Investment Planning Flashcards

Question

Real Estate | Land-improved NOI

Answer 1

Improved land typically is income producing. income properties include residential rental, commercial, and industrial properties. The intrinsic value of a real estate property can be computed using a NOI computation. ``` Gross rental + non-rental income ------------------------- Potential gross income (PGI) - vacancy and collection losses -operating expenses (not including interest and depreciation) -------------------------------- Net operating income ```

Answer 2

REIT = portfolio investment and subject to taxation like a stock, actively traded on securities markets, managed by board of directors with are ultimately accountable to their shareholders RELP = subject to passive loss rules, generally illiquid, managed by a general partner

Answer 3

Intrinsic value is the minimum price the option will command as an option. It is the difference between the market price and the exercise price of the stock. Exercise price (strike price) is the price at which the stock can be purchased or sold on exercise of the option. Premium is the market price of an option. As the option approaches its expiration date, the market price of the option approaches its intrinsic value. Time premium is the amount the market price of an option exceeds its intrinsic value.

Answer 4

At the time of purchase: nondeductible capital expenditure To the writer due to lapse: Premium paid is short-term gain To the writer due to exercise: premium paid is added to sale price (can be long term gain if the underlying security was held more than 12 months, otherwise is short term gain) To the holder: if the option is not exercised; The option is considered sold (it expires) and it is a short term loss. The option period is 9 months or less

Answer 5

Long commodity position: if a farmer is long a commodity, he needs a short hedge an will sell a futures contract. Short commodity position: If Kellogg is short a commodity (corn) Kellogg needs a long hedge and will but a futures contract.

Answer 6

Accredited (unlimited) Net worth of $1,000,000 (not including personal residence) Individual with an annual income of $200,000 couple with joint income of 300,000 think 1,2,3 Non-accredited Sold to a max of 35 investors must use a purchaser representative if not sophisticated

Answer 7

warrants are issued by corporations whereas calls are created by individuals warrants typically have maturities of several years warrants terms are not standardized; call options are standardized.

Answer 8

``` PRIME - can't diversify the system Purchase power risk Reinvestment rate risk Interest rate risk Market risk Exchange rate risk ```

Answer 9

KNown as diversifiable risk, may also be referred to in some reference books as non-systematic risk * Business Risk: Refers to the nature of the firm's operation * Financial risk - refers to how the firm finances its assets

Answer 10

This part of the risk is inescapable because no matter how well an investor diversifies, the risk of the overall market cannot be avoided. Also known as non-diversifiable risk or total risk

Answer 11

Devaluation: lowering of the value of a currency relative to the currencies of other nations; can also result from a rise in value of other currencies relative to the currency of a particular country Revaluation; generally means an increase in the currency's value

Answer 12

Positively: securities have a value of +1. The securities move exactly together as there is no reduction of portfolio risk. Negatively: Securities have a value -1. The securities move exactly opposite as risk is completely eliminated.

Answer 13

the square of the correlation coefficient measuring the proportion of the variation in one variable explained by the movement of the other variable. How is R2 used on exam? It describes the % of the funds movement that is explained by the movement in the s&P 500. Index funds/diversifeid funds based on the S&P 500 will have R2 of very close to 100%, while sector funds (not diversified) will ahve very low R2 (5-25%)

Answer 14

Define: The standard deviation divided by the average or mean

Answer 15

Standard Deviation: measures variability of returns used in a nondiversified portfolio and is a measure of total risk Beta: measures volatility of returns in a diversified portfolio and is a measure of systematic risk

Answer 16

To standardize for risk, one must divide an individual funds realized return by its beta coefficient.

Answer 17

Time Weighted: portfolio accounting method that measures investment performance (income and price changes) as a percentage of capital at work thus eliminating the effect of additions and withdrawals Dollar Weighted: portfolio accounting method that measures changes in total dollar value, treating additions and withdrawals of capital s part of the return along with the income and captial gains and losses

Answer 18

Real: the inflation adjusted interest rate Nominal: actual returns not adjusted for inflation The "real" rate is defined as the nominal rate of return adjusted for inflation

Answer 19

The total return (income plus price appreciation and dividends less margin interest) over the entire period divided byt he price of the investment (out of pocket)

Answer 20

IRR: discount rate at which the present value of future cash flows equals the cost of the investment. when the NPV of the cash flow is zero, the discount rate being used is the IRR. When the IRR is greater than the required return, the investment is acceptable.

Answer 21

YTM: promised compounded rate of return an investor will recieve from a bond at the rate equal to the computed YTM. Take into account both the market price of the bond as well as any capital gains or losses on the bond if held to maturity. When calculating YTM, always use semiannual compounding(even n a zero coupon bond)

Answer 22

YTC: presumes that the bond will be redeemed by the issuer at the first call date in the indenture agreement. Uses the same calculation as YTM except that the principal value at maturity is replaced the call price, and the maturity date is replaced by the first call date.

Answer 23

To make the returns on municipal bonds comparable to those of taxable bonds, the TEY can be calculated. Taxable equivalent yield = tax exempt yield / 1-tax bracket or Tax exempt yield = TEY x 1-tax bracket

Answer 24

t = years to maturity (remember duration and maturity are positively related) c= annual coupon (duration and coupon rate are inversely rated) y= YTM, the current yield on comparative bonds (duration is inversely related) remember coupon and yield are interest rates = INversely related.

Answer 25

duration equal to their maturities no coupon interest yet produces phantom income no reinvestment rate risk sold at deep discounts to par fluctuatemore than coupon bonds with same maturities

Answer 26

If interest rates are expected to rise, shorten duration UPS if interest rates are expected to fall fallen = LEN = lengthen duration

Answer 27

The smaller the coupon, the greater the relative price fluctuation The longer the term to maturity, the greater the relative price fluctuation. The lower the market interest rate, the greater the relative price fluctuation

Answer 28

If the market lowers the required rat of return for a stock the value of the common stock will rise. If investors expect that growth in dividends will be higher as a result of favorable development for the firm, the value of the common stock will rise. The opposite (higher required rate of return or lower dividends) lowers the value of the common stock

Answer 29

ROE = earning available for common (EPS) / Common equity (net worth or book value) Dividend payout ratio = common dividends paid / earning available for common (EPS)

Answer 30

the expected return on a fully diversified portfolio that a diversified portfolio should fall somewhere along the CML it cannot be used to evaluate the performance of a singe security r a portfolio that lacks full diversification Rf is the risk free return (100% tbills)

Answer 31

Efficient frontier provides an investor the highest return for any given level of risk or the lowest risk for any given level of return. Any point on the efficient frontier is efficient. Inefficient (attainable) all dots (those below the efficient frontier) are feasible but are inefficient. They are not the efficient frontier. Not feasible (unattainable) portfolios outside (above) the boundary (the efficient frontier) are not feasible because they cannot exist for any period of time under the model.

Answer 32

Strong form: asserts that stock prices fully reflect all information, public and private. Not even access to inside information can be expected in superior investment performance over time. no fundamental or technical analysis can produce superior results over time Semi-strong form: no tech, fundamental, insider maybe produce superior results Weak: no to tech and insider, Fundamental analysis may produce superior results.

Answer 33

Fundamental analysis methods Technical analysis methods Tactical asset allocation

Answer 34

``` buy and hold EMH dollar cost averaging index investing strategic asset allocation (revise every few years) core-satellite ```

Answer 35

current ratio = current assets/current liabilities current assets: cash equivalents marketable securities, accounts receivable, and inventory Current liabilities: accounts payable, credit card debt and taxes payable. always use credit card debt even if the credit cards are paid off monthly. Only use taxes payable when the material indicates the taxes are due or the material actually says they are payable.

Answer 36

``` dow jones = 30 stocks, price weighted s&p = value weighted russell 2000 = smallest 2000 wilshire 5000 = activity & movement Nasdaq = broad measure of OTC trading - value weighted EAFE - euro, Australia, Far East Lehman Brothers Aggregate bond: bond mkt ```

Answer 37

first in, first out method treats shares acquired first as being sold first specific ID allows the investor to create gain, neutralize gain, or create a loss ave cost method allows investor to divide the total cost of all shares held by the number of shares held

Answer 38

1st key = Look for R2 ( Less than 60 ) or NON DIVERSIFIED portfolio 2nd key = look for the highest SHARPE number

Answer 39

1st Key: Look for a high R2 (60+) or DIVERSIFIED portfolio 2nd Key: Look for highest positive alpha, If no alpha given, then look for the highest Treynor number

Answer 40

The formula for calculating when an investor will receive a margin call is the following: 1-initial margin % / 1-maint margin % multiplied by stock price Short cut = 2/3 of price if minim main is 25%, if minim maint is 30%, take 2/3 and choose next highest number

Answer 41

straddle - buying a put and buying a call; the buyer does NOT own the stock Collar: sell a call (out of the money) at one strike price and buys a put at a lower strike price; investor OWNS the stock Protective put: buying a stock (or owning it already) and a put for the stock serving as insurance agains the decline in the underlying stock

Answer 42

APT: Pricing of securities in different markets cannot differ for any significant lengthy of time. Explains movement in security prices without making an assumption concerning risk preferences Security returns are the result of arbitrage as investors seek to taker advantage of perceived differences in prices of risk exposure. Research suggests that 4 are preeminent. unexpected inflation unexpected changes in the level of industrial production unanticipated shifts in risk premium unanticipated changes in the structures of yields

Answer 43

Variables to value the option of a NON dividend paying stock * price of underlying stock * exercise price of the option * time remaining to the expiration of the option * interest rate * volatility of the underlying stock an increase in the exercise price of a call decreases the calls value. However, an increase in the exercise price of a put increases the put's value.