Investments Flashcards
What is a “Red Herring”?
A preliminary prospectus issued before SEC approval used to determine investors’ interest in security.
What is formula to calculate Margin Position?
Margin Position = Equity ÷ Fair Market Value (for %)
Margin Position = Fair Market Value - Margin Loan (for $)
What is the formula to calculate Equity in regards to Margin?
Equity = Stock Price - Loan
I.E. Equity = [$40 - ($50 × 0.25)]
How do you calculate price for Margin Call?
Margin Call = Loan/(1-Maintenance Margin)
I.E. Margin Call = $12.50/(1-0.25)
Margin Call = $16.67
What does Value Line & Morningstar rate and what are their rankings?
Value Line rates stocks by using 1 to 5, with 1 being best & 5 being worst.
Morningstar rates mutual funds by using 1 to 5 stars with 1 star being the worst & 5 stars being the best.
When are stock dividends taxed?
Stock dividends not taxed until stock is sold.
What did the Securities Act of 1933 do?
- Regulates issuance of new securities
- Requires new issues to have prospectus before purchase
What did the Securities Act of 1934 do?
- Regulates secondary market
- Created SEC to enforce securities regulations
What did the Investment Company Act of 1940 do?
- Authorized SEC to regulate investment companies
- Established investment companies as Open, Closed, Unit Investment Trusts (UITs)
What did the Investment Advisers Act of 1940 do?
-Required investment advisors to register with SEC or state
What did the Securities Investors Protection Act of 1970 do?
- Established SIPC to protect investors from losses due to brokerage firm failures, not bad investment decisions
- Protects accounts member firms open for clients, regardless of citizenship
What did the Insider Trading and Securities Fraud Act of 1988 do?
- Defines an insider as anyone w/info that is not available to public
- Insiders cannot trade on that info
What are some characteristics of T-Bills?
- Issued in varying maturities up to 52 wks
- Denominations in $100 increments thru Treasury Direct up to $5M/auction
What are some characteristics of Commercial Paper?
- Short-term loans between corporations
- Maturities of 270 days or less, doesn’t have to be registered with SEC
- Has denominations of $100k & sold at discount
What are some characteristics of Banker’s Acceptances?
- Facilitates imports/exports
- Maturities of 9 months or less
- Can be held until maturity or traded
What are some characteristics of Eurodollars?
-Deposits in foreign banks that are denominated in US Dollars
What is the difference between price-weighted average & a value-weighted average?
A price-weighted averages calculate an average based on price of shares of companies, while value-weighted averages incorporates market cap of companies’s stock into average.
Define Affect Heuristic
Deals with judging something, good or bad based on non-financial issues.
Define Anchoring
Attaching/anchoring one’s thought to a reference point even though there may be no logical relevance or pertinent to issue in question.
Define Availability Heuristic
When a decision maker relies upon knowledge that is readily available from their memory.
Define Bounded Rationality
When individuals make decisions, their rationality is limited by available information, tractability of decision problem, limitations of their minds, & time available to make decision.
-Seeking a satisfactory solution rathen than an optimal one.
Define Confirmation Bias
When people tend to filter information & focus on information supporting their opinions.
Define Cognitive Dissonance
Tendency to misinterpret information that is contrary to an existing opinion or only paying attention to information that supports existing opinion.
Define Disposition Effect
Aka Regret avoidance, investors don’t mark their stocks to market prices. They continue to mark their value to purchase prices even after they’ve changed.
Define Familiarity Bias
When investors tend to overestimate/underestimate risk of investments which they are unfamiliar/familiar.
Define Gambler’s Fallacy
When investors have incorrect understanding of probabilities which can lead to faulty predictions.
Define Herding
When people follow the masses or the “herd”.
Define Hindsight Bias
When an investor looks back after fact is known and assumes they can predict future as readily as they can explain the past.
Define Illusion of Control Bias
Tendency for people to overestimate their ability to control events
Define Overconfidence Bias
When an investor listens mostly to themselves, overconfident on relying on skills & capabilities to do their own research & make their own decisions.
Define Overreaction (in terms of Behavioral Finance)
A common emotion towards receipt of news or information
Define Prospect Theory
That people value gains and losses differently and will base their decisions on perceived gains rather than perceived losses. (Avoiding higher risk investments even though there is a strong risk adjusted return).
Define Recency
Giving too much weight to recent observations
Define Similarity Heuristic
This is when a decision or judgement is made when an apparently similar situation occurs even though they may have very different outcomes
What is a Monte Carlo Simulation?
It is a simulation that gives probability of success based off variables input of thousands of trials being ran/simulated.
Name all the different risks that are associated with systematic risk.
P.R.I.M.E. Purchasing power risk Reinvestment risk Interest rate risk Market risk Exchange rate risk
Name all the different risks that are associated with unsystematic risk.
A.B.C.D.E.F.G Accounting risk Business risk Country risk Default risk Executive risk Financial risk Gov'mt/Regulation risk
What is the Capital Market Line (CML) formula?
rp = rf + StDevp[(rm - rf)/StDevm]
What is the Arbitrage Pricing Theory (APT)?
Arbitrage Pricing Theory is a multifactor model that uses inflation, risk premium, & expect return to attempt to explain return based on factors that asserts that pricing imbalances cannot exist for a significant period of time otherwise investors will exploit the price and is balanced.
What is the Dividend Payout Formula?
Dividend Payout = Common Stock Dividend Per Share ÷ Earnings Per Share
What is the Return on Equity (ROE) formula?
ROE = Earnings per Share ÷ Stockholders Equity per Share
What is Dividend Yield formula?
Dividend Yield = Dividend ÷ Stock Price
What is Dow Theory?
A signal that a tech analyst uses to determine the end of a bull or bear market.
What is the Breadth of the Market?
A signal techical analysts use to see number of stocks that increase in value vs. number of stocks that decrease in value.
What is the Advance Decline Line?
It is info that tech analysts use to see difference between number of stocks that closed up versus number of stocks that closed down.
Summarize Weak Efficient Market Hypothesis
It rejects tech analysis and only way to beat market is through fundamentals.
Summarize Semi-strong Efficient Market Hypothesis
It rejects tech analysis and fundamentals and only way to beat market is through inside information.
Summarize Semi-strong Efficient Market Hypothesis
Summarize Strong Efficient Market Hypothesis
It rejects tech analysis, fundamentals, & insider info and there is no way to beat market since price has all information built in.
How does the user of the “Intrinsic value” formula arrive at the appropriate rate of return (the R or the K) used in this model?
By using the Capital Asset Pricing Model (CAPM)
Are EE Bonds marketable securities?
No
What is/are the agency(cies) bonds backed by the federal goverment?
Government national mortgage association (GNMA or Ginnie Mae)
FNMA-Fannie Mae’s & FHLMC-Freddie Mac’s bonds are not.
What are the 3 different types of municipal bonds?
General Obligation (GO), Revenue, Private activity. Only GO bonds are backed by municipality.
What are the names of the insurance companies that ensure municipal bonds?
American municipal bond insurance corporation (AMBAC) and Municipal bond insurance association corporation (MBIA)
Name the yields from highest to lowest for a premium bond.
- Coupon rate (Nominal rate)
- Current Yield
- YTM
- YTC
Name the yields from highest to lowest for a discount bond.
When you see a discount, “Call Mom’s Cell Now”
- yield to CALL
- yield to Maturity
- Current yield
- Nominal rate/coupon rate
What are some important things about Duration?
- It’s a weighted avg. maturity of all cash flows.
- Moment in time when investor is immunized from interest & reinvestment rate risks.
- Modified Duration is bond’s price sensitivity to interest rate changes.
- Bond portfolio should have duration equal to time horizon to be immunized.
What is formula for Conversion Value for Bonds?
CV = (Par Value ÷ Conversion Price) × Price of common stock
How do you calculate Net Operating Income?
Find Net Income and then add back depreciation & financing costs (interest expense) back.
OR
Gross Income - Operating Expenses
What is the intrinsic value & time value of a call option?
Intrinsic Value of Call =Stock price - Strike Price
Time Value = Option Premium - Intrinsic Value
What is the intrinsic value & time value of a call option?
What is the intrinsic value & time value of a put option?
Intrinsic Value of Put =Strike Price - Stock Price
Time Value = Option Premium - Intrinsic Value
What is Black-Scholes pricing model & the variables it uses?
The Black Scholes model is used to determine value of call option. Variables are:
- current price of underlying asset
- time until expiration
- risk-free rate of return
- volatility of underlying asset
What is the Put/Call Parity?
Put/Call parity attempts to value a put option based upon a call option.
What is the Binomial Pricing Model?
Binomial Pricing Model explains prices based upon the underlying asset price moving in 2 different directions.
