Investments Flashcards

Question

Real Estate

Answer 1

Unimproved land is a passive investment, can only appreciate not generate income. Improved land generates income from rentals. Intrinsic value of property is computed using NOI

Answer 2

NOI calculation: Gross Rental receipts +Non-Retnal Income = Potential Gross Income (PGI) -Vancany and collection losses -Operating Expenses (excluding interest & depreciation) =NOI Intrinsic Value = NOI / Cap Rate

Answer 3

REIT: Similar to close end fund, invests in real estate, construction loans and mortgages but is liquid. Equity REITs are income producing, mortgage REITs loan money to develop property (vulnerable to default and purchasing power risk). Taxed like a stock RELPs: Managed by GP, generally not marketable, subject to passive loss rules REMICs: Provide more flexibility than CMOs and may eventually replace them

Answer 4

Put: Intrinsic Value = Exercise Price - Market Price If EP > MP then put is in the money If EP < MP then IV is 0 and out of the money *cannot be negative Call: Intrinsic Value = Market Price - Exercise Price If MP > EP then call is in the money If MP < EP then IV is 0 and out of the money *cannot be negative

Answer 5

Writer: Option Lapses = short term gain for premium received (same for a put option) Option exercised = premium received added to sale price, can be long term gain if covered call and security was held for > 12 months Holder: Option not exercised = short term loss

Answer 6

Option to purchase stated number of shares for a specified time period. - Issued by corporations - Maturities of years (calls only up to 9 months) - Non standardizes terms - No intrinsic value

Answer 7

Stamps, coins, oriental rugs and antiques. typically rise in inflationary periods Long Term Cap Gain Rate: 28%

Answer 8

Max 35 non-accredited investors. Unlimited accredited investors. Accredited = 1-2-3 Test. 1 mil net worth (excluding primary residence), 200k annual income (single), 300K annual income (joint)

Answer 9

3 main types: Financial, Commodity and Foreign Currency Delivery: means settlement Offset: buyers sell their positions and sellers buy their positions prior to delivery Long position: Person who wants to buy commodity Short: Person who wants to sell the commodity Speculating is very risky in futures, but companies may use futures to hedge or mitigate risk Spot: Current market price Open interest: Number of contracts trading on a given day Daily limit: maximum permissible price increase or decrease relative to settlement price on previous day

Answer 10

Purchasing Power Risk: rise of prices and services erode purchasing power of fixed income through inflation Reinvestment Rate Risk: Proceeds will be invested at a lower interest rate than the security that generated the proceeds. Uncertainty about the rate future income can be invested at Interest Rate Risk: Change in interest rates will cause market value of fixed income security to fall. Relationship of bond prices and required rate of return Market Risk: Risk of the overall market Exchange Rate Risk: Uncertainty of the price at which one country's currency can be converted into anothers. - Devaluation: lowering the value of a currency relative to another currency - Revaluation: Increase in the value of a currency relative to another currency Systematic risk is expressed by Beta

Answer 11

Business Risk: Nature of firms operations Financial Risk: How firm finances its assets Can be reduced through diversification

Answer 12

Total risk is expressed by standard deviation. It is a makeup of systematic and unsystematic risk.

Answer 13

Lower correlation of foreign securities with US securities

Answer 14

Liquidity: Security can be bought or sold without delay and without substantial price change Marketability: Speed of a transaction

Answer 15

Mean: Middle point between two extremes Normal Distribution: Mean = most likely return, and is centered in bell curve (68, 95, 99) Lognormal Distribution: Upper limit is unlimited but lower cant go below 0, distribution is positively skewed with most values near lower limit, mean is to the right of highest point

Answer 16

Correlation Coefficient: Ranges from +1 (perfectly correlated and move together) to -1(negatively correlated and move opposite). Symbol is Pii. Pii= COVii / (STdev1*STdev2) use whole numbers for STdev's Covariance: COVii = Pii*STdev1*STdev2

Answer 17

= Standard Deviation / Mean

Answer 18

St. Dev: Measures the variability of returns, used in non diversified portfolio to measure total risk Beta: Measures volatility of returns used in a diversified portfolio to measure systematic risk Bi (beta) = [Pii * STdev(stock)] / STdev(market)

Answer 19

2nd Stat: Enter returns for stock under each year 2nd Data: down to X = mean, Sx= St Dev

Answer 20

(Sum of STdev's of all funds ) / # funds (use whole number not percentages) then look for the next lowest answer

Answer 21

Stock 1 Beta * Stock 1 weighting = Stock 1 weighted beta Stock 2 Beta * Stock 2 weighting = Stock 2 weighted beta Sum those answers together

Answer 22

Funds Annual Return / Beta

Answer 23

Geometric: Time Weighted Return (1+ return1) * (1+ return2) * (1 + return3) = FV for financial calculator. PV = sum of money, N= # of returns. Solve for I/Y Arithmetic = Sum of all returns / # of returns. Not a good use of measuring returns Dollar Weighted = IRR and NPV

Answer 24

[(1+after tax return) / (1+inflation rate)] - 1 then multiply by 100

Answer 25

Nominal: Actual returns produced over a given time without account for inflation Total: Annual return including appreciation or loss and dividends/interest Risk Adjusted: Return has been altered to account for differences in risk among variables of the same type Holding Period: (Sale price + Dividends&Interest - Purchase Price) / Purchase Price Margin HPR: [(Sale Price * Total Shares) - (Borrowed Funds + Interest) - Purchase Price of Shares Client Paid For] / Purchase Price of Shares Client Paid For

Answer 26

Use CF on calculator. Note: that if dividend hits on the same year as sale, net out the proceeds in that year.

Answer 27

When calculating YTC, use semiannual compounding (2 p/y) PV= Current MP I/Y = Solve for N = # Years xP/Y FV = Par PMT = (Coupon Rate * Par) / 2

Answer 28

When calculating YTC, use semiannual compounding (2 p/y) PV= Current MP I/Y = Solve for N = # Years until callable x P/Y FV = Call Price PMT = (Coupon Rate * Par) / 2

Answer 29

(Coupon Rate * Par) / Current Price

Answer 30

Tax exempt yield / (1 - Tax Rate)

Answer 31

Measure of how long it will take recoup the price paid by cash flows. Compares price volatility with equal coupons but different term lengths. Interest rates expected to rise: Buy high coupon short maturity (shorten duration) Interest rates expected to fall: Buy low coupon long maturities (lengthen duration) Duration = (1 + y) / y y = current yield on comparative bonds

Answer 32

Passive investment strategy where the portfolio duration is equal to a preselected time horizon

Answer 33

Their Duration equals their maturity. Their prices fluctuate more than those of coupon bonds with same maturities

Answer 34

Change in Price / Price also = -Duration (change in interest rates / [1 + YTM])

Answer 35

Smaller Coupon: greater price fluctuation. Convexity is largest Longer maturity: greater price fluctuation. Convexity is largest Market interest rate is lower: greater price fluctuation Low yield to maturity: Convexity is largest

Answer 36

Zero Growth: Price = Dividend / Required Rate of Return Constant Growth Model: Price = [Dividend * (1 + Growth Rate)] / (Required Rate of Return - Growth Rate) (Also same as Price to Free Cash Flow Fomula, Dividend is replaced by FCF per share) Dividend Discount Model (Shortcuts): Solve for constant growth using the 2nd dividend growth rate. Price = [Dividend * (1 + 2nd Growth Rate)] / (Required Rate of Return - 2nd Growth Rate) If 1st Growth Rate < 2nd Growth Rate, select the next lowest answer than the price solved for. If 1st Growth Rate > 2nd Growth Rate, select the next highest answer than the price solved for.

Answer 37

Normal: Higher yield for longer maturities Inverted: Lower yield for longer maturities

Answer 38

P/E: Price = Earnings * P/E ratio

Answer 39

ROE (per share) = EPS / Bookvalue or net worth (per share) Dividend Payout ratio: Common dividends paid / EPS

Answer 40

Seeks to quantify the relationship between risk and return. Four Basic Steps. 1. Security Valuation: Describe universe of assets by expected return and risk 2. Asset Allocation Decisions: Determining how assets are to be distributed among classes 3. Portfolio Optimization: Reconciling risk and return in selecting the securities to be included 4. Performance Measurement: Dividing each stock's performance into systematic and unsystematic risk

Answer 41

Expresses macro aspect of MPT. The straight line CML is tangent to Markowitz Efficient Frontier, optimal portfolio's align. It reveals: - Expected return on fully diversified portfolio - Diversified portfolio should fall somewhere on the CML - Individual securities or inefficient portfolios fall below the CML - Cannot be used to evaluate performance of a single security or not fully diversified portfolio - Risk free rate/return is 100% T-Bills

Answer 42

Markowitz's approach to portfolio selection, investors should evaluate portfolios based on their expected returns and risk (standard deviation). There are many optimal portfolios along the indifference curve. Indifference curves cannot intersect, where they are tangent is the optimal portfolio for that investor Lowest level of risk for a given level of expected return Highest expected return for a given level of risk. Any points above the efficient frontier are not feasible or unattainable. Any points below are attainable but inefficient. Risk averse have steep curved lines, less risk averse have flatter lines

Answer 43

At a micro level, its the relationship between risk and return for an individual security. It uses the CAPM to solve for the required rate of return. Rr= Rfr + (return market - Rfr) * Beta Return market - Rfr = Market Risk Premium (Return market - Rfr)*Beta = Stock Risk Premium If markets are in equilibrium, the expected return should equal the required return

Answer 44

Strong Form: All past, public and private info is included. Nothing can provided superior results Semi Strong Form: All past and current public info is included. Neither fundamental or technical analysis can produce superior results Weak Form: Past/historical Info is included, but fundamental analysis could produce superior results, but technical cannot.

Answer 45

Perform in contrast to what is expected in totally efficient: P/E Effect: Low P/E ratio stocks perform better than high P/E ratio stocks Small Firm Effect: Small firm stocks outperform large firm stocks January Effect: Stocks decline at the end of the year and rebound in January Neglected-firm Effect: Not commonly studied firms stocks outperform heavily studied firms

Answer 46

Current Ratio: Current Assets / Current Liabilities CA: Cash, Marketable Securities, AR and Inventory CL: AP, Credit Card Debt and Taxes Payable

Answer 47

Use charts or computer programs to identify and project prices. - Dow Theory: Aggregate measure of securities prices, shows direction of the overall market - Barron's Confidence Index: differential between returns of bonds and bonds of lesser quality will forecast future price movements - Advance/Decline Line, Moving Average, IA opinions, Odd lot theory Charting: Believe stock prices move in patterns. Plot market variables, stock prices and moving averages. Resistance: Price ceiling which shows persistent selling of a security. Sellers enter the market to push price lower. If stock breaks through resistance level, usually mean prices will go higher and outcome is considered bullish Support: Level where security tends to stop falling, due to more demand then supply. Temporary price floor, price at which security or index bottomed at the past. If price drops past support level, outcome is considered bearish

Answer 48

Dow Jones: 30 individual stocks. Price weighted S&P: Largest stocks on the NYSE Russell 2000: Smallest 2000 stocks in Russell 3000 index. Cap weighted Wilshire 5000: Broadest measure of activity in overall stock market Value Line: 1,700 stocks equally weighted on NYSE, AMEX and OTC NASDAQ: Broadest measure of OTC trading. Cap weighted EAFE: Compares performance of U.S. and international equity markets

Answer 49

1,000 trials based on inputs put into the system to determine the most possible outcomes. Results are shown in a histogram

Answer 50

3 Methods: FIFO Specific Lot Average Cost

Answer 51

Split: Amount owned in $'s stays the same, # of shares increases and cost per share decreases Reverse Split: mount owned in $'s stays the same, # of shares decreases and cost per share increases

Answer 52

Cannot repurchase the same security within 30 days of selling it for a loss. If you do no deduction will be allowed for the loss.

Answer 53

Purchase Date: Day order was placed and filled Ex-Dividend Date: Stock must be purchased before this date in order to qualify for the dividend Date of Record: 1st business day after the ex-dividend date. Shows the date the trades are settled. *Watch out for holidays and weekends they like to test those

Answer 54

Excess return of a portfolio to its standard deviation. Sharpe = (Return portfolio - Rfr) / STdev portfolio It's meaningless unless compared to the market or other MF's. You want the highest risk adjusted return when comparing to market or other MF's

Answer 55

Excess return of a portfolio to the Beta of the asset (not the market beta). Risk adjusted return Treynor = (Return portfolio - Rfr) / STdev portfolio You want the highest risk adjusted return when comparing to market or other MF's

Answer 56

Alpha. Measures the contribution of the portfolio manager. Alpha = Return portfolio - CAPM

Answer 57

R2 = square of the correlation coefficient (correlation coefficient * correlation coefficient) R2 < 60: Non-diversified portfolio, look for highest Sharpe ratio. Sharpe is measured in STdev, contains systematic and unsystematic risk R2 > 60: Look for highest Alpha (Jensen), if that is not a choice choose highest Treynor

Answer 58

Active return of a portfolio over it's benchmark. IR = (Return portfolio - Return benchmark) / Tracking error

Answer 59

Indexing, weights portfolio to match a broad based index

Answer 60

Bond Swap: Selling a bond and replacing it with another Stock option collar: Hedging strategy. Stock owner, sells a call at one strike price (out of the money) and buy a put at a lower strike (out of the money) Floating rate note collar: Protect holders against higher interest rates but pay lower yields than fixed rate notes of same maturity

Answer 61

Ladder: Bonds are purchased with different maturity dates, when each one matures another long term bond is purchased Bullet: Immediate duration bonds purchased and dont acquire short duration or long duration bondds Barbells: half short term duration bonds and half long duration bonds. Requires periodic rebalancing

Answer 62

Initial Margin: Reg T set requirement of 50% Maintenance Margin: [(1 - Initial Margin Requirment) / (1- Maintenance Margin requirement)] * Purchase price of stock

Answer 63

Short Selling: -Investor thinks that the price will security will decline but they do not own the stock Straddle: Buying a put and buying a call on the same security, because investor feels there will be movement of the security Protective Put: Owning a security and buying a put on it Currency Futures: Establish long position on a currency to lock in a price and avoid the risk

Answer 64

Tolerance: Amount of risk that an individual is comfortable assuming Capacity: amount of risk an investor must take in order to reach financial goals.

Answer 65

Tactical: Market timing approach Passive: Buy & Hold, Immunization, Laddered, Indexed Porftolio, Barbell, Dollar cost averaging Rebalancing is done for change in wealth, liquidity requirements, legal/regulatory, time horizon, tax circumstances, or needs/circumstances

Answer 66

CAPM: See previous cards Arbitrage Pricing Theory: Premise is that pricing of securities cannot differ for an significant length of time. Investors seek to take advantage of price differences because of unexpected inflation, changes in industrial production levels, shifts in risk premium, and changes in the structure of yields

Answer 67

Used to value options. Increase in the exercise price of a call, decreases the call's value Increase in the exercise price of a put, increases the put's value

Answer 68

Model assumes price of an option can be two possible values at the option expiration