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Emily CFP Cards > Investment Planning > Flashcards

Investment Planning Flashcards

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1
Q

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
A

Early Expansion

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2
Q

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
A

Mid Expansion

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3
Q

What stage of the business cycle are we in?

  • growth moderating
  • credit tightens
  • earnings under pressure
  • policy contractionary
  • inventories grow, sales growth falls
A

Late Expansion

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4
Q

What stage of the business cycle are we in?

  • falling activity
  • credit dries up
  • profits decline
  • policy eases
  • inventory, sales fall
A

Contraction

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5
Q

Use when R2 is > .70

A

Treynor

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6
Q

Real Rate of Return Formula

A

[(1 + portfolio return) / (1 + inflation)] - 1

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7
Q

If R2 is < .70, use this measurement of risk

A

standard deviation

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8
Q

If R2 is > .70, use this measurement of risk

A

beta

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9
Q

A broad distribution, more flat than normal, less predictable (stocks, small-cap)

A

platykurtic

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10
Q

A slender distribution, more peaked than normal, predictable (fixed income, T-Bills)

A

leptokurtic

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11
Q

Stock markets are usually skewed how?

A

positively, “skewed right”

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12
Q

The probability of a return falling between +/- 3 standard deviations of the average is:

A

99%

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13
Q

The probability of a return falling between +/- 2 standard deviations of the average is:

A

95%

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14
Q

The probability of a return falling between +/- 1 standard deviation of the average is:

A

68%

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15
Q

Systematic risk is measured by:

A

beta

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16
Q

Total risk is measured by:

A

standard deviation

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17
Q

What are the 5 unsystematic risks?

A

1) credit/default risk
2) regulatory risk
3) sovereignty risk
4) financial risk
5) business risk

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18
Q

What are the 5 systematic risks?

A

1) purchasing power risk
2) interest rate risk
3) reinvestment rate risk
4) market risk
5) exchange rate risk

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19
Q

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

A

dollar-weighted rate of return

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20
Q

The global standard for fund performance and is based solely on appreciation or depreciation of a portfolio from period to period

A

time-weighted rate of return (aka geometric mean)

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21
Q

HPR can lead to what behavioral pattern?

A

anchoring

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22
Q

What is the SIPC limit?

A

$500,000 for securities, with a limit of $250,000 for cash

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23
Q

Use when R2 is < .70

A

Sharpe

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24
Q

CAPM is used to quantify:
1)
2)
3)

A

1) expected return
2) required return
3) SML

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25
Q

The movements of stocks being utterly unpredictable, lacking any pattern that can be exploited by an investor

A

random walk

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26
Q

Investors who accept EMT would be what kind of investors?

A

passive

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27
Q

What would an investor who believes and accepts EMT buy?

A

index funds

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28
Q

States that the stock market is efficient and that all stocks reflect relevant price information

A

Efficient Market Theory (EMT)

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29
Q

What is the TWRR formula?

A

[(1+return1)(1+return2)…1/n] - 1

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30
Q

What is the Market Risk Premium?

A

(Rm - Rf)

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31
Q

What is the Stock Risk Premium?

A

(Rm - Rf) x B

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32
Q

How do you calculate R2 if it is not given?

A

take the correlation coefficient and multiply it by itself

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33
Q

If Alpha is positive, what does that mean?

A

there was more return than expected

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34
Q

If Alpha is zero, what does that mean?

A

the return was as expected

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35
Q

If Alpha is negative, what does that mean?

A

there was less return than expected

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36
Q

What is the formula to find D1? (Used in Dividend Growth Model and Expected Rate of Return)

A

D1 = D0 (1+g)

D0 = current dividend per share
g = dividend growth rate or company growth rate

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37
Q

When expected return is greater than required return, is the stock overvalued or undervalued?

A

undervalued; the investor should buy the stock

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38
Q

When expected return is less than required return, is the stock overvalued or undervalued?

A

overvalued; the investor should not buy the stock

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39
Q

What should an investor do if the expected return equals the required return?

A

the stock is fairly valued; the investor should buy the stock

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40
Q

What is the FINANCIAL criteria for accredited investors?

A
  • 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
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41
Q

What is the PROFESSIONAL criteria for accredited investors?

A

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

42
Q

What is the appropriate benchmark for primarily large US stocks?

A

SP500

43
Q

What is the appropriate benchmark for primarily small US stocks?

A

Russell 2000

44
Q

What is the appropriate benchmark for stocks in developed non-US economies?

A

MSCI Europe, Australasia, Far East Index (EAFE)

45
Q

What is the appropriate benchmark for stocks in emerging non-US economies?

A

MSCI Emerging Markets Index (EM)

46
Q

What is the appropriate benchmark for US bonds?

A

Barclays Capital Aggregate Bond Index

47
Q

What is the appropriate benchmark for publicly traded REITs?

A

Dow Jones US Select REIT Index

48
Q

What is the appropriate benchmark for commodities?

A

Deutsche Bank Liquid Commodity Index

49
Q

What is the appropriate benchmark for cash?

A

3-month T-Bill

50
Q

What is the appropriate benchmark for large US stocks and large US bonds?

A

Vanguard Balanced Index (VBIAX)

51
Q

What is the appropriate benchmark for all publicly traded US companies?

A

Wilshire 5000

52
Q

In an upward sloping (positive, normal) yield curve, the rates of short-term paper are _______ than the rates on long-term paper

A

lower

53
Q

In a flat yield curve, the rates of short-term paper are _______ than rates on long-term paper

A

more similar

54
Q

In a downward sloping (negative, inverted) yield curve, the rates of short-term paper are ______ than rates on long-term paper

A

higher

55
Q

An inversion in the yield curve is indicative of what?

A

a looming recession

56
Q

How sensitive is a bond with long duration and a low coupon to changes in interest rates?

A

more sensitive

57
Q

How sensitive is a bond with short duration and a high coupon to changes in interest rates?

A

less sensitive

58
Q

This plots the rates of fixed income securities from very short-term to very long-term securities

A

the yield curve

59
Q

The short end of the yield curve is very sensitive to what?

A

Fed policy

60
Q

The longer end of the yield curve is indicative of what?

A

anticipative economic conditions

61
Q

What is the minimum federal stock initial margin requirement?

A

50%

62
Q

What is the minimum federal maintenance margin requirement?

A

25%

63
Q

What are the leading indicators?

A
  • 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
64
Q

What are the coincident indicators?

A
  • employees on non-agricultural payrolls
  • personal income less transfer payments
  • industrial production
  • manufacturing and trade sales
65
Q

What are the lagging indicators?

A
  • 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)
66
Q

As long as ___% of a REIT’s taxable income is distributed, it is not taxable to the REIT

A

90%

67
Q

At least ___% of a REIT’s assets and income must be derived from real estate equity or mortgages

A

75%

68
Q

REMICs allow investors to receive a stream of income from ____________

A

mortgage payments

69
Q

What do equity REITs allow an investor to do?

A

offer investors the potential growth of their investments through realized capital gains, as well as the pass-through from rental income

70
Q

Commodities have a _______ correlation to equities

A

low

71
Q

The buyer of a call contract has the right to:

A

purchase shares

72
Q

The buyer of a put contract has the right to:

A

sell shares

73
Q

The seller of a call contract has the obligation to:

A

sell shares

74
Q

The seller of a put contract has the obligation to:

A

purchase shares

75
Q

A call is in the money when:

A

MP > EP

76
Q

A put is in the money when:

A

EP > MP

77
Q

Who guarantees the performance of both parties when it comes to options contracts?

A

OCC

78
Q

An options contract is “at the money” when:

A

MP = EP

79
Q

Which option strategy bears unlimited risk?

A

naked call writing

80
Q

Used to capitalize on volatility regardless of the direction of the stock

A

straddle

81
Q

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.?

A

Gross Domestic Product (GDP)

82
Q

Used to determine the ability to meet short-term obligations

A

liquidity ratios

83
Q

Used to determine the relative efficiency of financial management

A

activity ratios

83
Q

Used to measure relative profitability

A

profitability ratios

84
Q

Used to determine the ability to meet long-term obligations

A

debt ratios

85
Q

What is the current ratio?

A

current assets / current liabilities

86
Q

What is the quick ratio?

A

(current assets - inventories) / current liabilities

87
Q

What is the gross profit margin formula?

A

gross profit / sales

88
Q

What is the ROE formula?

A

EAT / equity

89
Q

What is the debt ratio?

A

total debt / total assets

90
Q

What is the margin call formula?

A

( 1- initial margin % / 1- maintenance margin %) x purchase price per share

91
Q

What is the net profit margin formula?

A

net income / total sales

92
Q

What is the P/E formula?

A

market cap / net income

93
Q

A stock with a high P/E ratio indicates:

A

high earnings growth in the future

94
Q

As market risk premium increases, the value of investment assets should:

A

fall

95
Q

Wash sale rules do not apply to:

A

dealers in securities

96
Q

Which option strategy is best for anticipated volatility?

A

straddle

97
Q

A return that plots above the SML indicates:

A

positive alpha

98
Q

An options contract that gives the buyer the right to purchase 100 shares of the underlying stock is:

A

call option

99
Q

Mutual fund custodians prefer to report cost basis information using what method?

A

average cost method

Emily CFP Cards (7 decks)

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