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CFP July 2023 > Investments > Flashcards

Investments Flashcards

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1
Q

Current Yield MEMORIZE

A
  • annual interest in dollars / bonds market price
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2
Q

Intrinsic Value of a Call MEMORIZE

A
  • market price - exercise price
  • remember COME
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3
Q

Intrinsic Value of a Put MEMORIZE

A
  • exercise price - market price
  • remember POEM
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4
Q

Tax Exempt Yield MEMORIZE

A
  • taxable yield * (1 - marginal tax rate)
  • remember to think about whether a bond would decrease in interest due to taxes
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5
Q

Return on Equity (ROE) MEMORIZE

A
  • EPS / common equity
  • common equity is either net worth or book value
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6
Q

Divided Payout Ratio

A
  • common dividends paid / EPS
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7
Q

Margin Call MEMORIZE

A
  • (1 - initial margin % / 1 - maintenance margin % ) * purchase price of the stock
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8
Q

P/E Ratio MEMORIZE

A
  • current market price / earnings
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9
Q

Types of Funds: Aggressive Growth

A
  • invests in securities offering maximum capital appreciation
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10
Q

Types of Funds: Balanced

A
  • invests in both stocks and bonds for both appreciation and income not necessarily at a 50/50 allocation
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11
Q

Types of Funds: Growth

A
  • invests in securities offering potentially rising share prices
  • dividends are less important
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12
Q

Types of Funds: Global Equity

A
  • invests in securities traded worldwide
  • includes U.S. securities
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13
Q

Types of Funds: International

A
  • invests in securities only outside of the U.S.
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14
Q

Types of Funds: Corporate Bond

A
  • invests in U.S. based companies bonds
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15
Q

Types of Funds: GNMA

A
  • invests in mortgage-backed securities
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16
Q

Types of Funds: High Yield

A
  • invests in non-investment grade corporate bonds (BB and below) for greater potential interest income
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17
Q

Types of Funds: Municipal Bonds

A
  • invests in bonds issued by state and others municipalities
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18
Q

Types of Funds: Specialty

A
  • invests in securities in a particular sector such as technology
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19
Q

Net Operating Income (NOI) computation

A
  • gross rental receipts + non-rental receipts = potential gross income (PGI)
  • PGI - vacancy and collection losses = effective gross income
  • effective gross income - operating expenses = net operating income (property cash flows)
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20
Q

Exercise Price

A
  • price of option upon exercising (strike price)
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21
Q

Premium

A
  • market price of option
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22
Q

Time Premium

A
  • market price - intrinsic value
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23
Q

Market Price is Less than Exercise Price

A
  • put = in the money
  • call = out of the money
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24
Q

Market Price is Greater than Exercise Price

A
  • put = out of the money
  • call = in the money
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25
Q

Call Option Taxation (Writer)

A
  • lapses - premium received is STCG
  • covered - premium is added to sale price (LT if held underlying security for 12+ months, otherwise ST)
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26
Q

Call Option Taxation (Holder)

A
  • if not exercised, option is considered sold and produces STCL
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27
Q

Inflation Risk

A
  • purchasing power risk
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28
Q

Interest Risks

A
  • reinvestment rate risk = lower interest interest rates at time of reinvesting
  • interest rate risk = changes in interest rates (bonds)
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29
Q

Correlation of Investments (Short Cut)

A
  • if zero choose number closest to zero
  • if less than one, take average of standard deviation and pick the next lowest number
30
Q

Risk Adjusted Return

A
  • divide an individual funds realized return by its beta coefficient
  • higher is better
31
Q

Calculating Geometric Mean

A
  • add 1 to the return’s expressed as decimals
  • multiply the results of step 1
  • plug into calculator as FV
  • input PV as -1
  • input number of years as N
  • solve for i
32
Q

Dollar Weighted Return

A
  • is an IRR calculation
  • assumes reinvestment rate is constant
33
Q

Holding Period Return w/ Margin

A
  • if margin calculate into actual dollars
  • total value MINUS (Margin amount + margin Interest) MINUS actual investment / actual investment
  • actual investment and margin are expected to be 50/50 but not always the case
34
Q

Holding Period Return if Value is Lost

A
  • [(Initial investment MINUS loss) - (margin + margin interest)] - actual investment / actual investment
35
Q

After-Tax Holding Period Return

A
  • sales proceeds + dividends - costs = taxable gain
  • taxable gain * (1 - capital gains rate) = after tax return
36
Q

Dividend Growth Models

A
  • zero-growth model (preferred stock)
  • constant growth model
  • both are valuation techniques
37
Q

Zero Growth Model

A
  • good for preferred stock
  • price = dividend / required rate of return
38
Q

Constant Growth Model

A
  • price = dividend (1 + growth rate) / required rate of return (r) - growth rate of dividends (g)
39
Q

Dividend Discount (Shortcut)

A
  • calculate based on 2nd number
  • choose number higher or lower based on first number in comparison to the 2nd
40
Q

Dividend Distribution Model Characteristics

A
  • if market lowers required rate of return, common stock’s value will rise
  • if market increases required rate of return, common stock’s value will fall
41
Q

Valuation Techniques

A
  • dividend growth model
  • price/earnings
  • free cash flow
  • return of equity
  • dividend payout ratio
42
Q

Free Cash Flow (Valuation)

A
  • similar to DDM, but instead of dividend use free cash flow (FCF)
43
Q

Capital Market Line (CML)

A
  • macro
  • relationship between risk and return of portfolio
  • point b is optimal risky portfolio (meets efficient frontier
  • point a is risk free (t-bills)
44
Q

Efficient Frontier (Risk Adverse)

A
  • steep curve, a lot of return needed to take risk
  • a risk tolerant investors curve would be more flat
45
Q

Security Market Line (SML)

A
  • micro
  • used to value a single asset
  • ri = rf + (rm - rf) beta
  • use formula to calculate required rate of return
46
Q

EMH - Strong Form

A
  • nothing matters
  • random walk
47
Q

EMH - Semi-Strong Form

A
  • reflects all publicly known information
  • only insider information can produce superior results
48
Q

EMH - Weak Form

A
  • only fundamental analysis can produce superior results
  • fundamental analysis looks at economic indicators
49
Q

Fundamental Analysis

A
  • examines financial statements to predict future
  • top down method (looks for trends, invests in those trends)
  • bottom up method (looks at companies)
  • ratio analysis (compared with similar firms)
  • liquidity ratio (current ratio)
  • activity ratio (how quickly a firm can convert to cash)
  • profitability ratio (compare two or more variables to measure firm’s income performance.

NOTE: it is best to use multiple ratios to compare stocks in the same industry

50
Q

Benchmarks

A
  • dow jones = price-weighted average
  • s&p 500 = float weighted
  • russell 2000 = popular capitalization weighted
  • value line = equally weighted
  • NASDAQ = broadest, OTC and capitalization weighted
  • wilshire 5000 - broadest overall, value weighted
  • EAFE - international equity market
51
Q

Short Sale Formula

A
  • sold short value - bought stock value - covered dividends = profit
52
Q

Risk Tolerant Characteristics

A
  • high debt ratio
  • small amounts of insurance
  • changes jobs/locations
  • makes quick decisions
  • high level of wealth for age
  • optimistic
  • handles stress well
  • experienced
53
Q

Risk Adverse Characteristics

A
  • no debt
  • high amounts of insurance
  • stable employment
  • deliberate
  • low level of wealth for age
  • pessimistic
  • handles stress poorly
  • inexperienced
54
Q

When to Rebalance Asset Allocation

A
  • change in wealth
  • change in liquidity
  • change in legal/regulatory consideration
  • change in time horizon
  • change in tax circumstances
  • change in needs or circumstances
55
Q

Passive Asset Allocation Strategies

A
  • buy and hold (EMH)
  • immunization
  • laddered bonds
  • indexed portfolios
  • barbell strategy
  • dollar-cost averaging
56
Q

Strategies with Concentrated Portfolio’s

A
  • selling position creates a capital gain but at favorable capital gains rates
  • setting up some sort of hedge with the current position (long puts and collars)
57
Q

Arbitrage Price Theory (APT)

A
  • securities in different market’s cannot differ for significant periods of time
  • unexpected inflation
  • unexpected changes in industrial production
  • unanticipated shift in risk premiums
  • unanticipated changes in structures of yields
58
Q

Black-Scholes Option Valuation

A
  • uses options to value stock
  • increase in exercise price decreases call value
59
Q

Conversion Value Calculation

A
  • (par (typically $1,000) / conversion price) x current market price of underlying stock
60
Q

Property Cash Flow Calculation

A
  • net operating cash flow - debt/mortgage services
61
Q

Covariance Shortcut

A
  • add the 2 risks
  • divide by 2 to find average
  • choose a number less than average if covariance is less than 1
62
Q

Coefficient of Variation (CV) Shortcut

A
  • to determine the riskiest divide standard deviation by the mean
  • higher the number, higher the risk
63
Q

Risk Adjusted Return Calculation

A
  • annual return / beta
  • highest number is best
64
Q

Tax Equivalence Shortcut

A
  • double coupon = 50%
  • add up all taxes
  • gage where in respect to the 50%
65
Q

Duration Shortcut

A
  • look at maturity
  • if coupon paying, duration must be less
  • choose a number less than maturity but make sure its not too close
66
Q

Capital Market Line (CML)

A
  • intersection of CML = risk free (100% t-bills)
  • point B = optimal risky portfolio (tangency)
  • moving from tangency to risk free, investor sells risky assets
67
Q

Anomalies (Active)

A
  • p/e effect
  • small firm effect
  • January effect
  • neglected firm effect
  • value line
68
Q

Active Strategies

A
  • anomalies
  • ratio analysis
  • fundamental analysis
  • technical analysis
69
Q

Alpha/Treynor/Sharpe Shortcut

A
  • eliminate answers
  • solve for risk adjusted return
  • realized / beta
  • if mixed r2, choose sharpe
70
Q

Stock Split Calculation

A
  • 5:2 stock split
  • 5/2 x 100 - shares already owned
  • 2/5 x prior price to find new par value
71
Q

At Margin Formula

A
  • (1 - initial margin % / 1 - maintenance % ) x purchase price of stock
72
Q

Maintenance Call Formula

A
  • find equity required by multiplying NEW value by maintenance %
  • find actual equity by taking NEW value and subtracting out 50% of the original value
  • take equity required and subtract out actual equity
    = maintenance call

CFP July 2023 (8 decks)

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