Investments Flashcards
Money market securities have maturities of
One year or less; anything longer is a capital market security
Beta of the overall market =
1.0; anything less is lower risk than the overall market
To calculate portfolio beta, use
Weighted averaging
What is a REMIC?
Real estate mortgage conduit; self-liquidating, flow-through entity; real estate mortgages and mortgage-backed securities
REMIC issues debt securities to investors in the form of publicly traded REMIC bonds
NOI Capitalization Approach
When valuing an investment in income producing property use:
V = NOI / Capitalization Rate
*When calculating vacancy rates, you use the gross rental receipts PLUS other income
A positive Alpha indicates:
The investment performed better than the market on a risk-adjusted basis
YTC Formula
Use TVM keys
N = Number of years to call x 2
I = ?
PV = $ amt paid for bond
PMT = Par value x coupon rate / 2
FV = Call amount
Multiply the return value for I to get YTC answer
You cannot diversify this type of risk:
Systematic Risk
Beta is the measure of this type of risk:
Systematic Risk
Standard Deviation measures:
Measures a security’s performance relative to its expected performance
Beta measures:
Relationship of a security’s movement relative to that of the market (systematic risk)
Alpha measures:
The level of over or underperformance of a security relative to market expectations
Geometric Rate of Return Calculation
Use TVM keys:
N: # of years after initial investment
I: ?
PV: (initial investment) (use negative)
PMT: 0
FV: Use the current value of asset
Ideal correlation for portfolio should be:
-1; this means that any two assets move opposite of one another
The indifference curve represents:
What level of risk an investor will accept for given levels of return
The efficient frontier represents:
Which portfolios are attainable and which are unattainable
What do the following use as a measure of risk:
1) Capital Market Line
2) Security Market Line
1) Standard deviation of the market
2) Beta
Capital Market Line Formula
How to determine how much of a fund’s movement is due to the movement of the market?
Square the correlation coefficient
Example: if correlation is .80, squre .80 to get .64. Therefore, 64% of the returns of the fund are due to movements in the market.
Coefficient of Determination
R-squared
Take correlation coefficient (R) and square it to get coefficient of determination
Value of a convertible bond as a debt instrument does not depend on the:
Conversion price
Duration Formula: What do y,c, and t stand for:
y: yield to maturity
c: coupon rate
t: time to maturity
This risk measures the extent to which a company uses debt securities and other forms of debt in its capital structure
Financial Risk
Uneven Dividend Cash Flow Formula
Step 1: Use the constant dividend growth model to calculate the value for the growth %, using the last year provided for dividend earned
Step 2: Use the cash flow keys. CF0 is zero, followed by the uneven dividends. In the last year, instead of using just the dividend, use the dividend PLUS intrinsic value calculated in step 1. Enter I = the required return. Calculate for NPV
Where are closed-end investment companies usually traded?
Secondary market
Odd lot purchase levels indicate:
The number of small investors in the market. This theory says small investors are always wrong.
If odd lot purchases are falling relative to odd lot sales, it indicates the little guy thinks the market will fall. Since the little guy is always wrong, this would indicate a rally is coming, not a bear market.
If the risk/return performance of a stock is above the SML, the stock is said to have a:
Positive Alpha
