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Custom cards > Investments > Flashcards

Investments Flashcards

1
Q

What does the Investment Policy Statement cover?

A

Return requirements
Risk tolerance
Time horizon
Taxes
Liquidity
Laws and regulations
Unique circumstances

RRTTLLU

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2
Q

Are the S&P and Dow price weighted or value weighted?

A

S&P is value weighted and the Dow is price weighted (does not take into account market capitalization)

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3
Q

What is the standard deviation bell curve?

A

+/- 1 standard deviations = 68%

+/- 2 standard deviations = 95%

+/- 3 standard deviations = 99%

(Half on one side of the mean, half is on the other)

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4
Q

What is the formula for Coefficient of Variation, and what does it indicate?

A

CV = standard deviation divided by average return

The higher the CV, the less you get in return for the amount of risk taken

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5
Q

Define correlation

A

Indicates how two assets move relative to each other, from +1 to -1.

Diversification benefits begin anytime correlation is less than +1 (risk is reduced)

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6
Q

When do you use standard deviation instead of beta?

A

When r2 is less than or equal to .70

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7
Q

What’s another word for r squared?

A

Coefficient of Determination

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8
Q

Which measure is most appropriate to use for a benchmark?

A

R squared

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9
Q

What are the systematic risks?

A

Purchasing Power risk
Reinvestment rate risk
Interest rate risk
Market risk
Exchange rate risk

PRIME

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10
Q

What is the only federal mortgage agency security that is backed by the full faith and credit of the US government?

A

GNMAs

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11
Q

How often are the 10K and 10Q filed and audited?

A

The 10K is filed annually and subject to auditing, whereas the 10Q isn’t audited but is filed quarterly.

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12
Q

Explain the Value Line rankings vs. Morningstar

A

VL ranks individual stocks on a scale of 1-5, 1 being the highest rating, whereas MS ranks mutual funds on a 1-5 scale with 5 being the highest

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13
Q

How many days before date of record must an investor purchase a stock to receive the dividend?

A

2

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14
Q

What does the Securities Act of 1934 regulate?

A

Secondary market and trading of securities. It also created the SEC.

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15
Q

What did the Investment Act of 1940 authorize the SEC to do?

A

It authorized the SEC to regulate investment companies

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16
Q

What does the Investment Advisers Act of 1940 require?

A

It requires advisors to register with the SEC or state

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17
Q

What are the money market securities?

A

-t bills
-commercial paper
-bankers acceptance
-Eurodollars

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18
Q

What are some features of bankers acceptances?

A

-facilitate imports/exports
-maturities of 9 months or less
-can be held until maturity or traded

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19
Q

Deals with judging something, whether it is good or bad. Do they like or dislike some company based on non-financial issues

A

Affect heuristic

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20
Q

Attaching one’s thoughts to a reference point even though there may be no logical relevance or is not pertinent

A

Anchoring, aka belief perseverance or conservatism

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21
Q

When a decision maker relies upon knowledge that is readily available in his or her memory

A

Availability heuristic

22
Q

When individuals make decisions and their rationality is limited by the available information or the cognitive limitations of their minds, or the time available to make the decision, which leads to seeking a satisfactory solution rather than an optimal one

A

Bounded rationality

23
Q

The tendency to misinterpret information that is contrary to an existing opinion or only pay attention to information that supports an existing opinion

A

Cognitive dissonance

24
Q

When an investor does not mark their stocks to market prices, and instead create a mental account of when they purchase stocks and continue to value them that way

A

Disposition effect

25
Q

People value gains and losses differently

A

Prospect Theory

26
Q

What is the difference between leptokurtosis and platykurtosis?

A

Leptokurtosis has a high peak and fat tails, indicating a higher chance of extreme events.

Platykurtosis has a low peak and thin tails, indicating a lower chance of extreme events.

27
Q

If the exam doesn’t give you r squared, what should you use to determine the performance?

A

Sharpe

28
Q

Arbitrage Pricing Theory asserts that pricing imbalances cannot exist for any significant period of time, so uses a multi-factor model to explain return. What factors are the inputs?

A

Inflation, expected returns, and the sensitivity to those factors.

Standard deviation and beta are not inputs.

29
Q

What is the dividend payout ratio?

A

Common stock dividend divided by earnings per share

30
Q

What is the return on equity formula?

A

Earnings per share divided by stockholder’s equity per share

31
Q

What are the tools/approaches that technical analysts use?

A

Charting
Market volume
Short interest
Odd lot trading
Dow theory
Breadth of the market
Advance decline line

32
Q

What are the tools/approaches that fundamental analysts use?

A

Financial statement analysis
Economic data

33
Q

What does the weak form efficient market hypothesis assert?

A

-price already reflects historical information

-Rejects technical analysis, embraces fundamental and insider information

34
Q

What does the semi-strong form efficient market hypothesis assert?

A

-prices already reflect historical and public information, only insider information can lead to above average returns

35
Q

What does the strong form efficient market hypothesis assert?

A

-price reflects all available information in the world and reacts immediately to any new information
-historical, public, and insider information is already calculated into the price and above average returns are impossible on a consistent basis

36
Q

Are EE bonds marketable or non-marketable securities?

A

Non-marketable

37
Q

What are the three types of municipal bonds?

A

General obligation
Revenue bonds
Private activity bonds

38
Q

Which type of municipal bond is backed by the full faith and credit of the issuing authority?

A

General obligation

39
Q

What are the municipal bond insurance agencies?

A

AMBAC and MBIA

40
Q

Order the relationship of bond rates on discount and premium scenarios

A

High to low:

Premium: CR CY YTM YTC
Discount: YTC YTM CY CR

If you see a discount, CALL mom’s cell now!

41
Q

How do you immunize an investor’s bond portfolio from interest rate risk?

A

The portfolio’s duration should match the investor’s time horizon

42
Q

How does size of duration relate to price sensitivity and interest rate changes?

A

The bigger the duration, the more price sensitive/volatile it is to rate changes

43
Q

What is the formula for converting bonds?

A

Par divided by conversion price, times price of the common stock

44
Q

If the CFP exam asks which option will provide the investor with the maximum gains if the stock appreciates, what is the right answer?

A

Buying a call

45
Q

If the CFP exam asks which option will provide the investor with the maximum gains if the stock price falls, what is the right answer?

A

Buying a put

46
Q

What is the intrinsic value for a call option?

A

Stock price - strike price

47
Q

What is the intrinsic value of a put option?

A

Strike price - stock price

48
Q

What is the the time value of an option?

A

Premium - intrinsic value

49
Q

When asked about which option will protect profits or lock in gains, what is always the answer?

A

Buying a put

50
Q

What is the Black/Scholes model use for?

A

To determine the value of a call option

51
Q

What are not inputs in the Arbitrage Pricing Theory?

A

Standard deviation and beta

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