Investments Flashcards
Primary markets and issues are regulated by the _____________.
Securities Act of 1933
Secondary markets and issues are regulated by the __________.
Securities Act of 1934
Market Order
Sell ASAP at current price (most common)
Limit Buy Order
Wait for limit price or lower to buy
Limit Sell Order
Wait for limit price or higher to sell
Stop Order
When price gets hit, turns into a market order
Stop Limit Order
Combines features of a stop order and a limit order
Investment Advisors Act of 1940
Requires advisors to register with the SEC
DOL Rule
Established best interest standard and put fiduciary standards on ERISA accounts
Holding Period Return
Formula (Not from formula sheet)
[(Ending Value - Initial Value) + Income Generated] / Initial Value
Holding Period Return (is/is not) indexed for time
Is not
Holding period return assumes dividends (are/are not) reinvested
are not
Holding Period Return
Capital Appreciation Component
(Ending Value - Initial Value) / Initial Value
Holding Period Return
Income Yield Component
Income / Initial Value
Dollar-weighted return (does/does not) account for when investments are made and when withdrawals occur
does
Time-weighted return is based solely on the __________ or __________ of the portfolio from period to period
appreciation;depreciation
Total Risk = __________ + __________
Systematic Risk, Unsystematic Risk
Which type of risk can NOT be eliminated through diversification?
systematic risk
Systematic risk is quantified by what statistic?
Beta
Types of Systematic Risk
“PRIME”
Purchasing Power Risk
Reinvestment Risk
Interest Rate Risk
Market Risk
Exchange Rate Risk
Types of Unsystematic Risk
Business Risk
Financial Risk
Default/Credit Risk
Regulation Risk
Sovereignty Risk
The probability of a return falling within +/- 1 standard deviation of the average is ___%
68%
The probability of a return falling within +/- 2 standard deviations of the average is ___%
95%
The probability of a return falling within +/- 3 standard deviations of the average is ___%
99%
__________ refers to the extent to which a distribution is not symmetrical
Skewness
__________ skewed distributions have many outliers in the upper, or right tail
Positively
__________ skewed distributions have many outliers in the lower, or left tail
Negatively
__________ is a statistical measure that describes when a distribution is more or less peaked than a normal distribution
Kurtosis
Normal distributions are also known as __________
mesokurtic
A distribution curve that is more peaked than normal is known as __________
leptokurtic (slender)
A distribution curve that is less peaked than normal is known as __________.
platykurtic (broad) (“platy is flatty”)
Investors who accept the Efficient Market Theory would be __________ investors and buy only index funds
passive
Efficient Market Hypothesis
Strong Form
Inside Information - No
Fundamental Analysis - No
Technical Analysis - No
Efficient Market Hypothesis
Semi-Strong Form
Inside Information - Yes
Fundamental Analysis - No
Technical Analysis - No
Efficient Market Hypothesis
Weak Form
Inside Information - Yes
Fundamental Analysis - Yes
Technical Analysis - No
Efficient Market Theory
Anomalies
- Low P/E Effect
- Small Firm Effect
- Neglected Firm Effect
- January Effect
- Value Line Phenomenon
The __________ __________ curve identifies the optimal amount of return given a unit of risk taken
efficient frontier
The efficient frontier uses _________ for the risk measure
standard deviation
All points on the efficient frontier curve are deemed equally __________
efficient
Points __________ the curve are deemed inefficient
below
Points __________ the curve are deemed impossible
above
Where you plot on the efficient frontier curve is determined by __________ __________
risk tolerance
Risk averse investors have (steep/flat) indifference curves
steep
Risk tolerant investors have (steep/flat) indifference curves
flat
The Sharpe Ratio measures the risk-adjusted performance of a portfolio in terms of __________.
standard deviation
The Sharpe Ratio is appropriate to use when R2 ____ 0.70
<
Sharpe Ratio is a (comparative/absolute) value
comparative
The higher the Sharpe ratio, the (higher/lower) the risk-adjusted rate of return
higher
The Treynor Ratio is appropriate to use when R2 ____ 0.70
>
The Treynor Ratio is a (comparative/absolute) value
comparative
The higher the Treynor Ratio, the (higher/lower) the risk-adjusted rate of return
higher
The Treynor Ratio measures the risk-adjusted performance of a portfolio in terms of __________
Beta
CAPM is used to quantify __________ __________ given a market return and a Beta to the market
expected return
CAPM is used top plot the __________ __________ __________
security market line
CAPM
Market Risk Premium
(Rm - Rf)
Also known as the equity risk premium
CAPM
Stock Premium
(Rm - Rf)Bi
Return of the market less the risk free rate times Beta
Once CAPM produces the expected return, it can be subtracted from the __________ return to determine alpha
actual return
What is another name for Alpha?
Jensen’s Performance Index
What does Alpha quantify?
Risk-adjusted rate of return
Alpha is only valid when R2 _____ 0.70
>
Alpha is a (comparative/absolute) value
absolute
Does Alpha use Beta or standard deviation?
Beta
When Alpha is above the Security Market Line (SML) (or positive)…
performance was better than expected
When Alpha is on the Security Market Line (SML) (or zero)…
performance was as expected
When Alpha is below the Security Market Line (SML) (or negative)…
performance was less than expected
The _____ _____ plots the rates of fixed income securities from very short-term securities all the way out to thirty-year maturity securities
yield curve
Yield Curve
Upward Sloping
Normal, positive
The rates of short-term paper are lower than the rates on longer-term paper
Yield Curve
Flat
Rates of short-term and longer-term paper are similar
Yield Curve
Downward Sloping
Negative, inverted
The rates of short-term paper are higher than the rates of longer-term paper
An inversion of the yield curve is indicative of a looming __________
recession
The yield curve is a function of both the __________ _____ and ___ ______
business cycle; Fed policy
The (short/long) end of the yield curve is sensitive to Fed policy
short
The (short/long) end of the yield curve is a market rate and is predictive of anticipated economic conditions
long
Bond valuation is a function of:
- the bond’s coupon payments
- the market rate of interest for comparable bonds
- the amount of time until maturity
- maturity value
Compounding frequency for bond calculations
semi-annual
The stated or coupon yield of a bond
Nominal yield
The annual income paid divided by the current market price of the bond
Current Yield
________ is used to estimate the sensitivity of a bond to changes in rates
Duration
Yield to Worst is the lower of _____ __ ________ and _____ __ ____
Yield to Maturity; Yield to Call
As interest rates rise, bond prices (rise/fall)
fall
Discount Bond Yields
Highest to Lowest
Yield to Call
Yield to Maturity
Current Yield
Premium Bond Yields
Highest to Lowest
Current Yield
Yield to Maturity
Yield to Call
Duration is always stated in _____
years
For normal income-producing bonds, duration will always be (shorter/longer) than maturity
shorter
For zero-coupon bonds, the duration and years to maturity will be ___ ____
the same
Duration (increases/decreases) with maturity
increases
A higher coupon will result in a (higher/lower) duration
lower
Duration tends to (over/under)estimate risks from rising interest rates and (over/under)estimate benefits from lowering interest rates
over; under
Matching the duration of a fixed income portfolio to an investor’s time horizon _________ those assets
immunizes
Longer duration = (more/less) sensitive to interest rate changes
more
Which systematic risks does portfolio immunization lower?
Reinvestment risk and Purchasing Power risk
Duration is a (linear/curved) estimate
linear
