory

A

Investors are willing to accept a lower rate of return for more liquidity, shorter duration or time to maturity.

72
Q

Yield curve theories- what is market segmentation theory

A

Yield curve moves based on supply and demand. If demand is less than supply, interest rates will increase. If demand great than supply, interest rates for new bonds will fall

73
Q

Yield curve theories- what is expectations theory

A

The yield curve reflects investors inflation expectations. If the expectation is inflation will be lower in the future, you get an inverted yield curve.

74
Q

Yield curve theories- what is unbiased expectations theory

A

Basically says long term rates are just geometric averages of a bunch of short term rates over that period of time.

75
Q

Things to remember about bond duration?

A
  • the bigger the duration, the more price sensitive to interest rate movements.
    -duration is the moment in time the investor is immunized from interest rate risk.
    -duration should be aligned with client time horizon
76
Q

What is a tax swap

A

Basically tax loss harvesting for bonds.

77
Q

What is barbell approach

A

Involves owning both short and long term bonds.

78
Q

What are laddered bonds

A

Purchase bonds with varying maturities.

79
Q

What are bullets

A

Pay very little coupon and most of the money at the end. Could even be a zero coupon bond in this strategy.

80
Q

What do you know about preferred stock

A

Stated par value. Stated dividend rate as a percentage of par. Price of stock may move with common stock. Dividend does not fluctuate. Price is more closely tied to interest rate than common stock. Corporation gets a tax deduction for preferred stock dividends.

81
Q

What’s the conversion value formula for preferred stock to bond

A

(Par/conversion price) X price of the common stock

82
Q

Tell me about A Shares

A

Front end load fee. Small 12B1 fees. Good for long term investors

83
Q

Tell me about B Shares

A

No front end load but has a backend load for redemption. Also maximum 12b1 fee of 1%. Convertible to A shares

84
Q

Tell me about C shares

A

Small backend load. Usually 1% 12b1 fees. Not convertible to A shares. Usually good for short term investing.

85
Q

What are the three types of REITS

A

Mortgage (invests in mortgages, construction loans), equity (rental income), or hybrid. REIT must payout 90% of income to shareholders to maintain tax exempt status.

86
Q

What’s a married put

A

Buying a put for a security that you own. Portfolio insurance

87
Q

What’s a covered call

A

Selling a call option on a security you own.

88
Q

What is black and scholes

A

Attempts to measure the value of a call option.

89
Q

What is put/call parity

A

Attempts to value a put option based on the value of a call option

90
Q

What is binomial pricing model

A

Explains put and call prices based on the underlying asset moving in two directions

91
Q

What are LEAPS

A

These are long term stock options usually up to two years as opposed to the normal 9 months or less for options. Higher premiums for these.

92
Q

What is a debenture bond

A

Unsecured corporate debt

93
Q

What is Jensen index

A

This is Jensen’s alpha. Risk adjusted measure to see if you earned more on your investment than the risk indicated you would.

94
Q

Often municipal bonds are insured. Who insures them?

A

Municipal bond insurance association. Another group is American municipal bond assurance corporation

95
Q

What are American depository receipts

A

Allow US investors to buy foreign country stock denominated in US dollars

96
Q

As a measure of risk, the capital market line uses

A

Standard deviation

97
Q

As a measure of risk the securities market line uses

A

Beta

98
Q

The optimal portfolio is said to occur at the tangency of which two measures?

A

Indifference curve and efficient frontier.

99
Q

What is arithmetic mean vs geometric mean

A

Arithmetic is normal. Geometric rod 1+return for each year. Multiply each one. Then take the square root of that answer.

100
Q

What’s a red herring

A

Preliminary prospectus issued by the managing house of an offering

101
Q

How do you calculate net operating income

A

Take income - costs + depreciation + interest

102
Q

What is anchoring

A

Behavioral finance. Buying securities that have fallen in value because it “must” get back up to that recent high.

103
Q

What is Firm Commitment

A

The investment banker agrees to purchase the entire IPO and resell the securities to the public.

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