Investments Flashcards
Margin Position Formula
Margin Position = Equity/FMV
Price to Receive Margin Call (Formula)
Price to Receive Margin Call = Loan/(1-Maintenance Margin)
Standard Deviation
- A measure of total risk
- Appropriate measure of risk for an un-diversified portfolio
- Larger standard deviation = more risky
Standard Deviations (#|%)
- 1 Standard Deviation (68%)
- 2 Standard Deviations (95%)
- 3 Standard Deviations (99%)
Coefficient of Variation
- Compare 2 assets with different averages
- Higher CV = more risky
(x= mean expected return)
Correlation Coefficient
- Ranges from -1 to 1
Covariance
- Measures interactive risk of two securities combined
- Measure of relative risk
Beta
- A measure of systematic (market) risk
- Appropriate risk measure for a well-diversified portfolio
- Beta Coefficient is a measure of an individual security’s volatility relative to the market (beta of market = 1)
Coefficient of Determination
- R^2
- Measures how much of return is due to the market
- If R^2 is below 0.7 then beta is not a good measure of risk of fund/security
Efficient Frontier
Compares portfolios on their risk/return relationships. Impossible to achieve returns above the efficient frontier.
Capital Asset Pricing Model (CAPM)
Calculates the relationship of risk and return of an individual asset or investment
Treynor Index
- relative risk measure
- Uses beta
- higher = better
Sharpe Index
- Relative risk measure
- Uses standard deviation
- higher = better
Jensen’s Alpha
- Absolute risk measure
- Uses beta
- higher = better
Holding Period Return
- No consideration of time investment was held
- Not a compounded rate of return
Dividend Payout Ratio
Relationship between the amount of earnings paid to shareholders in the form of dividend, relative to earnings per share
Return on Equity (ROE)
Measures overall profitability of a company
There is a direct relationship between ROE, earnings, and dividend growth
Dividend Yield
States the annual dividend as a % of stock price
Random Walk Theory
- States that prices of stocks are “unpredictable” but not arbitrary
- states forecasters cannot predict with consistency or accuracy response of stocks prices to stimulus
- states that at any given moment prices of securities are best incorporation if all available information and are a true reflection of value
Weak Form (Efficient Market Hypothesis)
Historical information will not help investors achieve above average market returns; rejects technical analysis
Semi-Strong Form (Efficient Market Hypothesis)
Historical and public information will not help investors achieve above average market returns; rejects technical and fundamental analysis
Strong Form (Efficient Market Hypothesis)
Historical, public, and private information will not help investors achieve above average market returns; rejects technical and fundamental analysis and inside information
(Diversify randomly or invest in index)
GNMA - Ginnie Mae
ONLY federal agency backed by the full faith and credit of the US government
Tax Equivalent Yield (TEY)
r= tax exempt yield
t= marginal tax rate
Coupon Rate
The annual payment amount in dollars, divided by the par value
Current Yield
The annual payment amount in dollars divided by the current price of the bond
Yield to Maturity
Discounting a stream of cash flows over the life of the investment and adding the discounted value of the future park value repayment
Duration
Indicates a bond’s sensitivity to changes in interest rates
Higher duration = more price sensitive
