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CFP > Investments > Flashcards

Investments Flashcards

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1
Q

Unsystematic Risks

A

Business Risk
Financial Risk

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2
Q

Systematic Risks

A

PRIME

Purchasing power risk
Reinvestment rate risk
Interest rate risk
Market risk
Exchange rate risk

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3
Q

Brokered CDs risk

A

Interest rate risk, because they are traded (negotiable). Regular CDs do not have interest rate risk

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4
Q

Yield Ladder

A

Discounted Bonds
Y - Yield to call
M - Yield to Maturity
C - Current yield
—— A - Annual coupon rate (nominal) ——–
C - Current yield
M - Yield to Maturity
Y - Yield to call
Premium Bonds

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5
Q

STRIPS

A

Zero-coupon treasury securities
Direct obligation of the federal govt
Discount on STRIPS is taxed as taxable (phantom) income, earned annually.

Typically purchased by tax-deferred entities becasue they don’t need to recognize the phantom income

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6
Q

TIPS

A

Treasury Inflation-Protection Securities
Taxed annually on interest payment + appreciation in face value
No state and local tax
Increase in face value is phantom income

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7
Q

EE Bonds

A

Nonmarketable, nontransferable, and can’t be used for collateral
Issued at face value

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8
Q

EE Bond term

A

20 years, but if not redeemed at maturity, they will accrue for additional 10 years

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9
Q

EE Bond taxation

A

Not subject to federal taxes until bonds are redeemed or reach maturity (unless an EE education bond)
Interest not subject to state or local tax

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10
Q

EE “education” bonds

A

Has to be owned by parent
Tax free if parent’s AGI is less than the phaseout at redemption
Can’t be education EE bonds if in a UTMA because they would be owned by the student

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11
Q

I Bonds

A

inflation-indexed accrual securities issued by the US gov’t

Nonmarketable, non-transferable, and nonnegotiable

Interest compounded every 6 months on semi-annual anniversary of bond’s issue date

Issued in same denominations as EE bonds but no guaranteed rate of earnings

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12
Q

I Bonds interest rate

A

Two parts: fixed base rate and an inflation adjustment additional amount

inflation adjustment is updated every 6 months

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13
Q

I Bonds taxation

A

Same as EE bonds and can also qulaify for “education” status

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14
Q

GNMA

A

Ginnie Mae securities purchase a pool of FHA/VA guaranteed mortgages

Guaranteed by federal government

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15
Q

FNMA / FHLMC

A

Fannie Mae and Freddie Mac are not guaranteed.

They have been taken over by federal government and are placed into conservatorship of the FHFA (Federal Housing Finance Agency)

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16
Q

CMOs

A

Mortgage-backed pools

Mortgage payments receieved are distributed ona “cash flow” basis

A to Z tranches – A is fast pay, M is medium pay, and Z bears no coupon but receieves cash flow from collateral remaining after the other tranches are satified (most risky)

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17
Q

Corporate and Muni bond risks

A

DRIP

Default risk
Reinvesment risk
Interest rate risk
Purchasing power risk

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18
Q

UITs

A

Unmanaged security portfolio offered by a sponsor and handled by an independent trustee

Passive investment because its assets are not traded, but frozen

Self liquidating because as funds are receieved, they are distributed to unit holders. Sponsor will redeem units at NAV

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19
Q

Black-Scholes option valuation model

A

Considers 5 variables to value the option of a non-divident paying stock (Think “call up”)

  • Exercise price of option
  • Time remaining to expiration of option
  • Interest rate
  • Volatility of underlying stock
  • Price of underlying stock
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20
Q

Call option taxability

A

At time of purchase - nondeductible capital expenditure

Taxability to writer due to lapse - premium receieved is short-term gain

Taxability to writer due to exercise - premium receieved is added to sale price (taxed as LTCG if held over 12 months, otherwise it’s all STCG)

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21
Q

LEAPs

A

Long-term Equity AnticiPation

Expiration ranges from 9-mos to 3 years

Once a LEAP is exercised, investor must hold shares of stock for over a year in order to pay LTCG rates

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22
Q

Warrants

A

Similar to call options

Right to purchase issuer’s common stock at a specified price

  • Warrants are issued by corps
  • Maturities of several years vs. 9-mos
  • Terms are not standardized
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23
Q

Short selling

A
  • Short sales must be made in a margin acct
  • Net proceeds plus required margin are held by broker
  • No time limit on short sale
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24
Q

Private placement (Reg. D)

A

Offered to max 35 “non-accredited” investors
Exempt from registration, but must provide an “offering memoranDum”

1-2-3 test
Accredited investor has $1M net worth, or $200k annual income, or joint $300k income

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25
Q

What does covariance measure?

A

Covariance measures the extent to which two stocks are related to each other

COV

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26
Q

Correlation coefficient symbol

A

ρij

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27
Q

What does correlation coefficient of +1 mean?

A

Securities are perfectly positively correlated
Maximum risk

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28
Q

What does correlation coefficient of -1 mean?

A

Securities are perfectly negatively correlated

Securites move opposite of each other, completely elimiating risk (std dev of 0)

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29
Q

What does coefficient of variation measure?

A

Measures relative variability to compare investments with widely varying rates of return and standard deviations

Std deviation divided by mean

CV indicates risk per unit of expected return

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30
Q

Standard deviation curve

A

68%, 95%, and 99%

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31
Q

What does beta measure?

A

Systematic risk
Volatility of security’s return relative to a market index (Beta = 1)

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32
Q

What does a negative Beta mean?

A

Moves opposite to the market

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33
Q

Risk-adjusted return calculation

A

Realized return / beta

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34
Q

How to calculate geometric mean

A

Add 1 to each return, then multiply together
Use answer as FV and -1 as PV
N is number of years, and solve for i

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35
Q

What type of return is geometric mean?

A

Time-weighted return

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36
Q

What is holding period return?

A

HPR is the total return (income + price appreciation and divs or int receieved, less margin interest paid) divided by the price of the investment (out-of-pocket cost)

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37
Q

Taxable Equivalent Yield calculation

A

tax-exempt yield / 1 - marginal tax rate

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38
Q

What is the intersection of the CML called?

A

Rf or risk-free (100% T-bills)

39
Q

Strong form EMH

A

stock prices fully reflect all information, both public and private.

No fundamental
No technical

40
Q

Semi-strong EMH

A

All publicly known information is fully reflected in stock price

Yes to insider information
No fundamental
No technical

41
Q

Weak form EMH

A

historical price data is already reflected in current stock prices and is of no value in predicting future price changes

Fundamental
No technical

42
Q

Fundamental analysis

A

Can include research of factors such as interest rates, GDP, inflation, unemployment, and inventories. Can also include balance sheets and income statements to forecast future stock price movements. Also consider past company performance in predicting future trends

43
Q

Technical analysis

A

Follows charts or computer programs to identify and project price trends in a market

44
Q

What are considered investment grade bonds?

A

BBB and better (S&P)

45
Q

What are considered bad bonds?

A

BB and below (S&P)

46
Q

What entities are most likely to purchase preferred stock?

A

C Corps because at least 50% of the dividends are tax-free

47
Q

When to use Sharpe ratio

A

When R^2 is under 60

48
Q

When to use Alpha

A

When R^2 is over 60

49
Q

When to use Treynor

A

When R^2 is over 60 and alpha is not given

50
Q

What to use when various R^2s are given?

A

Sharpe

51
Q

Alpha/Treynor risk measured in terms of ___

A

Beta

52
Q

Sharpe risk measured in terms of ___

A

Standard deviation

53
Q

Calculation for “at margin” price (margin requirement)

A

1 - initial margin percentage / 1 - maintenance margin percentage x purchase price of stock

54
Q

Calculate margin call

A

30% (maint. %) X current value of stock (all shares) = equity required

equity required - initial margin loan amt = actual equity

equity required - actual equity = maintenance call amount

55
Q

Ex-dividend date

A

Day after purchase date

56
Q

Date of record

A

2 days after purchase date, 1 day after ex-dividend date

57
Q

What entity controls margin?

A

Federal Reserve Board

58
Q

What is Reg T?

A

Determined the initial margin amount of 50%

59
Q

What entity controls minimum maintenance margin requirements?

A

FINRA and exchanges

60
Q

EMH anomalies

A

P/E effect
Small-firm effect
January effect
Neglected-firm effect
Value line

61
Q

Ratio analysis

A

Comparing one of the following

  • Compare individual ratios for a firm over a period of time or establish norms for the firm
  • Compare the individual firm’s ratios to an industry average
62
Q

A ___ is a deposit in any foreign bank that is denominated in dollars

A

Eurodollars

63
Q

How are TBills sold?

A

Competitive bids

64
Q

What are GICs?

A

Guaranteed Investment Certificates

Issued by insurance companies, there is no interest rate risk because the issuer takes all the interest rate risk

65
Q

How much of REIT income can come from securities like GNMAs?

A

Up to 15% of investment income can come from securities like GNMAs

66
Q

Mortgage REIT income comes from the spread between the _______ and the _______

A

Lending rate and the borrowing rate

67
Q

What is the “daily limit” in a futures contract?

A

The maximum permissible price increase or decrease relative to the settlement price the previous day

68
Q

Which index is price weighted?

A

Dow Jones

69
Q

Bottom-Up method

A

Focuses on the individual stock performance before considering broader economic trends

70
Q

Which performance evaluation measures total risk?

A

Sharpe

Measures risk through standard deviation (systematic and unsystematic risk because the portfolio is non-diversified)

71
Q

Shortcut to measure duration

A

When bond pays a coupon, pick the next lower number under years to maturity

Zero coupon bonds have duration equal to YTM

72
Q

Determine which of two stocks is riskier

A

Coefficient of variation

Relative measure of volatility = standard deviation / mean (pick higher answer)

73
Q

Are CDs marketable?

A

No, unless they are brokered CDs

74
Q

Are T-bills marketable?

A

No, because they can be easily converted to cash (liquid)

75
Q

How are UITs issued?

A

Issued in units, not shares

76
Q

What is a dollar-denominated bond issued in the US by foreign banks and corporations?

A

Yankee bond

77
Q

Interest rate risk

A

Change in interest rates will cause the market value of the fixed income security to fall

78
Q

Purchasing power risk

A

Loss of purchasing power through inflation

79
Q

Reinvestment rate risk

A

Risk that proceeds available for reinvestment must the be invested at a lower interest rate than the instrument that generated the proceeds

80
Q

Time-weighted return

A

geometric mean

81
Q

Dollar-weighted return

A

IRR/NPV

82
Q

Current yield

A

Annual interest in dollars / Bond’s current price

83
Q

Top-down method

A

An investor first looks at trends in the general economy, then selects industries, and ultimately selects companies that should benefit from those trends

84
Q

Activity ratio

A

Measure of how rapidly a firm is able to convert various accounts into cash (or sales). The quicker, the more effectively the firm is being run

85
Q

Support level

A

Where a security tends to stop falling because there is more demand than supply (temporary price floor)

86
Q

Resistance level

A

Price ceiling at which technical analysts note persistent selling of a commodity or security

87
Q

Dow theory

A

Aggregate measure of securities prices and thus does not predict the direction of changes in individual stock prices. Its purpose is to show the direction of the overall market

88
Q

Barron’s Confidence Index

A

Presumes that the differential between the returns on quality bonds and bonds of lesser quality will forecast future price movements

89
Q

How is S&P 500 weighted?

A

Float weighted

90
Q

Russell 2000

A

Capitalization weighted index of stock price performance of smallest 2000 stocks in Russell 3000 index

91
Q

Willshire 5000

A

Broadest measure of activity and movement of the overall stock market

Value weighted index

92
Q

Value line benchmark

A

Equally weighted index consisting of 1700 selected issues that are on the NYSE, AMEX, and OTC market

93
Q

NASDAQ

A

Broadest measure of OTC trading

Capitalization weighted index includes all the issues that trade on the NASDAQ system

94
Q

EAFE index

A

Relative performance of the US and international equity markets

CFP (6 decks)

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