Investment Planning Flashcards
1
Q
Efficient Market Hypothesis
Weak Form
A
- Asserts FUNDAMENTAL analysis
- Historical information will NOT help achieve above-average market returns
- Advantage through INSIDE Information
2
Q
Efficient Market Hypothesis
Semi-Strong Form
A
- Rejects both technical & fundamental analysis
- INSIDE Information WILL lead to above-average market returns
3
Q
Efficient Market Hypothesis
Strong Form
A
- Asserts that stock prices reflect ALL available information
- No advantage could be gained
- Even with inside information can one out-perform
4
Q
Ex-Dividend Date
A
- One business day before Record Date
- Sell on Ex-Date, you will receive the dividend
- Buy on Ex-Date, you will NOT receive the dividend
- Must buy before Ex-Date to receive dividend
- BE MINDFUL OF BUSINESS DAYS & WEEKENDS
5
Q
Securities Act of 1934
A
- Regulates secondary market
- Created the SEC
6
Q
Securities Investors Protection Act of 1970
A
- Covers losses resulting from brokerage firm failures
- Protects accounts regardless of the client’s citizenship
7
Q
Money Market Securities
Treasury Bills
A
- Varying maturities up to 52 weeks
- Denominations of $100 increments
8
Q
Money Market Securities
Commercial Paper
A
- Maturities of 270 days or less
- Does NOT have to register with SEC
- Denominations of $100,000
- Sold at a discount
9
Q
Money Market Securities
Bankers Acceptance
A
- Facilitates Imports & Exports
- Maturities of 9 months or less
- Can be traded or held until maturity
10
Q
Money Market Securities
Eurodollars
A
- Deposits in foreign banks denominated in US Dollars
11
Q
Affect Heuristic
A
- Like or dislike a company based on non-financial issues
12
Q
Anchoring
A
- Also known as Conservatism & Belief Perseverance
- Attaching one’s thoughts even though there may be no logical relevance
13
Q
Availability Heuristic
A
- Relies upon information readily available in one’s memory
- May cause investors to overweight recent events or patterns
14
Q
Confirmation Bias
A
- Focus on information supporting their opinions
15
Q
Cognitive Dissonance
A
- Tendency to misinterpret information contrary to an existing opinion and support an existing one
16
Q
Disposition Effect
A
- AKA Regret Avoidance or Faulty Framing
- Create mental accounts of their stock purchases
- And continue even after market prices have changed
17
Q
Familiarity Bias
A
- Underestimate/overestimate investments which they familiar/unfamiliar with
18
Q
Prospect Theory
A
- Base their decisions on perceived gains rather than perceived losses
- May avoid high risk investments even if they offer strong risk-adjusted returns
- One may over-insure against risks through low deductibles
19
Q
Herd Mentality
A
- Leads to buying high and selling low
20
Q
Representativeness
A
- Thinking a good company is a good investment without an analysis
21
Q
Familiarity
A
- Investing in companies that are familiar, like his or her own emplyer
22
Q
Leptokurtic
A
- High peak
- Fat tails
- HIGHER chance of extreme events
23
Q
Platykurtic
A
- Low peak
- Thin tails
- LOWER chance of extreme events
24
Q
Coefficient of Variation
A
- Useful in determining which investment has more relative risk when they have different average returns
- Tells us the probability of actually experiencing a return close to the average return
- Higher the CV the more risky an investment per unit of return
25
Mean Variance Optimization
- Process of adding risky securities
- But keeping the expected return the same
- Finding the balance of asset classes to provide the lowest Std
26
Covariance
- Measures Relative Risk
27
Coefficient of Determination (R-Squared)
- Measures what % of return is due to the market
- Determines how well-diversified a portfolio is
- Square the Correlation Coefficient
- If greater than or equal to 0.70 - use Beta
- If less than 0.70 - use Std
