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KB CFP March 2024 > Investments > Flashcards

Investments Flashcards

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
Call Option Taxation (Writer)
- lapses - premium received is STCG - covered - premium is added to sale price (LT if held underlying security for 12+ months, otherwise ST)
26
Call Option Taxation (Holder)
- if not exercised, option is considered sold and produces STCL
27
Inflation Risk
- purchasing power risk
28
Interest Risks
- reinvestment rate risk = lower interest interest rates at time of reinvesting - interest rate risk = changes in interest rates (bonds)
29
Correlation of Investments (Short Cut)
- if zero choose number closest to zero - if less than one, take average of standard deviation and pick the next lowest number
30
Risk Adjusted Return
- divide an individual funds realized return by its beta coefficient - higher is better
31
Calculating Geometric Mean
- 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
Dollar Weighted Return
- is an IRR calculation - assumes reinvestment rate is constant
33
Holding Period Return w/ Margin
- 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
Holding Period Return if Value is Lost
- [(Initial investment MINUS loss) - (margin + margin interest)] - actual investment / actual investment
35
After-Tax Holding Period Return
- sales proceeds + dividends - costs = taxable gain - taxable gain * (1 - capital gains rate) = after tax return
36
Dividend Growth Models
- zero-growth model (preferred stock) - constant growth model - both are valuation techniques
37
Zero Growth Model
- good for preferred stock - price = dividend / required rate of return
38
Constant Growth Model
- price = dividend (1 + growth rate) / required rate of return (r) - growth rate of dividends (g)
39
Dividend Discount (Shortcut)
- calculate based on 2nd number - choose number higher or lower based on first number in comparison to the 2nd
40
Dividend Distribution Model Characteristics
- 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
Valuation Techniques
- dividend growth model - price/earnings - free cash flow - return of equity - dividend payout ratio
42
Free Cash Flow (Valuation)
- similar to DDM, but instead of dividend use free cash flow (FCF)
43
Capital Market Line (CML)
- 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
Efficient Frontier (Risk Adverse)
- steep curve, a lot of return needed to take risk - a risk tolerant investors curve would be more flat
45
Security Market Line (SML)
- micro - used to value a single asset - ri = rf + (rm - rf) beta - use formula to calculate required rate of return
46
EMH - Strong Form
- nothing matters - random walk
47
EMH - Semi-Strong Form
- reflects all publicly known information - only insider information can produce superior results
48
EMH - Weak Form
- only fundamental analysis can produce superior results - fundamental analysis looks at economic indicators
49
Fundamental Analysis
- 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
Benchmarks
- 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
Short Sale Formula
- sold short value - bought stock value - covered dividends = profit
52
Risk Tolerant Characteristics
- 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
Risk Adverse Characteristics
- no debt - high amounts of insurance - stable employment - deliberate - low level of wealth for age - pessimistic - handles stress poorly - inexperienced
54
When to Rebalance Asset Allocation
- 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
Passive Asset Allocation Strategies
- buy and hold (EMH) - immunization - laddered bonds - indexed portfolios - barbell strategy - dollar-cost averaging
56
Strategies with Concentrated Portfolio’s
- 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
Arbitrage Price Theory (APT)
- 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
Black-Scholes Option Valuation
- uses options to value stock - increase in exercise price decreases call value
59
Conversion Value Calculation
- (par (typically $1,000) / conversion price) x current market price of underlying stock
60
Property Cash Flow Calculation
- net operating cash flow - debt/mortgage services
61
Covariance Shortcut
- add the 2 risks - divide by 2 to find average - choose a number less than average if covariance is less than 1
62
Coefficient of Variation (CV) Shortcut
- to determine the riskiest divide standard deviation by the mean - higher the number, higher the risk
63
Risk Adjusted Return Calculation
- annual return / beta - highest number is best
64
Tax Equivalence Shortcut
- double coupon = 50% - add up all taxes - gage where in respect to the 50%
65
Duration Shortcut
- look at maturity - if coupon paying, duration must be less - choose a number less than maturity but make sure its not too close
66
Capital Market Line (CML)
- 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
Anomalies (Active)
- p/e effect - small firm effect - January effect - neglected firm effect - value line
68
Active Strategies
- anomalies - ratio analysis - fundamental analysis - technical analysis
69
Alpha/Treynor/Sharpe Shortcut
- eliminate answers - solve for risk adjusted return - realized / beta - if mixed r2, choose sharpe
70
Stock Split Calculation
- 5:2 stock split - 5/2 x 100 - shares already owned - 2/5 x prior price to find new par value
71
At Margin Formula
- (1 - initial margin % / 1 - maintenance % ) x purchase price of stock
72
Maintenance Call Formula
- 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

KB CFP March 2024 (8 decks)

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