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Financial Planning Fundamentals > Investments > Flashcards

Investments Flashcards

1
Q

What is a “Red Herring”?

A

A preliminary prospectus issued before SEC approval used to determine investors’ interest in security.

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2
Q

What is formula to calculate Margin Position?

A

Margin Position = Equity ÷ Fair Market Value (for %)

Margin Position = Fair Market Value - Margin Loan (for $)

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3
Q

What is the formula to calculate Equity in regards to Margin?

A

Equity = Stock Price - Loan

I.E. Equity = [$40 - ($50 × 0.25)]

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4
Q

How do you calculate price for Margin Call?

A

Margin Call = Loan/(1-Maintenance Margin)
I.E. Margin Call = $12.50/(1-0.25)
Margin Call = $16.67

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5
Q

What does Value Line & Morningstar rate and what are their rankings?

A

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.

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6
Q

When are stock dividends taxed?

A

Stock dividends not taxed until stock is sold.

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7
Q

What did the Securities Act of 1933 do?

A
  • Regulates issuance of new securities

- Requires new issues to have prospectus before purchase

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8
Q

What did the Securities Act of 1934 do?

A
  • Regulates secondary market

- Created SEC to enforce securities regulations

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9
Q

What did the Investment Company Act of 1940 do?

A
  • Authorized SEC to regulate investment companies

- Established investment companies as Open, Closed, Unit Investment Trusts (UITs)

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10
Q

What did the Investment Advisers Act of 1940 do?

A

-Required investment advisors to register with SEC or state

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11
Q

What did the Securities Investors Protection Act of 1970 do?

A
  • 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
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12
Q

What did the Insider Trading and Securities Fraud Act of 1988 do?

A
  • Defines an insider as anyone w/info that is not available to public
  • Insiders cannot trade on that info
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13
Q

What are some characteristics of T-Bills?

A
  • Issued in varying maturities up to 52 wks

- Denominations in $100 increments thru Treasury Direct up to $5M/auction

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14
Q

What are some characteristics of Commercial Paper?

A
  • 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
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15
Q

What are some characteristics of Banker’s Acceptances?

A
  • Facilitates imports/exports
  • Maturities of 9 months or less
  • Can be held until maturity or traded
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16
Q

What are some characteristics of Eurodollars?

A

-Deposits in foreign banks that are denominated in US Dollars

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17
Q

What is the difference between price-weighted average & a value-weighted average?

A

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.

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18
Q

Define Affect Heuristic

A

Deals with judging something, good or bad based on non-financial issues.

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19
Q

Define Anchoring

A

Attaching/anchoring one’s thought to a reference point even though there may be no logical relevance or pertinent to issue in question.

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20
Q

Define Availability Heuristic

A

When a decision maker relies upon knowledge that is readily available from their memory.

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21
Q

Define Bounded Rationality

A

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.

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22
Q

Define Confirmation Bias

A

When people tend to filter information & focus on information supporting their opinions.

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23
Q

Define Cognitive Dissonance

A

Tendency to misinterpret information that is contrary to an existing opinion or only paying attention to information that supports existing opinion.

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24
Q

Define Disposition Effect

A

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.

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25
Q

Define Familiarity Bias

A

When investors tend to overestimate/underestimate risk of investments which they are unfamiliar/familiar.

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26
Q

Define Gambler’s Fallacy

A

When investors have incorrect understanding of probabilities which can lead to faulty predictions.

27
Q

Define Herding

A

When people follow the masses or the “herd”.

28
Q

Define Hindsight Bias

A

When an investor looks back after fact is known and assumes they can predict future as readily as they can explain the past.

29
Q

Define Illusion of Control Bias

A

Tendency for people to overestimate their ability to control events

30
Q

Define Overconfidence Bias

A

When an investor listens mostly to themselves, overconfident on relying on skills & capabilities to do their own research & make their own decisions.

31
Q

Define Overreaction (in terms of Behavioral Finance)

A

A common emotion towards receipt of news or information

32
Q

Define Prospect Theory

A

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).

33
Q

Define Recency

A

Giving too much weight to recent observations

34
Q

Define Similarity Heuristic

A

This is when a decision or judgement is made when an apparently similar situation occurs even though they may have very different outcomes

35
Q

What is a Monte Carlo Simulation?

A

It is a simulation that gives probability of success based off variables input of thousands of trials being ran/simulated.

36
Q

Name all the different risks that are associated with systematic risk.

A 
P.R.I.M.E.
Purchasing power risk
Reinvestment risk
Interest rate risk
Market risk
Exchange rate risk
37
Q

Name all the different risks that are associated with unsystematic risk.

A 
A.B.C.D.E.F.G
Accounting risk 
Business risk
Country risk
Default risk
Executive risk
Financial risk
Gov'mt/Regulation risk
38
Q

What is the Capital Market Line (CML) formula?

A

rp = rf + StDevp[(rm - rf)/StDevm]

39
Q

What is the Arbitrage Pricing Theory (APT)?

A

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.

40
Q

What is the Dividend Payout Formula?

A

Dividend Payout = Common Stock Dividend Per Share ÷ Earnings Per Share

41
Q

What is the Return on Equity (ROE) formula?

A

ROE = Earnings per Share ÷ Stockholders Equity per Share

42
Q

What is Dividend Yield formula?

A

Dividend Yield = Dividend ÷ Stock Price

43
Q

What is Dow Theory?

A

A signal that a tech analyst uses to determine the end of a bull or bear market.

44
Q

What is the Breadth of the Market?

A

A signal techical analysts use to see number of stocks that increase in value vs. number of stocks that decrease in value.

45
Q

What is the Advance Decline Line?

A

It is info that tech analysts use to see difference between number of stocks that closed up versus number of stocks that closed down.

46
Q

Summarize Weak Efficient Market Hypothesis

A

It rejects tech analysis and only way to beat market is through fundamentals.

47
Q

Summarize Semi-strong Efficient Market Hypothesis

A

It rejects tech analysis and fundamentals and only way to beat market is through inside information.

Summarize Semi-strong Efficient Market Hypothesis

48
Q

Summarize Strong Efficient Market Hypothesis

A

It rejects tech analysis, fundamentals, & insider info and there is no way to beat market since price has all information built in.

49
Q

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?

A

By using the Capital Asset Pricing Model (CAPM)

50
Q

Are EE Bonds marketable securities?

A

No

51
Q

What is/are the agency(cies) bonds backed by the federal goverment?

A

Government national mortgage association (GNMA or Ginnie Mae)

FNMA-Fannie Mae’s & FHLMC-Freddie Mac’s bonds are not.

52
Q

What are the 3 different types of municipal bonds?

A

General Obligation (GO), Revenue, Private activity. Only GO bonds are backed by municipality.

53
Q

What are the names of the insurance companies that ensure municipal bonds?

A

American municipal bond insurance corporation (AMBAC) and Municipal bond insurance association corporation (MBIA)

54
Q

Name the yields from highest to lowest for a premium bond.

A
  1. Coupon rate (Nominal rate)
  2. Current Yield
  3. YTM
  4. YTC
55
Q

Name the yields from highest to lowest for a discount bond.

A

When you see a discount, “Call Mom’s Cell Now”

  1. yield to CALL
  2. yield to Maturity
  3. Current yield
  4. Nominal rate/coupon rate
56
Q

What are some important things about Duration?

A
  • 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.
57
Q

What is formula for Conversion Value for Bonds?

A

CV = (Par Value ÷ Conversion Price) × Price of common stock

58
Q

How do you calculate Net Operating Income?

A

Find Net Income and then add back depreciation & financing costs (interest expense) back.
OR
Gross Income - Operating Expenses

59
Q

What is the intrinsic value & time value of a call option?

A

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?

60
Q

What is the intrinsic value & time value of a put option?

A

Intrinsic Value of Put =Strike Price - Stock Price

Time Value = Option Premium - Intrinsic Value

61
Q

What is Black-Scholes pricing model & the variables it uses?

A

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
62
Q

What is the Put/Call Parity?

A

Put/Call parity attempts to value a put option based upon a call option.

63
Q

What is the Binomial Pricing Model?

A

Binomial Pricing Model explains prices based upon the underlying asset price moving in 2 different directions.

Financial Planning Fundamentals (6 decks)

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