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CFP > Investment Planning > Flashcards

Investment Planning Flashcards

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1
Q

Describe Securities Act of 1933

A

Regulates the issuance of new securities (Primary Market )
Requires new issuance to be accompanied with a prospectus before being purchased

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2
Q

Describe Securities Act of 1934

A

Regulates the Secondary Market and trading of securities
Created the SEC to enforce compliance with security regulations and laws

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3
Q

What is the SEC

A

Securities Exchange Commission

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4
Q

That are the tree types of Investment Companies

A

Open, Closed, Unit Investment Trusts

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5
Q

Describe Investment Advisors Act of 1940

A

Required investment advisors to register with the SEC or State

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6
Q

Describe Securities Investors Protection Act of 1970

A

to protect investors for losses resulting from brokerage firm failures
does not protect investors from incompetence or bad investment decisions
protects member firms regardless of citizenship

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7
Q

Describe Insider Trading and Securities Fraud Enforcement Act of 1988

A

An insider is anyone with information that is not avail to the public
insiders cannot trade on this information

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8
Q

When is ex- dividend date

A

The date stock trades without dividend
One business day before date of record

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9
Q

Equation for Margin Position

A

Equity/ Fair Market Value

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10
Q

Equation for Equity (Margin calculation)

A

Stock- Loan Price

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11
Q

Equation for Margin Call

A

Loan/ (1- Maintenance Margin)

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12
Q

Define Treasury Bills

A

Issued in varying maturities up to 52 weeks
denominations in $100 increments through treasury Direct up to 5 mil per auction

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13
Q

Define Commercial Paper

A

Short Term loans between corporations
Maturities of 270 or less and it doesn’t have to register with SEC
Denominations of 100,000 and sold at discount

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14
Q

Define Bankers’ Acceptance

A

Facilitates Imports/ Exports
Maturities of 9 mos or less
Hold to maturity or trade

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15
Q

Define Euro Dollars

A

Deposits in foreign banks that are denominated in USD

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16
Q

What are the components of an Investment Policy Statement

A
  1. Return Requirements
  2. Risk Tolerance
  3. Times Horizon
  4. Liquidity
  5. Taxes
  6. Laws & Regulations
  7. Unique Circumstances
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17
Q

Describe Simple Price Weighted Average

A

average price of stock
does not consider percent allocation of the position within the portfolio

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18
Q

Describe Value Weighted Index

A

incorporates market capitalization of individual stocks into the average

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19
Q

Name Indices that use Simple Price Weighted Average

A

Dow Jones industrial average

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20
Q

Name Indices that use value weighted index

A

S&P 500
Russell 2000 (smallest market cap)
Wilshire 500
EAFE- tracks Europe, Australia, Asia

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21
Q

Behavioral Bias- Affect Heuristic

A

Deals with Judging something whether it’s good or bad.

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22
Q

Behavioral Bias- Anchoring/ Conservatism/ Belief Perseverance

A

attaching one’s thoughts to a reference point even though there may be no logical relevance or not pertinent to the issue in question

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23
Q

Behavioral Bias- Availability Heuristic

A

Decision maker relies on knowledge that is readily available in his or her memory.

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24
Q

Behavioral Bias- Bounded Rationality

A

Seeking satisfactory solutions rather than optimal ones
during decision making rationality is limited by the available information

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25
Q

Behavioral Bias- Confirmation Bias

A

Tendency to filter information and focus on information supporting their decision

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26
Q

Behavioral Bias- Cognitive Dissonance

A

Misinterpret information that is contrary to an existing opinion or only pay attention to information that supports and existing opinion

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27
Q

Behavioral Bias- Disposition Effect

A

“Regret/ Avoidance/ Faulty Framing. Investors make mental accounts when they purchase stock and then continue to mark their value as purchase price even when market price has changed

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28
Q

Behavioral Bias- Familiarity Bias

A

over/ underestimate risk of investments when they are familiar/ unfamiliar with them.

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29
Q

Behavioral Bias- Gambler’s Fallacy

A

investor having incorrect understanding of probabilities which can lead to faulty predeictions

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30
Q

Behavioral Bias- Hindsight Bias

A

looking back and assuming you can predict the future as readily as the past can be explianed

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31
Q

Behavioral Bias- Overconfidence Bias

A

investor listens mostly to self

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32
Q

Behavioral Bias- Illusion of Control Bias

A

overestimate ability to control events

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33
Q

Behavioral Bias- Overreaction

A

emotion towards new or info

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34
Q

Behavioral Bias-Prospect Theory

A

provides that people will value gains and losses differently and will base their decisions on perceived gain over losses. “loss averse”

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35
Q

Behavioral Bias- Recency

A

giving too much weight to recent observations

36
Q

Behavioral Bias- Similarity Heuristic

A

decision or judgement is made when a similar situation occurs even though the situations may have different out comes

37
Q

Standard Deviation

A

Measure of Risk & Variability of Returns

38
Q

Coefficient of Variation Use

A
  • Used to determine which investment has more relative risk when investments have different average returns.
  • Tells the probability of actually experiencing a return close to average return.
  • The higher the CV the riskier an investment per unit of return
39
Q

Coefficient of Variation Calculation

A

Standard Deviation/ Average Return

40
Q

Platykurtic Shape

A

Low peak, thin tail (lower change of extreme events)

41
Q

Leptokurtic Shape

A

High Peak, Fat Tail (higher chance of extreme events)

42
Q

Kurtosis

A

a variation of returns

43
Q

Covariance

A

The measure of two securities combined and their interactive risk. (how price movements between two securities are related to each other

44
Q

What is Covariance a measure of?

A

Relative risk

45
Q

Correlation/ Correlation Coefficient

A

measure of movement of one security relative to that of another (relative risk measure)

46
Q

Positive 1 Correlation means

A

Two assets are perfectly positively correlated

47
Q

Correlation of 0 means

A

the assets are completely uncorrelated

48
Q

Negative 1 Correlation means

A

perfectly negative correlation

49
Q

Beta

A

a measure of an individual securities volatility relative to the market (systematic risk)

50
Q

Beta of the market

A

1

51
Q

Coefficient of Determination or (R squared)

A

a measure of how much return is due to the market or what percentage of a security’s return is due to the market.

52
Q

Unsystematic Risk

A

Accounting Risk
Business risk
Country Risk
Default Risk
Executive Risk
Financial Risk
Government Regulation risk

Diversifiable Risk
Unique Risk
Company specific risk

53
Q

Systematic Risk

A

Purchasing power (equities + bonds)
Reinvestment rate risk (bonds)
interest rate risk (equities + bonds)
market risk (equities+ bonds)
exchange rate risk (equities)

Non diversifiable risk
economy based risk

54
Q

Efficient Frontier

A

The curve which illustrates the best possible returns that could be expected from all possible portfolios. in terms of risk and reward relationship

55
Q

Indifference Curves

A

constructed using selections made based on this highest level of return given an acceptable level of risk. Represents how much return an investor needs to take on risk.

56
Q

Efficient Portfolio

A

when an investors indifference curve is tangent to the efficient frontier

57
Q

Capital Market Line

A

the Macro Aspect of the Capital Asset Pricing model. specifies the relationship between risk and return in all possible portfolios

58
Q

What level of risk does Capital Market Line use

A

Standard Deviation

59
Q

Capital Asset Pricing Model

A

Calculates the relationship of risk and return of an individual security using beta as its measure of risk

60
Q

What does the information ratio measure

A

The excess return and consistency provided by a fund manager relative to a bench mark

61
Q

Dividend Payout Ratio Formula

A

Common stock/ Earnings Per Share

62
Q

Return on Equity Formula

A

Earnings per share/ stockholders equity per share

63
Q

Dividend Yield Formula

A

Dividend/ Stock Price

64
Q

What calculations are included in Fundamental Analysis?

A

Liquidity, activity, profitability, common stock measurements

65
Q

Odd lot trading

A

trades less than 100 shares

66
Q

The Dow Theory

A

Signals and end to a bull or bear market

67
Q

Breadth of the market

A

Measures the number of stocks that increase in value versus the number of stocks that decline in value

68
Q

Advance Decline Line

A

difference between the number of stocks that closed up vs the number of stocks that decreased in value.

69
Q

Types of Active Asset Allocation

A

Strategic (yearly re-allocation), Tactical (frequent re- allocation)

70
Q

Non Marketable Treasury Issues

A

Series EE/ E bonds, Series HH/ H Bonds, Series I Bonds

71
Q

Marketable US Treasury Issues

A

T Bills, US Treasury notes, US Treasury Bonds

72
Q

Describe the Liquidity Preference Theory

A

Lower yield for shorter maturities because investors prefer liquidity. Long term yield should be higher because of added risk associated with long term maturities

73
Q

Market Segment Theory

A

Yield curve depends on supply and demand.

74
Q

Expectations Theory

A

Yield curve theory- yield curve reflects investors inflation expectations

75
Q

Unbiased Expectations Theory

A

Related to the term structure of interest rates. Assumes that todays long term rates are geometric averages of current expected and future short term rates.

76
Q

Bond Duration

A

Weighted average of all cash flows
Longer the duration the more sensitive to interest rate changes

77
Q

Modified Duration

A

Bond’s price sensitivity to changes in interest rates

78
Q

Conversion Value equation

A

CV= PAR/ CP x Ps

79
Q

Conversion Ratio

A

1000/ CP- the number of shares the convertible bond can be converted into.

80
Q

How to calculate Net Asset Value (NAV)

A

Assets- Liabilities/ Shares Outstanding

81
Q

Types of Mutual Funds

A

Aggressive Growth
Growth
Growth & Income
Value Fund
Balanced Fund
Bond Fund
Money Market Funds
index funds
sector funds
asset allocation/ life style funds
global funds
international funds

82
Q

Intrinsic Value of Call Option

A

Stock Price- Strike Price….. cannot be less than 0

83
Q

Time Value Equation

A

Premium- Intrinsic Value

84
Q

Option Pricing Model- Black Scholes

A

considers current price of underlying asset, time until expiration, risk free rate of return, and volatility pf underlying asset.

85
Q

Option Pricing Model- Put Call Parity

A

attempts to value put option based on value of corresponding call option.

86
Q

Optio Pricing Model- Binomial Pricing Mode

A

values option assuming that stock can only move on one of two directions

CFP (5 decks)

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