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CFP > Investments > Flashcards

Investments Flashcards

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1
Q

Margin Position = ???

A

Equity / FMV

Equity = Stock Price - Loan

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2
Q

Margin Call = ???

A

Loan / 1 - Maintenance Margin

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3
Q

Securities Act of 1933

A

Regulates issuance of new securities

Requires new issues are accompanied with a prospectus before being purchased

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4
Q

Securities Act of 1934

A

Regulates secondary market and trading of securities

Created the SEC to enforce compliance with security regulations and laws

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5
Q

Investment Company Act of 1940

A

Authorized the SEC to regulate investment companies

Three types of investment companies: Open, Closed, Unit Investment Trusts

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6
Q

Investment Advisors Act of 1940

A

Required investment advisors to register with the SEC or state

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7
Q

Securities Investors Protection Act of 1970

A

Established SIPC to protect investors for losses resulting from brokerage firm failures
Does not protect investors from incompetence or bad investment decisions
Protects accounts member firms open for clients, regardless of the client’s citizenship

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8
Q

Insider Trading and Securities Fraud Enforcement Act of 1988

A

Defines an insider as anyone with info that is not available to the public
Insiders cannot trade on that information

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9
Q

Treasury Bills

A

Issued in varying maturities up to 52 weeks

Denominations in $100 increments through Treasury Direct up to $5M per auction. Larger amounts available through a competitive bid

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10
Q

Commercial Paper

A

Short-term loans between corporations
Maturities of 270 days or less and it does not have to register with the SEC
Commercial paper has denominations of $100k and are sold at a discount

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11
Q

Bankers Acceptance

A

Facilitates imports/exports
Maturities of 9 months or less
Can be held until maturity or traded

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12
Q

Eurodollars

A

Deposits in foreign banks that are denominated in USD

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13
Q

IPS establishes….

A 
RR TTLLU
Risk
Return
Taxes
Time-line
Liquidity
Legal
Unique circumstances
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14
Q

Affect Heuristic

A

Deals with judging something, whether it is good or bad. Do they like or dislike some company based on non-financial issues

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15
Q

The Mean-Variance Portfolio Theory

A

Governs- Mean-Variance investors choose portfolios by viewing and evaluating mean returns and variance for their entire portfolios

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16
Q

The CAPM

A

The basic theory that links return and risk for all assets by combining a risk-free asset with risky assets from an efficient market

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17
Q

The Behavioral Portfolio Theory

A

Governs- investors segregate their money into various mental accounting layers. Compartmentalizing versus seeing the portfolio as a whole

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18
Q

The Behavioral Asset Pricing Model

A

Determines the expected return of a stock using Beta, book to market ratios, market cap ratios, stock ‘momentum’, the investor’s likes or dislikes about the stock or company, social responsibility factors, status factors, and more.

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19
Q

Anchoring

A

Attaching or anchoring one’s thoughts to a reference point even though there may be no logical relevance or is not pertinent to the issue in question. Also known as conservatism or belief perseverance

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20
Q

Availability Heuristic

A

When a decision maker relies upon knowledge that is readily available in his or her memory, the cognitive heuristic known as ‘availability’ is invoked. This may cause investors to overweight recent events or patterns while paying little attention to longer term trends

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21
Q

Bounded Rationality

A

When individuals make decisions, their rationality is limited by the available information, the tractability of the decision problem, the cognitive limitations of their minds, and the time available to make the decision. Decision-makers in this view act as “satisficers”, seeking a satisfactory solution rather than an optimal one. Inability to consider significant amounts of info is a cause

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22
Q

Confirmation Bias

A

A commonly used and popular phrase is that “you do not get a second chance at a first impression.” People tend to filter info and focus on info supporting their opinions

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23
Q

Cognitive Dissonance

A

The tendency to misinterpret info that is contrary to an existing opinion or only pay attention to info that supports an existing opinion

24
Q

Disposition Effect

A

Known as Regret Avoidance or “faulty framing” where normal investors do not mark their stocks to market prices. Investors create mental accounts that they reference even after market has changed

25
Q

Familiarity Bias

A

Investors tend to overestimate/ underestimate the risk of investments with which they are unfamiliar/ familiar

26
Q

Gambler’s Fallacy

A

Investors often have incorrect understanding of probabilities which can lead to faulty predictions. Ie selling a stock after consecutive successful trading sessions because they don’t think it will continue

27
Q

Herding

A

People tend to follow the masses

28
Q

Hindsight Bias

A

Looking back after the fact is known and assuming they can predict the future as readily as they can explain the past

29
Q

Illusion of Control Bias

A

The tendency for people to overestimate their ability to control events; feeling of control over outcomes they do not influence

30
Q

Overconfidence Bias

A

An investor that listens mostly to himself or herself, overconfident investors mostly rely on their skills and capabilities to do their own homework or make their own decisions. Overstate risk tolerance as a consequence

31
Q

Overreaction

A

A common emotion towards the receipt of news or info

32
Q

Prospect Theory

A

Provides that people value gains and losses differently and will base their decisions on perceived gains rather than perceived losses. Investors avoid higher risk even if they offer strong risk adjusted returns. Explains over insuring against risks through low deductibles

33
Q

Recency

A

Giving too much weight to recent observations or stimuli; for example, focusing on short-term past performance

34
Q

Similarity Heuristic

A

Used when a decision or judgment is made when an apparently similar situation occurs even though the situations may have very different outcomes

35
Q

Naïve diversification

A

The process of investing in every option available to the investor

36
Q

Representativeness

A

Thinking that a good company is a good investment without regard to an analysis of the investment

37
Q

Familiarity

A

Causes investment in companies that are familiar, such as an employer

38
Q

Loss aversion

A

Investors prefer avoiding losses more than experiencing gains. Feel more pain from losses than enjoying gains

39
Q

Coefficient of Variation (CV) = ???

A

Standard Deviation / Average Return

40
Q

Leptokurtic

A

High peak and fat tails (higher chance of extreme events)

41
Q

Platykurtic

A

Low peak and thin tails (lower chance of extreme events)

42
Q

Monte Carlo Simulation

A

Spreadsheet simulation that gives a probabilistic distribution of events occurring

Eg. running out of $ in retirement with a client who has a withdrawal rate of 3%, 4%, or 5%, Then adjusts assumptions and returns the probability of the event based on the assumption

43
Q

Systematic Risks

A 
PRIME
Purchasing Power Risk- inflation erodes and dollar today can't purchase same amount tomorrow
Reinvestment Rate Risk
Interest Rate Risk
Market Risk
Exchange Rate Risk
44
Q

Unsystematic Risks

A 
ABCDEFG
Accounting Risk
Business Risk
Country Risk
Default Risk
Executive Risk
Financial Risk
Government/Regulation Risk
45
Q

What measure of risk does the Capital Market Line (CML) use?

A

Standard Deviation

46
Q

Arbitrage Pricing Theory (APT)

A

Asserts that pricing imbalances cannot exist for any significant period of time; otherwise investors will exploit the price imbalance until the market prices are back to equilibrium

Multi-factor model that attempts to explain return based on factors. Anytime a factor has a value of zero, then that factor has no impact on return

Attempts to take advantage of pricing imbalances

Inputs are factors such as inflation, risk premium, and expected returns and their sensitivity to those factors

Standard Deviation and beta are not inputs variables to the APT

47
Q

Dividend Payout Ratio = ???

A

Common Stock Dividend / Earnings per Share

48
Q

Return on Equity (ROE) = ???

A

Earnings per Share / Stockholders Equity per Share

49
Q

General Obligation Bonds

A

Backed by the full faith, credit & taxing authority of the municipality that issued the bond

50
Q

Revenue Bonds

A

Backed by the revenue of a specific project

NOT backed by the full faith, credit & taxing authority of the entity that issued the bond

51
Q

Private Activity Bonds

A

Used to finance construction of stadiums

52
Q

Discount (Yield Ladder)

A

Call (Yield to Call)
Mom’s (Yield to Maturity)
Cell (Current Yield)
Now (Nominal Yield)

53
Q

Duration

A

The weighted average maturity of all cash flows

The bigger the duration, the more price sensitive or volatile the bond is to interest rate changes

Duration is the moment in time the investor is immunized from interest rate risk and reinvestment rate risk

A bond portfolio should have a duration equal to the investor’s time horizon to be effectively immunized

54
Q

Modified Duration

A

A bond’s price sensitivity to changes in interest rates

55
Q

Net Operating Income (NOI) = ???

A

NOI = Net Income + depreciation + financing activities

CFP (7 decks)

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