Investment Planning Flashcards
1
Q
If a project has a negative NPV of 93.25 should the project be taken?
A
No
2
Q
What is IRR?
A
This it the break even rate required for the NPV of a project to equal 0.
3
Q
If the IRR is greater than or equal to the discount rate of a project, should the project be taken?
A
Yes
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.
5
Q
What is the formula for real rate of return?
A
1+Return divided by 1+inflation, -1 and x100
6
Q
What is the securities act of 1933
A
Regulation of new public offerings in the primary market. Prospectus now required
7
Q
What is the securities act of 1934
A
Regulates THE SECONDARY MARKET. The sec is now born
8
Q
What’s the investment company act of 1940
A
Authorized the sec to regulate investment companies. Open, closed and unit investment trusts.
9
Q
What is the adviser act of 1940
A
Required advisers to be registered with the sec or the state.
10
Q
What is the security investors protection act of 1970
A
Protects investors from losses resulting in brokerage firm failures.
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.
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.
13
Q
What is bankers acceptance
A
Facilitates imports and exports. Matures in 9 months or less. Can be held to maturity or traded.
14
Q
What are Eurodollars
A
Deposits in foreign banks that are in US dollars
15
Q
What is the maintenance margin
A
Minimum amount of equity required to be in the position
16
Q
What price does an investor receive a margin call price
A
Loan divided by 1-maintenance margin
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.
18
Q
Is high risk a high standard deviation or low standard deviation
A
High standard deviation equals high risk
19
Q
What is the formula for coeffecient variation
A
standard deviation divided by expected return
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
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
22
Q
What does R Squared measure
A
what percentage of the return of an investment is from the market (S&P)
23
Q
What is systematic risk
A
Risk that cannot be diversified away. This is market risk. Economy based risk.
24
Q
What is unsystematic risk.
A
This is diversifiable risk. Company specific or unique risk.
25
what is the formula for the capital asset pricing model
expected ROR = rise free return + ((market return - risk free return)*Beta)
26
What is the one thing you need to know about the arbitrage pricing theory formula?
Standard Deviation and Beta are not inputs to the formula
27
What is the formula for the dividend discount model
value = Next dividend / (required return - expected return)
28
What is the PE Ratio formula
Price divided by earnings per share
29
What is the dividend payout ratio
dividend payout ratio = common stock dividend / earnings per share
30
What is the return on equity formula
ROE = earnings per share / stockholders equity per share
31
What is the formula for dividend yield
dividend yield = dividend per share / stock price
32
What is efficient market hypothesis
Price of stocks are unpredictable, just get an index fund
33
What are the three levels of efficient market hypothesis
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.
34
What is the difference between a secured and unsecured bond
Secured has some sort of asset that backs the bond. Unsecured bonds have nothing backing them and are more risky.
35
What are general obligation bonds
Muni bond back by the municipality that issued the bond
36
What are revenue bonds
Backed by the revenue of a specific project. Toll roads. Municipal bond example
37
What are private activity bonds
Used to fund construction of stadiums
38
what is the duration of a 10 year zero coupon bond
It is 10 years. If there are coupon payments coming before the 10 years is up, then the duration is less than 10 years.
39
What is a closed investment company
Fixed initial market cap. Shares trade on an organized exchange. May trade at a premium or discount to NPV
40
What is an open investment company
Unlimited market cap. Shares are bought and redeemed directly from fund family. Shares trade at NAV
41
What is a unit investment trust company
Can typically be equity or fixed income unit investment trust. Typically fixed income trust. Self liquidating. Shares and NOT units.
42
What is a global fund
Invests in international and US securities
43
What are international funds
Only invest in international and NOT US.
44
What is Black and Shoales
Model used to determine the value of a call option.
45
What are warrants
Warrants are essentially call options issued by a corporation. Warrants are not standardized, where call options are. Usually these are 5-10 years.
46
What does kurtosis measure
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
What does covariants measure and what’s the formula
Measures the combined risk of two securities. Both standard deviation multiplied by each other, then multiply by correlation number.
48
What’s the correlation formula
Covariance divided by (stand dev of asset a X standard dev of asset b)
49
What does beta measure
Risk relative to the market
50
What does R Squared measure
How much of a securities return is due to the market. Correlation squared
51
What measure of risk does the capital market line use
Standard deviation
52
What measure of risk does the securities market line use
Beta. The intersection at the y axis is the risk free ROR
53
What does Jensen’s alpha measure
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
What is arbitrage pricing theory
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
What is the PE ratio formula
Price / EPS
56
What is the dividend payout ratio formula
Common stock Dividend / EPS ….. the higher the payout ratio the more mature the company. Also greater risk the dividend will decrease.
57
What is the ROE return on equity formula
EPS / Stockholders equity per share
58
What is the dividend yield formula
Dividend / stock price
59
What’s the difference between weak, semi strong, and strong forms of market hypothesis
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
What’s the important stuff to know about series EE bonds
They’re non marketable and are not taxed at the state or local level.
61
What are the matures for treasury bills, notes and bonds
Bills are less than 1 year. Notes are 2-10 years. Bonds are 10+ years.
62
What is original issue discount
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
What are the only types of bonds backed by the full credit and faith of the US gov
Ginny Mae bonds
64
What are secured corporate bond examples
Mortgage back securities and collateral trust bonds
65
What are collateralized mortgage obligations
Mortgages divided into traunches A-Z. Ranging from fastest paid off to slowest.
66
What are the three types of muni bonds
General obligation bond, revenue bonds, private activity bonds. Only general obligation bond is backed by the full faith and credit of the municipality.
67
What is yield to maturity measuring
Total return of a bond over the course of time you hold it.
68
What’s the difference between current yield and coupon rate
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
What is yield to call measuring
The ROR earned by an investor over the period of time up until the issuer calls the bond.
70
What is accrued interest
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
Yield curve theories- what is liquidity preference theory
Investors are willing to accept a lower rate of return for more liquidity, shorter duration or time to maturity.
72
Yield curve theories- what is market segmentation theory
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
Yield curve theories- what is expectations theory
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
Yield curve theories- what is unbiased expectations theory
Basically says long term rates are just geometric averages of a bunch of short term rates over that period of time.
75
Things to remember about bond duration?
- 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
What is a tax swap
Basically tax loss harvesting for bonds.
77
What is barbell approach
Involves owning both short and long term bonds.
78
What are laddered bonds
Purchase bonds with varying maturities.
79
What are bullets
Pay very little coupon and most of the money at the end. Could even be a zero coupon bond in this strategy.
80
What do you know about preferred stock
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
What’s the conversion value formula for preferred stock to bond
(Par/conversion price) X price of the common stock
82
Tell me about A Shares
Front end load fee. Small 12B1 fees. Good for long term investors
83
Tell me about B Shares
No front end load but has a backend load for redemption. Also maximum 12b1 fee of 1%. Convertible to A shares
84
Tell me about C shares
Small backend load. Usually 1% 12b1 fees. Not convertible to A shares. Usually good for short term investing.
85
What are the three types of REITS
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
What’s a married put
Buying a put for a security that you own. Portfolio insurance
87
What’s a covered call
Selling a call option on a security you own.
88
What is black and scholes
Attempts to measure the value of a call option.
89
What is put/call parity
Attempts to value a put option based on the value of a call option
90
What is binomial pricing model
Explains put and call prices based on the underlying asset moving in two directions
91
What are LEAPS
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
What is a debenture bond
Unsecured corporate debt
93
What is Jensen index
This is Jensen’s alpha. Risk adjusted measure to see if you earned more on your investment than the risk indicated you would.
94
Often municipal bonds are insured. Who insures them?
Municipal bond insurance association. Another group is American municipal bond assurance corporation
95
What are American depository receipts
Allow US investors to buy foreign country stock denominated in US dollars
96
As a measure of risk, the capital market line uses
Standard deviation
97
As a measure of risk the securities market line uses
Beta
98
The optimal portfolio is said to occur at the tangency of which two measures?
Indifference curve and efficient frontier.
99
What is arithmetic mean vs geometric mean
Arithmetic is normal. Geometric rod 1+return for each year. Multiply each one. Then take the square root of that answer.
100
What’s a red herring
Preliminary prospectus issued by the managing house of an offering
101
How do you calculate net operating income
Take income - costs + depreciation + interest
102
What is anchoring
Behavioral finance. Buying securities that have fallen in value because it “must” get back up to that recent high.
103
What is Firm Commitment
The investment banker agrees to purchase the entire IPO and resell the securities to the public.
