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CFP Exam Study > Investments > Flashcards

Investments Flashcards

1
Q

ETFs, govt bond funds, and tech mutual funds liquid?

A

False

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2
Q

Can Alpha be used when R2 is lower then .6?

A

No, use standard deviation or sharpe ratio.

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3
Q

Which risk does Beta measure?

A

Systematic Risk

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4
Q

Which Risk measure does Markowitz model use?

A

Standard Deviation (covariance, correlation coefficient, and return)

Not Beta

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5
Q

Which form of Efficient Market Hypothesis are effected by Anomalies (January effect)

A

None, Anomalies contradict EMH

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6
Q

Dividend Discount Model and SML/ required rate of return use decimals for rates%?

A

True

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7
Q

When do bonds sell at Discount VS Premium?

A

Premium when rates have fallen
Discount when rates have increased

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8
Q

Who is most likely to buy STRIPS?

A

Pension fund because plan is tax deferred.
STRIPS create taxable phantom interest

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9
Q

Long term Bond VS Zero when rates have fallen?

A

Long term bond has price appreciation opportunity

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10
Q

How to calculate Gross Profit on stock

A

Total income + Growth/ basis

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11
Q

Who is insider?

A

Officer
Board of Directors
Any person with information no one else has

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12
Q

Current Yield on Bond calculation

A

Annual Interest / Current Price

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13
Q

Calculate return of stock purchased with foreign currency

A

Apply return percentage to original value of yen
Divide that figure by new value of yen

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14
Q

How to determine which stock is riskier?

A

Apply a relative measure of variability: Coefficient of Variation (CV)

CV= standard deviation/ expected return

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15
Q

Which tax rate when calculating TEY (tax equivalent yield)?

A

Use the tax rate they are avoiding

States tax rate for Treasury
Federal tax rate for Municipal

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16
Q

Which Formula?

A

Dividend Discount Model (constant growth)

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17
Q

Which Formula?

A

Required Rate of Return for DDM

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18
Q

Which Formula?

A

Covariance

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19
Q

Which Formula?

A

Standard Deviation of two assets based on weighting.

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20
Q

Which Formula?

A

Beta

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21
Q

Which Formula?

A

Required Rate of Return

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22
Q

Which Formula?

A

Alpha (Jensen)

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23
Q

Which Formula?

A

Treynor Ratio

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24
Q

Which Formula?

A

Change in Price of Bond

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25
Which Formula?
Tax Equivalent Yield
26
Which Formula?
Sharpe Ratio
27
Current Yield Formula?
Annual Interest in Dollars/ Bonds Market Price
28
Property Intrinsic Value formula?
NOI/ cap rate
29
Intrinsic value of Call?
Market Price - Exercise Price
30
Intrinsic Value of Put?
Exercise Price - Market Price
31
Return On Equity?
Earnings available per common (EPS)/ Common Equity (net worth or book value)
32
Dividend Payout Ratio?
Common Dividends Paid/ Earnings available for common (EPS)
33
Margin Call formula?
1- Initial Margin %. / 1-Maintenance margin % X purchase price of stock
34
Price / Earnings Ratio?
Current Market Price/ Earnings
35
Corp and Muni Bond risk (DRIP)
Default Reinvestment Interest Rate Purchasing Power
36
Govt Bonds Risk (RIP)
Reinvestment Interest Rate Purchasing Power
37
Capitalization sizes (4)
Large- exceeds $10B Mid- 2-10B Small- less than 2B Micro- less than 300M
38
American Depository Receipt facts (3)
Prices of ADRs quoted in US Dollars Dividends paid in US Dollars Dividends declared in foreign currency
39
Real Estate NOI formula
Gross receipts +non rental income (laundry, etc) = Potential Gross Income -Vacancy and collection losses -Operating Expenses (excluding interest/ depreciation) =Net Operating Income
40
Option Intrinsic Value
Difference between market price and exercise price
41
Option Premium
market price of option, approaches IV near expiration
42
Option Time Premium
amount the market price exceeds intrinsic value
43
Call Option Taxability- writer
lapse-premium received is short term gain exercise- premium added to sales price ( can be long term based on underlying)
44
Call Option Taxability- holder
not exercised- short term loss or gain
45
Option Straddle
buying a put and call- does not own stock
46
Option Collar
sells call (out of money) and buys put at a lower strike price- owns stock
47
Protective Put
buying put on stock owned to serve as insurance against decline
48
Warrants VS Call Options (3)
Warrants issued by corp, calls created by individuals Warrants have maturities of several years, calls 9 months Warrant terms not standardized, call options are
49
Future Contracts Long/ Short
Long- farmer needs short hedge, will sell contract to avoid price drop Short-Kellogs needs long hedge, will by future contract to avoid increase
50
Reg D Accredited VS Non-Accredited investor
Accredited- Net worth $1m or income of $200k ($300k joint) Non-Accredited- sold to max 35 investors must use purchaser representative if not sophisticated
51
Coefficient of determination -R2
Describes percentage of a funds' movement explained by movement in S&P 500. Index funds/ diversified funds close to 100%
52
Standard Deviation VS Beta
Std Dev- measures variability of returns in non-diversified portfolio- total risk Beta -index of volatility in diversified portfolio- systematic risk
53
Geometric VS IRR return
Geometric- time weighted, evaluates portfolio manager IRR- dollar weighted, compares absolute dollar amount changes
54
Holding Period Return
total return including appreciation and dividends less margin interest over the entire period divided by out of pocket cost of investment
55
Duration positive VS inverse related
Positive- years to maturity Inverse- annual coupon, current yield or yield to maturity
56
Zero Coupon Bond facts (5)
Duration equal to maturity No coupon interest, yet produces "phantom" income No reinvestment rate risk Sold at deep discounts to par Price fluctuates more than coupon bonds with same maturity
57
Using Duration to Manage Bond Portfolios (rates rise vs fall)
Interest rates expected to rise- shorter duration (buy high coupon bonds with short maturities) Interest rates expected fall- lengthen duration (buy low coupon bonds with long maturities
58
Greater Bond Price fluctuation when (3)
low coupon longer term to maturity lower the market interest rate
59
What is Convexity for bonds and when largest (3)
the degree which duration changes as yield to maturity changes largest: low coupon long maturity low yield to maturity
60
3 types of efficient market hypothesis
Strong Form- prices reflect all information Semi-Strong form- all publicly known information is reflected in price (except insider info) Weak Form- historical price data (technical analysis) priced in, fundamental analysis may product superior results
61
Dow Jones
30 industry stocks, price weighted
62
S&P 500
value/cap weighted
63
Russell 200
smallest 200 stocks- value/cap weighted
64
Wilshire 5000
overall stock market- value/cap weighted
65
Valueline
1700 equally weighted stocks
66
NASDAQ
OTC trading- value/cap weighted
67
Europe, Australia, and Far East (EAFE)
major foreign markets, value/cap weighted
68
Barclays Aggregate Bond
5000 US Bonds
69
Tax Basis of Mutual Fund (3)
FIFO Specific ID- seller identifies shares sold Average Cost
70
When to use Sharpe ratio
when low R2 (less than 60) use highest Sharpe number
71
When to use Jensen /Alpha or Treynor ratio
High R2 (60+) or diversified portfolio Use highest positive alpha, then highest Trynor
72
Margin Call at what price (formula)
1-initial margin% / 1-maint margin % X purchase price
73
Arbitrage Price Theory (4)
Unexpected Inflation Unexpected change in production Unanticipated shift in risk premium Unanticipated change in yields
74
Unsystematic Risk (2)
Diversifiable risks: Business risk Financial Risk
75
Systematic Risk
Risk of overall market, non-diversifiable
76
Types of Systemic Risk (PRIME)
Purchasing Power Reinvestment Interest Rate Market Risk Exchange rate
77
Yield Ladder (YMCA
Yield to Call Yield to Maturity Current Yield Nominal Yield (Annual Coupon Rate)
78
EE / I Bonds Rates
EE-Interest Rate (fixed) based on 10 year Treasury I Bond fixed rate + inflation adjustment every 6 months
79
EE/ I Bonds Taxation
Subject to Federal Taxation when redeemed (unless for education) Not subject to state or local taxes
80
Types of Municipal Securities (3)
General obligation bonds- backed by full faith, credit, taxing power Revenue Bonds- backed by specific source of revenue Insurer Muni Bonds- insured by AMBAC and MBIA
81
Indenture / Bond Agreement parts (5)
Form of bond Amount of issue Protective covenants/ sinking fund Ratios- working capital and current ratio Redemption rights (call, put, conversion)
82
Who regulates disclosures on form ADV?
SEC
83
Calculate Bond’s Market Price
Annual interest/ Current Yield
84
How to calculate Geometric Mean?
1. Multiply each return by the preceding 1.3 x 1.4 x.6 x .8= .8736 2. Solve for i FV .8736 PV -1 N 4
85
What is R2?
Coefficient of determination It is square of Correlation Coefficient Describes % of funds movement that corresponds with movement of S&P 500

CFP Exam Study (6 decks)

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