Investment Planning Flashcards
What stage of the business cycle are we in?
- activity rebounds (GDP, employment)
- credit begins to grow
- profits grow rapidly
- policy is stimulative
- inventories are low, sales improve
Early Expansion
What stage of the business cycle are we in?
- growth peaking
- credit growth strong
- profit growth peaks
- policy neutral
- inventories, sales grow
- equilibrium is reached
Mid Expansion
What stage of the business cycle are we in?
- growth moderating
- credit tightens
- earnings under pressure
- policy contractionary
- inventories grow, sales growth falls
Late Expansion
What stage of the business cycle are we in?
- falling activity
- credit dries up
- profits decline
- policy eases
- inventory, sales fall
Contraction
Use when R2 is > .70
Treynor
Real Rate of Return Formula
[(1 + portfolio return) / (1 + inflation)] - 1
If R2 is < .70, use this measurement of risk
standard deviation
If R2 is > .70, use this measurement of risk
beta
A broad distribution, more flat than normal, less predictable (stocks, small-cap)
platykurtic
A slender distribution, more peaked than normal, predictable (fixed income, T-Bills)
leptokurtic
Stock markets are usually skewed how?
positively, “skewed right”
The probability of a return falling between +/- 3 standard deviations of the average is:
99%
The probability of a return falling between +/- 2 standard deviations of the average is:
95%
The probability of a return falling between +/- 1 standard deviation of the average is:
68%
Systematic risk is measured by:
beta
Total risk is measured by:
standard deviation
What are the 5 unsystematic risks?
1) credit/default risk
2) regulatory risk
3) sovereignty risk
4) financial risk
5) business risk
What are the 5 systematic risks?
1) purchasing power risk
2) interest rate risk
3) reinvestment rate risk
4) market risk
5) exchange rate risk
A rate of measurement for a specific client with their own specific set of cash flows. Accounts for when (and at what price level) investments are made and when withdrawals occur
dollar-weighted rate of return
The global standard for fund performance and is based solely on appreciation or depreciation of a portfolio from period to period
time-weighted rate of return (aka geometric mean)
HPR can lead to what behavioral pattern?
anchoring
What is the SIPC limit?
$500,000 for securities, with a limit of $250,000 for cash
Use when R2 is < .70
Sharpe
CAPM is used to quantify:
1)
2)
3)
1) expected return
2) required return
3) SML
The movements of stocks being utterly unpredictable, lacking any pattern that can be exploited by an investor
random walk
Investors who accept EMT would be what kind of investors?
passive
What would an investor who believes and accepts EMT buy?
index funds
States that the stock market is efficient and that all stocks reflect relevant price information
Efficient Market Theory (EMT)
What is the TWRR formula?
[(1+return1)(1+return2)…1/n] - 1
What is the Market Risk Premium?
(Rm - Rf)
What is the Stock Risk Premium?
(Rm - Rf) x B
How do you calculate R2 if it is not given?
take the correlation coefficient and multiply it by itself
If Alpha is positive, what does that mean?
there was more return than expected
If Alpha is zero, what does that mean?
the return was as expected
If Alpha is negative, what does that mean?
there was less return than expected
What is the formula to find D1? (Used in Dividend Growth Model and Expected Rate of Return)
D1 = D0 (1+g)
D0 = current dividend per share
g = dividend growth rate or company growth rate
When expected return is greater than required return, is the stock overvalued or undervalued?
undervalued; the investor should buy the stock
When expected return is less than required return, is the stock overvalued or undervalued?
overvalued; the investor should not buy the stock
What should an investor do if the expected return equals the required return?
the stock is fairly valued; the investor should buy the stock
What is the FINANCIAL criteria for accredited investors?
- net worth over $1 million (excluding primary residence) OR
- income over $200,000 (S) or $300,000 (M) in each of the 2 prior years, and reasonably expects the same income for the current year
What is the PROFESSIONAL criteria for accredited investors?
any one of these:
- investment professional (S7, S65, or S82)
- director, executive officer, or GP of the company selling securities
- a “family client” or “family office” that qualifies as an accredited investor
- for investments in a private fund, “knowledgeable employees” of the fund
What is the appropriate benchmark for primarily large US stocks?
SP500
What is the appropriate benchmark for primarily small US stocks?
Russell 2000
What is the appropriate benchmark for stocks in developed non-US economies?
MSCI Europe, Australasia, Far East Index (EAFE)
What is the appropriate benchmark for stocks in emerging non-US economies?
MSCI Emerging Markets Index (EM)
What is the appropriate benchmark for US bonds?
Barclays Capital Aggregate Bond Index
What is the appropriate benchmark for publicly traded REITs?
Dow Jones US Select REIT Index
What is the appropriate benchmark for commodities?
Deutsche Bank Liquid Commodity Index
What is the appropriate benchmark for cash?
3-month T-Bill
What is the appropriate benchmark for large US stocks and large US bonds?
Vanguard Balanced Index (VBIAX)
What is the appropriate benchmark for all publicly traded US companies?
Wilshire 5000
In an upward sloping (positive, normal) yield curve, the rates of short-term paper are _______ than the rates on long-term paper
lower
In a flat yield curve, the rates of short-term paper are _______ than rates on long-term paper
more similar
In a downward sloping (negative, inverted) yield curve, the rates of short-term paper are ______ than rates on long-term paper
higher
An inversion in the yield curve is indicative of what?
a looming recession
How sensitive is a bond with long duration and a low coupon to changes in interest rates?
more sensitive
How sensitive is a bond with short duration and a high coupon to changes in interest rates?
less sensitive
This plots the rates of fixed income securities from very short-term to very long-term securities
the yield curve
The short end of the yield curve is very sensitive to what?
Fed policy
The longer end of the yield curve is indicative of what?
anticipative economic conditions
What is the minimum federal stock initial margin requirement?
50%
What is the minimum federal maintenance margin requirement?
25%
What are the leading indicators?
- average weekly hours of production workers (manufacturing)
- initial claims for unemployment insurance
- manufacturers’ new orders
- percentage of companies reporting slower deliveries
- new orders of non-defense capital goods
- new private housing starts
- yield curve
- S&P 500
- money supply (M2) growth rate
- index of consumer expectation
What are the coincident indicators?
- employees on non-agricultural payrolls
- personal income less transfer payments
- industrial production
- manufacturing and trade sales
What are the lagging indicators?
- average duration of unemployment
- ratio of trade inventories to sales
- change in index of labor cost per unit of output
- average prime rate
- commercial and industrial loans outstanding
- ratio of consumer installment credit outstanding to personal income
- change in Consumer Price Index (CPI)
As long as ___% of a REIT’s taxable income is distributed, it is not taxable to the REIT
90%
At least ___% of a REIT’s assets and income must be derived from real estate equity or mortgages
75%
REMICs allow investors to receive a stream of income from ____________
mortgage payments
What do equity REITs allow an investor to do?
offer investors the potential growth of their investments through realized capital gains, as well as the pass-through from rental income
Commodities have a _______ correlation to equities
low
The buyer of a call contract has the right to:
purchase shares
The buyer of a put contract has the right to:
sell shares
The seller of a call contract has the obligation to:
sell shares
The seller of a put contract has the obligation to:
purchase shares
A call is in the money when:
MP > EP
A put is in the money when:
EP > MP
Who guarantees the performance of both parties when it comes to options contracts?
OCC
An options contract is “at the money” when:
MP = EP
Which option strategy bears unlimited risk?
naked call writing
Used to capitalize on volatility regardless of the direction of the stock
straddle
What is the statistic that measures the total market value of a country’s income and output of goods and services produced by all the people and companies in the U.S.?
Gross Domestic Product (GDP)
Used to determine the ability to meet short-term obligations
liquidity ratios
Used to determine the relative efficiency of financial management
activity ratios
Used to measure relative profitability
profitability ratios
Used to determine the ability to meet long-term obligations
debt ratios
What is the current ratio?
current assets / current liabilities
What is the quick ratio?
(current assets - inventories) / current liabilities
What is the gross profit margin formula?
gross profit / sales
What is the ROE formula?
EAT / equity
What is the debt ratio?
total debt / total assets
What is the margin call formula?
( 1- initial margin % / 1- maintenance margin %) x purchase price per share
What is the net profit margin formula?
net income / total sales
What is the P/E formula?
market cap / net income
A stock with a high P/E ratio indicates:
high earnings growth in the future
As market risk premium increases, the value of investment assets should:
fall
Wash sale rules do not apply to:
dealers in securities
Which option strategy is best for anticipated volatility?
straddle
A return that plots above the SML indicates:
positive alpha
An options contract that gives the buyer the right to purchase 100 shares of the underlying stock is:
call option
Mutual fund custodians prefer to report cost basis information using what method?
average cost method
