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Jason Flash Cards > Investment Planning > Flashcards

Investment Planning Flashcards

1
Q

What is the difference between a 10k/10Q and an annual report?

A

10K: annual financial report as required by the SEC

10Q: quarterly unaudited financials

Annual Report: Contains a message from the CoB on the progress in the past year and outlook for the coming year.

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2
Q

What is the difference between liquidity and marketablility?

A

Liquidity: how quickly something can be turned into cash

Marketability: Ready-made market for something

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3
Q

What are the types of orders?

A

Market: When time is appropriate (when frequently traded)

Limit: When price is appropriate (when not frequently traded)

Stop Order: When price hits a certain price, it becomes a market order

Stop Limit or Stop-Loss: When (1) price target is hit, becomes a limit and then (2) when the limit price is reached, it becomes a Market.

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4
Q

What are the characteristics of Margin?

A

The initial margin is how much the investor must contribute.

Reg T set the initial margin at 50% and was established by Fed Reserve

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5
Q

Assuming a stock was acquired on margin, when must an investor contribute more cash and how is it determined?

A

Required Equity - Actual Equity = Amount required to contribute?

Required = Stock Price * Maintenance Margin

Actual = Stock Price - Debt

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6
Q

Assuming a stock was acquired on margin, at what price would the investor be required to contribute additional cash?

A

This is the Margin Call Formula. It is used to determine when an investor must add to his margin position.

Margin Call = Loan amount per share/(1 - Maint. Margin)

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7
Q

What is the ex-dividend date?

A

The date the stock trades without a dividend. Must own the stock by this date in order to be registered and entitled to the dividend.

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8
Q

What is the date of record?

A

The date on which one must be a registered shareholder.

Date of Record minus 2 days in order to be entitled to a dividend.

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9
Q

What must one know in order to understand a client’s risk tolerance?

A

The Investment Policy Statement establishes RR TTLLU

Return, Risk, Taxes, Time-Line, Liquidity, Legal, Unique circumstances of the client.

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10
Q

For purposes of the margin requirement, what is the formula for a loan?

A

Loan = Price * (1 - initial margin requirement)

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11
Q

How do the stock split and the stock dividend impact a shareholder without bringing any changes in the value to the company?

A

The value of the stock split and the value of the stock dividend increase the number of shares but not the total value of those shares

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12
Q

How does the DIJA differ from the other indexes?

A

DIJA is priced based whereas the others are value based.

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13
Q

When considering standard deviation, what do the numbers 68, 95 and 99 represent?

A

68%: 1 standard deviation

95%: 2 standard deviations

99%: 3 standard deviations

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14
Q

What do the standard deviations help with?

A

What is the probability of achieving a result of x%?

100 - total for standard (68% for 1 sd) = difference

Difference/2 = probability

A higher standard deviation will mean the stock is more risky. If asked which stock is more risky, select the one with the highest standard deviation.

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15
Q

What is the coefficient of variation and how is it used?

A

CV = Standard Deviation / Average Return

Used to measure risk of two or more stocks with different average returns.

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16
Q

What is a Monte Carlo Simulation?

A

A spreadsheet simulation that gives a probabilistic distribution of events occurring.

17
Q

What does covariance measure?

A

Measures two securities combined and their interactive risk.

Measures relative risk.

SD of Asset A * SD of Asset B * Correlation Coefficient

18
Q

What does correlation measure?

A

Movement of one security against another.

Covariance/[(SD of A)*(SD of B)]

Diversification can occur at less than 1 and is most diversified at -1

19
Q

What does beta measure?

A

The volatility of a single security against the whole market.

The greater the beta, the more risk

Return of stock / Return of market

It is the measure of risk of a diversified portfolio.

20
Q

What is R-Squared?

A

It is the square of correlation coefficient.

A higher R-Squared means most of the return is coming from the market thereby meaning less systemic risk.

If greater than 0.7, then a good measure…if less than that, use standard deviation.

21
Q

What do we look for in R-Squared when measuring a client’s portfolio?

A

The highest Beta.

22
Q

What is portfolio risk?

A

A measure of risk measured through determination of the interactivity of the standard deviation and covariance of security in the portfolio?

Weighted Average Approach: Deviation*Weight for each security then pick the choice that is less than this.

23
Q

What is Systemic Risk and what are they?

A

The lowest level of risk one could expect in a fully diversified portfolio. It is inherent in the system:

Not diversifiable

PRIME:

Purchasing Power
Reinvestment Rate of Return
Interest Rate Risk
Market Risk
Exchange Rate Risk
24
Q

What is Unsystemic Risk and what are they?

A

The risk that exists in a specific firm or investment.

Diversifiable

ABCDEFG

Accounting Risk
Business Risk
Country Risk
Default Risk
Executive Risk
Financial Risk
Government Risk
25
Q

What is the efficient frontier?

A

Represents the most efficient portfolios in terms of risk and reward.

High Return Low Risk
Low Risk High Return

26
Q

What is one way to describe an optimal portfolio for a client?

A

Where the client’s Indifference Curve is tangent to the Efficient Portfolio.

27
Q

How is the expected rate of return calculated? What is the CAPM model?

A

Required Rate of Return =

Risk Free Rate + (Market Risk Premium) * Beta

Market Risk Premium = Return of Market - Risk Free Rate

28
Q

What is the Security Market Line?

A

The relationship between risk and return as defined by CAPM and graphically plotted results in the SML.

29
Q

What is the information ratio? (it is one portfolio performance measure)

A

A relative risk-adjusted performance measure

(Portfolio’s actual return - Return of the benchmark)/tracking error on active return

30
Q

What should one keep in mind when considering the Traynor Index and the Sharpe Index? (both used as portfolio measures)

A

Traynor is for diversified portfolios so uses Beta

Sharpe is for nondiversified portfolios so use Standard Deviation.

31
Q

If given standard deviation, R squared, Alpha and Sharpe, how best to evaluate?

A

If R-Squared over 70, then pick the one the with highest alpha (for well diversified portfolios).

If R-Squared under 70, then pick the one with the highest Sharpe

32
Q

If correlation is .8, which is the best measure?

A

.8^2 = .64. Because this is less than .7, this is a sign of a undiversified portfolio, we must use Sharpe as it is a measure of standard deviation.

Jason Flash Cards (6 decks)

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