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