Investments Flashcards
Initial margin
Amount of equity an investor must contribute to enter margin transaction
Maintenance margin
Min amount of equity required before margin call
Margin call formula
Loan / (1- maintenance margin)
Margin position formulas
Equity: stock price per share - loan per share
Margin: equity per share / FMV
Required Equity (margin formula)
Stock price x maintenance Margin
Actual equity (margin)
Investor must contribute difference between required equity and actual equity
Stock price - debt
Standard deviation
Total risk of undiversified portfolio
Bigger SD, the riskier
Standard deviation %
1 standard deviation : 68%
2: 95%
3: 99%
Covariance of Variation
= standard deviation / average return
Higher , more risky
Useful for comparing 2 assets with different avg returns
Correlation coefficient
Measure movement of security relative to another
+1 is perfectly correlated
= stand Dev1 x stand Dev2 x correlation
Beta
Measures Systematic risk
Beta of market is 1
Coefficient of determination (r squared)
Correlation coefficient squared
Tells investors if beta is appropriate measure of risk
If rsquarwr over 70% use beta
Holding period return
(Selling price - purchase price +/- cash flows) / purchase price
Treynor index
Uses beta to measure reward achieved relative to risk
Needs to be compared to another Treynor index
Sharpe ratio
Provides measure of portfolio performance to risk
Uses standard deviation
Jensens alpha
Uses beta
Higher the alpha, better the performance
Negative alpha is underperformance
Dollar weighted return
Cash flows of investor, not stock
Time weighted return
Cash flows of the investment
Ex mutual fund
Price to earnings ratio (PE ratio)
Amount an investor is willing to pay
= price / earnings per share
Dividend payout ratio
% of firms earnings being paid as dividend
= common stock div / earnings per share
Return on Equity
Overall profitability of company
= earnings per share / stockholders equity per share
Dividend yield
Annual dividend as a % of stock price
= div per share / stock price
Efficient market hypothesis
If market was perfectly efficient, price would be reflective of all info
Weak form of efficient market hypothesis
Stock prices can be beaten by inside information
Rejects technical analysis
