Investment Planning Review Flashcards
true or false?
futures contracts require a margin account
true
purchasing a contract for future delivery is termed a ___- position
long
a long position will ___ in value if the underlying commodity/asset increases in value
increase
selling a contract for future delivery is called a ___ position
short
a short position will ____ in value if the underlying commodity/asset decreases in value
increase
what type of hedge , long or short, should a farmer use if he grows and sells wheat?
short hedge
use a short hedge when you would already benefit from a price appreciation in the asset/commodity
use a short hedge to protect a price decrease in your commodity/asset
how would a farmer take a short position in wheat?
by selling a futures contract
true or false?
future contracts are taxed annually regardless of when sell or purchase occurs
true
if a producer needs wood to sell tree houses to people, is he long or short in wood? how would he hedge against wood price fluctuation?
short ; buy futures contracts
net gains or losses from future contracts are taxed as if ___% are long term and ___% are short term regardless of the actual breakdown
60% ; 40%
one option contract gives the holder the right to buy or sell ___ shares
100
how to calculate the intrinsic value of an option?
market price - exercise price
writing a ___ option is very risky
naked
a ___ option is when you are writing an option on a security you already own
covered
a ___ option is when you are writing an option on a security that you don’t already own
naked
____ is the number of outstanding contracts for a specific option
open interest
what is the main difference between American options and European options?
American options can be exercised at any time before expiration, but European options can only be exercised at expiration
what is your max gain when you buy a call option?
unlimited
what is your max loss when you buy a call option?
premium paid
what is your max gain when you buy a put option?
exercise price less the premium you paid
what is you max loss when you buy a put option?
premium paid
what is your max loss when you sell a call option?
unlimited if naked call
what is your max loss when you sell a put option?
exercise price less premium received
what is your max gain when you sell a call option?
premium received
what is your max gain when you sell a put option?
premium received
under the black-scholes valuation method, the option premium ____ as the time to expiration increases
increases
under the black-scholes valuation method, the more volatile the stock, the ____ the option premium will be
greater
under the black-scholes valuation method, the call premium will ___ as the risk free rate of return increases
increase
under the black-scholes valuation method, the call premium will be ___ for a lower exercise price
greater
under the black-scholes valuation method, the call premium will be ___ for a higher market price
greater
___ are puts and calls with lengthy expiration dates
LEAPS (long term equity anticipation securities)
Most LEAPS expire within ____ or ___ years of initial listing dates
2 or 3
true or false?
LEAPS are available on stocks, ADRs, but not indexes
false, they are available for all of those
___ is used to protect a gain in a long position of stock
zero cost collar
what does a zero cost collar consist of?
long position in stock, long put option, and a short call option
which have longer lives, warrants or options?
warrants (usually)
___ are issued by companies where as ____ are issued by individuals
warrants ; options
under a warrant the exercise price is usually set ___ the current market price
above (well above)
____ give the holder the right to purchase a certain number of shares of a specified common stock at a predetermined price for a specified time period
warrants
___ allows the holder to buy new issues before the company offers them to the general public
preemptive rights
___ allows stockholders to purchase common stock below the current market price
preemptive rights
___ is the right to maintain proportionate ownership in company
preemptive rights
the closer the intrinsic value of an option gets to the premium, the ____ the option is to expiration
closer
___ measures the extent to which the returns on any two securities are related
correlation
true or false?
correlation denotes association and causation
false, on association
___ is a relative measure of systematic risk
beta
a security portfolio with a beta of 1.25 would be considered ____% more risky than the market
25%
studies show that betas for individual securities are or are not stable over time?
are not
studies show that betas for portfolios are or are not stable over time?
are
what does a coefficient of determination equal to 70% tell us about the relationship between XYZ stock and the market?
it tells us that 70% of XYZ price movement can be explained by the market (systematic risk) and the other 30% can be explained from non market factors (unsystematic risk)
true or false?
beta captures both the systematic and unsystematic risk within a portfolio
false
what does it mean if the coefficient of determination equals 1 or 100%?
it means that the total risk is equal to the market risk only (systematic risk only)
how do you calculate the coefficient of determination?
square the correlation coefficient
___ describes the percentage of variability of the dependent variable that is explained by changes in the independent variable
coefficient of determination
R squared = ___
coefficient of determination
___ is a relative measure of total risk per unit of expected return
coefficient of variation
what is the main use of the coefficient of variation?
used to compare investments with varying rate of returns and standard deviations
how to calculate the coefficient of variation
standard deviation of asset / expected return of asset
_____ is an absolute measure of the variability of returns around the mean or expected mean
standard deviation
standard deviation measures ____ risk and beta measures ___ risk
total ; systematic
the ___ measures the number of standard deviations a data value is from the mean
z score
z score formula
(data value - mean) / standard deviation
___ measures whether a distribution is is more or less peaked than a normal distribution
kurtosis
____ is when a distribution is more peaked than a normal distribution
leptokurtic
___ is a distribution where more observations are cluttered around the mean
leptokurtic distribution
an investor who wants to minimize volatility in their portfolio would prefer a ____ distribution
leptokurtic
____ is a distribution that is less peaked than a normal distribution
platykurtic
____is a distribution where more observations are further away from a mean
platykurtic
____ only measures the downside volatility of an investment
semivariance
when used in analysis, the ___ the semivariance of a security, the less likely the security will incur a substantial loss in value
lower
___ measures the consistency in which a manager beats a benchmark
information ratio
what is the efficient frontier’s risk measure?
standard deviation
the portfolio that lies at the ___ of the indifference curve and the efficient frontier is the optimum portfolio for the investor
tangent
who developed the efficient frontier?
harry markowitz
the ___ consists of portfolios with the highest expected return for a given level of risk
efficient frontier
how many indifference curves can an investor have?
an unlimited amount
true or false?
an assumption of CAPM is that transaction costs are equal to zero
true
true or false?
an assumption of CAPM is that taxes are equal to zero
true
true or false?
an assumption of CAPM is that markets are always in equilibrium
true
the capital market line uses ___ on the y axis
risk free rate
the capital market line uses ___ on the x axis
standard deviation of portfolio
___ states that investors are unable to consistently outperform the market on a risk adjusted basis
efficient market hypothesis
___ form of EMH states that the current stock price already includes historical info such as trading volume, public info, and prices
weak
___ form of EMH includes only information that can be found by technical analysis
weak
____form of EMH includes historical data and data from analyzing financial statements, industry info, and economic outlook
semi strong
___ form of EMH includes info that can be found from technical and fundamental analysis
semi strong
____ form of EMH includes all public info including historical data, financial statements, and insider info
strong
___ analysis is the process of determining the FMV or intrinsic value of a security
fundamental
what is the order of top down analyzing?
economy, industry, company
what is the order of bottom up analyzing?
company, industry, economy
___ is the present value of expected future cash flows discounted at an appropriate discount rate while taking the risk of the investment into consideration
intrinsic value
___ analysis is an attempt to determine the demand side of the supply/demand equation for a particular stock or set of stocks
technical
as a bond’s price increases the current yield will ___
decrease
as a bond’s price decreases the current yield will ___
increase
if a bond is trading at a discount, the current yield will be ___ than the coupon rate
higher
if a bond is trading at a premium, the current yield will be ____ than the coupon rate
less
the coupon rate of a bond and the duration of a bond have a(n) ___ relationship
inverse
the duration of a zero coupon bond will equal the bond’s ____
maturity
a bond with coupon payments will always have a duration that is ___ than its time to maturity
less
the duration and YTM of a bond have a(n) ___ relationship
inverse
as the YTM of a bond increases, the duration will ___
decrease
higher quality bonds will have a ___ duration than lower quality bonds
higher
when is convexity the greatest?
low coupon bonds
long maturity bonds
low YTM bonds
what is convexity?
the degree to which duration changes as a result of changes in the YTM
Large convexity implies a ___ change in duration
large
coupon rates and convexity have a(n) ___ relationship
inverse
maturity and convexity have a(n) ___ relationship
direct
yield to maturity and convexity have a(n) ___ relationship
inverse
yield to maturity and duration have a(n) ____ relationship
inverse
if the conversion value of a security is less than the market price of a stock, should the conversion happen?
no
if the market lowers the required rate of return, the value of the common stock will ____
increase
if the market raises the required rate of return, the value of the common stock will _______
decrease
if investors decide the dividend growth will be higher, the value of the common stock will ____
increase
if investors decide the dividend growth will be lower, the value of the common stock will _____
decrease
the constant dividend growth model is best to use with ____ companies
mature
____ refers to the amount of equity within a company and is determined by subtracting liabilities from assets
book value
____ is the cash received if the company discontinues business, sells all assets, and distributes the funds to shareholders
liquidation value
____ usually represents the minimum value of a company
liquidation value
____ is the amount of the issuing company’s stockholder equity divided by the total number of common shares outstanding
price to book value
____ is the most appropriate approach when there are several properties in a market that have recently been sold having similar characteristics to the property that is being valued
sales comparison approach
____ approach is designed to estimate the value of a property by determining how much it would cost to replace the property and then making any adjustments for depreciation or deterioration of the property
cost approach
___ approach takes the position that the value of the property is based on the income that can be generated from the property
income capitliation
______ is defined as net income (income less fixed and variable operating expenses) before depreciation and debt service
net operating income
___ form of return provides an assessment of an investor’s actual performance rather than a portfolio managers
dollar weighted return
____ for of return is the preferred method for analyzing the performance of a portfolio
time weighted return
the purpose of ___ asset allocation is to choose an appropriate asset allocation based on forecasts of the economy, expectations of selected asset classes, and risk tolerance of the client
strategic
___ asset allocation refers to changing the mix of investment classes based on changing market conditions
tactical
___ is an investment strategy investing in both broad market indexes and higher risk alternatives
core and satellite
what is the main benefit from a buy and hold strategy?
minimal transaction costs and taxes
true or false?
an index fund is an example of a buy and hold strategy
true
the S&P 500 is a good bench mark for ____
large cap companies (US)
the Russell 2000 is a good bench mark for ___
small cap companies
the MSCI EAFE is a good bench mark for ___
international markets
the Wilshire 500 is a good bench mark for ___
overall US market
if you are building a benchmark for a specific portfolio then the correlation between your portfolio in the benchmark should be ___
high
the goal of ___ is to protect a bond portfolio from interest rate risk and reinvestment rate risk
immunization
____ is an approach where investors purchase a series of bonds with similar maturities that are focused around one point in time
bullet strategy
___ is an approach where funds are invested in both short term and long term bonds
barbell (dumbbell) strategy
___ is an approach where funds are invested in bonds with staggered maturities
laddered strategy
___ involves exchanging bonds with identical characteristics selling for different prices
substitution swap
___ involves the exchange of one type of bond with another type of bond
intermarket swap
___ involves exchanging a lower YTM bond with a higher YTM bond
pure yield pickup swap
