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Melissa's Flash Cards > Investments > Flashcards

Investments Flashcards

1
Q

Total risk is measured by what?

A

standard deviation

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2
Q

What are the 5 non-diversifiable risks?

A

-Purchasing power risk
-Reinvestent risk
-Interest rate risk
Market risk
-Exchange rate risk

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3
Q

Systematic risk is measured by what?

A

beta

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4
Q

Name 5 unsystematic risks

A

-Business risk
-Financial risk
-Default or credit risk
-Regulation risk
-Sovereignty risk

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5
Q

What 3 factors influence an investor’s capacity for risk?

A

1) Time horizon
2) Liquidity needs
3) Total investable assets

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6
Q

What are 2 assumptions when using Holding period Return?

A

-Not indexed for Time Value of Money
-Assumes dividends are not reinvested

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7
Q

Risk-averse investors have _ indifference curves

A

steep

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8
Q

Risk-tolerant investors have _ indifference curves

A

flat

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9
Q

what measure of risk is used in an efficient frontier?

A

standard deviation

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10
Q

what is the definition of “random walk”?

A

the movements of stocks being utterly unpredictable , lacking any pattern that can be exploited as an investor

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11
Q

name 3 facts about S-corps

A

1) max 100 shareholders
2) 1 share class of stock (voting and non-voting)
3) offers opportunity to avoid payroll taxes when setup property
4) not designed for huge growth since shareholders are limited

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12
Q

name 3 facts about c-corps

A

1) rare double taxation
2) corporate tax level is 21%
3) shareholder dividends are taxed at shareholder rates
4) multiple shareclasses

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13
Q

name 3 facts about partnerships

A

1) general partners have full control/management and unlimited liability
2) limited partners have minimal control/management and limited liability
3) partners share gains and losses

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14
Q

name 3 facts about LLCs

A

1) liability protection
2) multiple shareclasses
3) no shareholder cap

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15
Q

When is expected return is greater than required rate of return a stock is _

A

undervalued

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16
Q

What does r represent in the TEY formula?

A

tax-free yield

17
Q

What is the Margin Call Price formula?

A

1 minus initial margin over 1 minus maintenance margin times initial purchase price

18
Q

What are the 2 basic variables that determine an option’s price?

A

Intrinsic value and time premium

19
Q

Everything else equal, the _ the maturity of a bond and the _ the coupon, the greater the sensitivity of the bond’s price to interest rate changes.

A

longer, lower

20
Q

A _ coupon will result in a lower duration.

A

higher

21
Q

What is considered a junk grade bond?

A

Anything under BBB- or Baa3 for Moody’s

22
Q

What are 2 other names for an options buyer?

A

holder and long

23
Q

What are 2 other names for an options seller?

A

writer and short

24
Q

What is the intrinsic value formula for call options?

A

Market price-exercise price

25
Q

What is the intrinsic value formula for put options?

A

Exercise price - market price

26
Q

Time premium is made up of 3 variables. The greater any of the 3 variables, the greater the time premium. What are the 3 variables?

A

1) Risk-free rate of return
2) Time to expiration
3) Variability of the underlying stock (as measured by standard deviation)

27
Q

What does the efficient frontier represent

A

It represents the optimal amount of return given a level of risk.

28
Q

Does HPR assume reinvestment of dividends?

A

NO

29
Q

If the NPV and IRR suggest 2 different investment projects, select the project with the _

A

higher positive NPV

30
Q

What is the main weakness of IRR?

A

Any cashflows are reinvested back at the IRR, so it underestimates when rates are higher and overestimates when rates go lower.

31
Q

What model exemplifies that expected returns are a function of market risk?

A

The Capital asset pricing model

32
Q

What does the behavioral asset pricing model assume?

A

That expected returns are a function of factors other than systematic risk such as market cap, P/E ratios, and momentum.

33
Q

How do you implement a collar? How does it work?

A

Long the stock, long the put, short the call. The put is used to protect against a stock price decrease and the call premium is used to offset the cost of the put.

34
Q

How do you implement a straddle?

A

Long a put and a call on the same underlying stock with the same expiration date and strike price.

35
Q

Does the SML use standard deviation or beta?

A

The SML uses systematic risk or beta while the CML uses standard deviation or total risk.

36
Q

What is the current yield formula?

A

Coupon payment divided by current price ex: 70/922 = 7.59%

37
Q

Regarding future contracts, owners/sellers are _ and buyers are _.

A

long, short

Melissa's Flash Cards (18 decks)

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