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CFP "Wrong Answer" Cards > Investments > Flashcards

Investments Flashcards

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1
Q

What entity type is most likely to buy preferred stock?

A

C corps because they can take advantage of the 50% (or more) dividend exclusion.

The current law enacted by the Tax Cuts and Jobs Act states that if a corporation owns less than one-fifth of another company’s shares it can deduct 50% of dividends. If a corporation owns 20% or more of the company, it can deduct 65% of dividends.

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2
Q

T or F:
All ADRs satisfy the IRS definition of a “qualified foreign corporation”.

A

False. Most ADRs do, but not all.

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3
Q

Mutual fund shares are ______, not tradeable.

A

REDEEMABLE. Shares of mutual funds are nonnegotiable, redeemable securities.

Non-negotiable describes the price of a good or security that cannot be adjusted, or a part of a contract that is considered a requirement by one or both involved parties.

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4
Q

Both Equity and Mortgage REITS generally pay out at least ______ of Net Investment Income.

A

90%

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5
Q

_______ REIT income is derived from the difference between net rental income and interest paid on the loans to acquire the properties.

A

Equity

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6
Q

_______ REIT income comes from the spread between the lending rate and borrowing rate.

A

Mortgage

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7
Q

T or F: REITs cannot invest in limited partnerships.

A

True. Limited partnerships are often tax shelters.

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8
Q

If a REMIC (Real Estate Mortgage Investment Conduit) is established as a corporation, how is its income taxed?

A

As pass-through income

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9
Q

________________ funds are issued with a limited number of shares. Shares in a(n) ______________ fund increase or decrease based on customer deposits and redemptions. _____ issue units, not shares.

A

Closed-end funds
Open-end funds
Unit investment trusts

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10
Q

True or false - a no-load mutual fund can always be purchased at NAV

A

TRUE. If the fund is a “no load” fund, there is no sales charge, and customers buy at net asset value (NAV).

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11
Q

_______ funds offer a high level of diversification because they include both US and international issues.

A

Global

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12
Q

Forms 10K and 10Q are submitted to the _______

A

SEC.

Annual report goes to stockholders.
Form 1120 is the corporate federal tax return.

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13
Q

Are future contracts securities?

A

NO. They are not securities. They are regulated by the Commodity Futures Trading Commission - not the SEC.

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14
Q

Buying a long call has _________ profit potential.

A

Unlimited.

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15
Q

______ a call and ________ a put are generally profitable strategies in a rising market.

A

Buying / selling

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16
Q

_______ a put and ______ a naked call are generally profitable in a falling market.

A

Buying / selling

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17
Q

How do I determine the margin requirement?

A

[(1 - Initial Margin Req. %) / (1 - Maintenance Margin Req. %)] x Stock Purchase Price

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18
Q

In the Arbitrage Pricing Model, when a factor is zero, it is _____________.

A

Expected or anticipated.

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19
Q

Behavioral finance studies indicate that in a panic mode, most investors ______ make changes.

A

Will not.

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20
Q
A
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21
Q

In Arbitrage Pricing Theory, the expected value of each factor is ______.

A

Zero

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22
Q

Under the Black/Scholes option pricing model, an increase in the _________ will decrease the value of a call.

A

Strike price

A call with a higher exercise price would have less value than another call with the same remaining time to expiration but with a lower exercise price. The right to buy lower is worth more.

All the other variables have a direct relationship for calls or puts:
Price of the underlying stock
Time remaining to the expiration of the option
Interest rate
Volatility of the underlying stock

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23
Q
A
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24
Q

True or false: zero coupon bonds do not need to be accreted.

A

False.

Municipal discount bonds, corporate discount, bonds, and zero coupon bonds must be accreted. Accretion generates phantom income, but enables the bondholder to raise the basis accordingly.

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25
Q

T-bills are issued in which terms?

A

3/6/12 month

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26
Q

T-bills are sold on a _________ basis and sold by __________.

A

discounted yield / competitive bid

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27
Q

Treasury bonds are issued _______ and are subject to ______ risk.

A

at par // reinvestment / interest rate / purchasing power

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28
Q

Treasury bonds sold on _____ basis and can be callable.

A

YTM

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29
Q

TIPS

In any year when the principal value of the bond increases due to the inflation adjustment, the gain is _______.

A

reportable income

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30
Q

TIPS Treasury Inflation Protection Securities

The inflation adjustment ________ the basis of the bond.

A

increases.

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31
Q

I bonds are taxed like EEs. The owner will generally choose to ________.

A

defer tax

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32
Q

For I bonds, interest is added to the bond _______ and is paid when the holder cashes the bond.

A

monthly

I bonds interest is composed to two parts: the fixed part and the inflation part.

33
Q

What is a security backed by mortgages where investors receive payments sourced from the interest and principal on the underlying mortgages? It is a pass-through security and represents pooled debt obligations repackaged as certificates.

A

mortgage-backed certificates

34
Q

If a bond is selling at a premium, its current yield _________ than its yield to maturity.

A

higher than .
DISCOUNT
Yield to Call
Maturity
Current Yield
Annual Coupon Rate ——
Current Yield
Maturity
Yield to Call
PREMIUM

35
Q

With EE bonds , in order to qualify for the education interest exclusion, the tax payer must generally be the ________

A

Parent.

Also check whether or not income exceeds EE phaseout.

36
Q

If a client invests for short-term, they face _________ risk.

A

reinvestment rate

37
Q

The S&P Index would carry a ____________ risk

A

Nondiversifiable or systematic

38
Q

Risk quantified as ____________ includes variability, nondiversified portfolio, and total risk.

A

standard deviation

39
Q

What is the shortcut to finding the portfolio standard deviation?

A

Add the risks together. Divide by the number of risks. If the correlation coefficient is less than 1.0, choose the next lowest answer.

40
Q

Unless the securities in the portfolio are perfectly positively correlated (+1), the standard deviation (the risk) of the portfolio must be _______ the weighted average standard deviation of the individual securities.

A

Less than

Add the risks together. Divide by the number of risks. If the correlation coefficient is less than 1.0, choose the next lowest answer.

41
Q

The beta of a portfolio is __________ the weighted beta.

A

equal to

A portfolio’s beta is the weighted average of each security in the portfolio multiplied by its beta.

42
Q

GNMA bondholders face _______ reinvestment risk than do regular bond holders.

A

Greater, since periodic payments from mortgage-backed securities include both interest and principal.

43
Q

The beta coefficient for the market is constant at _____.

A

1

44
Q

The correlation coefficient between the US large cap market (US common stock fund) and an emerging markets fund is _______

A

LOW.

45
Q

______ expresses volatility and systematic risk.

A

Beta

46
Q

_______ expresses non-systematic risk, unsystematic risk, total risk.

A

Standard Deviation

47
Q

The _________ ranges from -1 to +1.

A

Correlation coefficient

48
Q

How do I find the standard deviation of a single investment?

A

Sigma, Sigma, Sigma, gold 7 (mean), gold 8 (standard deviation)

49
Q

How do I find the coefficient of variation (CV)?

A

Standard deviation divided by the average return.

The higher the result, the greater the risk.

50
Q

Negative correlation will _____ the overall portfolio’s beta.

A

Reduce.

When the correlation coefficient is negative, the beta will be negative.

51
Q

Covariance (COV) has a _______ relationship with the correlation coefficient.

A

Direct. They move together.

52
Q

The Dow Theory indicates a(n) _________ strategy that is not supported by Modern Portfolio Theory.

A

Active

53
Q

Dow Theory focuses on what two Dow Jones Indexes?

A

Industrials and Transportation

54
Q

The _______ theory factors price action, support and resistance levels, stock values, confirmations, and divergences.

A

Dow

55
Q

Considered the broadest measure of the stock market.

A

Wilshire 5000

56
Q

_______ measures stock performance of small companies.

A

Russell 2000

57
Q

Wilshire 5000 Index is _______-weighted.

A

Value.

58
Q

The Dow Jones Index is _____-weighted.

The Value Line Index is _______-weighted

A

Price

equally

59
Q

The purpose of the sinking fund is to ________.

A

Reduce default risk

60
Q

If R-squared is under 60, use the highest ________ number.

If R-squared is over 60, use the highest _____ and then the highest _______.

A

Sharpe

Alpha / Treynor

R is correlation coefficient

61
Q

Normal, triangular, uniform, and lognormal are all examples of ________.

A

probability distributions

62
Q

A method presumed to identify the top of a bull market and the bottom of a bear market.

A

Dow Theory

63
Q

Assume returns on a managed portfolio are regressed agains the returns on a market index. The resulting alpha shows _________.

A

The return added to the portfolio by the portfolio manager.

64
Q

A financial ratio is considered to be most useful with __________.

A

several ratios within the same industry over time.

65
Q

If a bond has a high coupon rate, its duration is _________ than similar maturity debt with a smaller coupon.

A

Shorter

High coupon –> Low Duration (inversely related)
Smaller coupon –> Higher Duration

66
Q

If a bond has a long maturity, its duration will be _______ than similar maturity debt with a shorter maturity.

A

Shorter

Long maturity –> long duration (directly related)

67
Q

By matching the duration of the bond or bonds to the time horizon of the financial goal, you can generally offset ________ risk and _________ risk.

A

interest rate / reinvestment

68
Q

Zero coupon bonds are more ________ sensitive than other coupon bonds with identical maturities.

A

interest rate

69
Q

Zero coupon bonds are more _______ if interest rates move quickly compared to other bonds with similar maturities.

A

volatile

70
Q

If interest rates are expected to rise, buy ____ coupon bonds with ______ maturities to _____ duration.

A

High / short / shorten

interest rates UP, Shorten duration
UPS

71
Q

If interest rates are expected to fall, buy ___ coupon bonds with _____ maturities to _____ duration.

A

low / long / lengthen

Interest rates FALl, LENgthen duration
FALLEN

72
Q

Interest rates rise. _____ long-term bonds.

A

Sell

Because long-term bonds will fall in price

73
Q

Utility stocks typically have _____ dividend payment ratios.

A

High

common dividend paid / earnings per share

74
Q

Gross earnings of the company _______ factored in calculating the intrinsic value of a stock using the Dividend Discount model.

A

is not

75
Q

How do you calculate Return on Equity for stock?

A

Earnings available for common (EPS) / Common equity (book value or net worth)

76
Q

What is the dividend payout ratio?

A

Common dividend paid / EPS

77
Q

What is the stock’s yield?

A

Dividend / Closing Price

78
Q
A

CFP "Wrong Answer" Cards (11 decks)

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