Investments Flashcards
Inv 1-2 What is a US dollar deposited in a Hong Kong bank called?
Eurodollar- Any dollar deposited in any foreign bank
Inv 1-2 What is a yankee bond?
Dollar denominated bonds issued in the US by foreign banks and corps.
INV 1-3 How can you remember premium and discount bonds?
Premium
-———— N CY YTM YTC
Discount /\
INV 1-3 when is an issuing corporation most likely to call its bonds?
When the bonds are selling at a significant premium.
Inv 1-3 Client purchased a 5k bond bearing interest at 8% per year, payable January 1st and July 1st. Price was 5,250 and included accrued interest of $133 for Jan 1- April 30 (4 months). What will the 1099 report? What will be taxable interest? What is the basis?
- $200, $67 reportable income, basis 5,117.
$200 received on 7/1 will cause the 1099 and will include accrued interest. $200-133 paid to the bond seller. Taxable interest is $67. Basis is 5,250-133= 5117
INV 1-5 What is accretion in relation to bonds?
Accretion generates phantom income on original issue discount bonds. Bondholder raises basis accordingly.
INV 1-6 When denominations are T-Bills sold? When do they mature?
6 months, $100 denominations
Investments 1-7 Can Treasury Bonds be called? When?
Yes, 15 years prior to maturity
Investment 1-7 Describe tax treatment of TIPS.
Interest paid and principal increase is taxed as ordinary income tax. The principal increase is phantom income and raises the cost basis. Remember, this is only subject to federal tax.
Investments 1-9 are EE, HH, and I bonds marketable?
No
Investments 1-9 Describe the taxation of EE bonds.
Owner has the option of having the interest taxed each year. Otherwise not subject to federal income tax until the bonds are redeemed or reach maturity. State and local tax free.
Investments 1-10 Can UTMA or UGMA accounts hold EE or I bonds?
No
Investments 1-12 What’s the default risk, interest rate risk, reinvestment rate risk for GNMAs?
Default none.
Interest rate risk- prices fall when rates rise
Reinvestment rate risk- Reduced certainty of the monthly payment due to homeowners repaying their mortgage loans prematurely when interest rates fall.
Investment 1-12 How is the payment received broken down for GNMA?
Part interest and part return of principal.
Investments 1-12 of GNMA, FHLB, CNMA, FHLMC, which are backed by the government.
GNMA
Investments 1-13 What’s the safest type of municipal credit?
GO bonds- they can compel a tax levy to make payment on debt if needed.
Investments 1-14 Describe a Z tranche CMO.
Longest duration of all the classes (like a zero bond) received interest and principal only after the other tranches have been liquidated. Highest interest rate risk. Highest yield of all tranches.
Investments 1-17 What is the bond conversion value formula?
CV= (par/cp) Ps
CP= conversion price
Ps= current market price of underlying stock
PAR= Par value of bond (presume $1,000 if not stated otherwise)
Investments 2-1 what’s the difference between 10Qs and 10Ks.
10Qs are Quarterly reports from the corporation to the SEC and 10Ks are annual.
Investments 2-2 What’s the difference between cumulative and non cumulative preferred stock shares?
Cumulative- Missed dividend payments must be made up. Non cumulative doesn’t.
Investments 2-2 Who typically buys preferred stock?
Corporate treasurer- 50% of dividends received are typically excluded from taxation.
Investments 2-3 How are ADR dividends declared?
Declared in country of origin
Investments 2-4 Highlights of UITs
Units are redeemed at NAV. Distributed to unit holders (not shareholders). Done on secondary market.
Investments 2-9 Formula for a properties intrinsic value?
NOI/Cap rate= Inti sic value
Investments 2-10 What’s the 90% rules for REITs?
If a REIT distributes 90% of its income then it only has to pays tax on the undistributed portion. If it’s below 90% then it pays tax on everything.
Note shareholders can deduct 20% of pass through income from reits.
Tax 2-11 What can’t reits invest in?
Limited partnerships because they are tax shelters.
Inv. 3-1 What is the formula for intrinsic value of a put?
IV= EP- MP
Inv 3-2 What is the formula for intrinsic value of a call option?
IV = MP- EP
Inv. 3-6 Client bought a stock @ $60 on Jan 15. 13 months later, he wrote a 9 month call $70 when the stock was trading at $70. The call premium was $13. The price of the stock continued to rise, and the holder exercised the call before the option expired. What amount of gain will Lance have to report, and is it long term or short term?
2,300 LTCG
Inv 4-7 Define a liquid asset.
Asset that can be converted into cash without significant loss of principal.
Inv 4-8 Define marketable asset
Asset that can be traded (not redeemed)
Inv 4-11 What is the equation for Coefficient of Variation? CV
CV = Standard deviation divided by the average of mean return.
Inv 4-11 What does standard deviation measure?
Measures variability of returns in a non diversified portfolio and is a measure of total risk.
Inv 4-11 what does Beta measure?
Beta measures volatility of returns used in a diversified portfolio and is a measure of systemic risk.
Inv 4-12 Which of the following stocks has highest standard deviation?
1. 10%, 6%, 12%, -5%
2. 8%, 12%, 16%, -8%
Use E+ for each number then gold 8key
Second stock
Inv. 4-13 In a normal bell shaped curve. Where does one standard deviation fall? What about 2 and 3?
- 68%
- 95%
- 99%
Inv 3-15 If you own both stock A and Stock B equally. What is the risk of correlation coefficient is .6?
Stock A Expected return 10% Risk 15%
Stock B Expected return 35% Risk 45%
Between 20-30%. 30% would be the answer if it was 1.0 correlation coefficient. So at .6 go with something was than 30.
Inv 4-16 What does Beta measure?
Measures the volatility of a particular security or portfolio rate of return to the volatility of the market as a whole.
Inv 4.16 What is the equation for Beta?
Beta= COV(stock,market)/SDsquared (market…= Coorelation coefficients standards deviation (stock) divided by standard deviation of market
Inv 4-18 How do you determine a mutual funds risk adjusted return?
Take the annual return and divide it by beta.
Inv 5-1 what’s another term for geometric mean?
Time weighted return.
Inv 5-1 How to solve for geometric mean?
- Add 1 to all the percentages. (12% become 1.12, -15% becomes .85)
- Multiple all the numbers in step 1
- The answer become FV
- -1 is your PV always
- N is the number of years of the investment
- Solve for i
Inv. 5-5 Client buys 100 shares of stock at 50/share. Stock pays .25 quarterly dividend. Company earnings increase by 10% and it declares the dividend will increase by 5% for the year. Client sells stock at $53. What is the total return if he holds the stock for one year?
8.1%
53+ 1.05 - 50/ 50
Inv. 5.5 Client has 10k to invest. Wants to buy max possible of shares on margin. Interest on margin of 9%. Stock goes up by 30% in one year and client sells. What is the rate of return?
51%
26k-(10k+900) -10k/10k
Inv 5.6 Why is buying on margin aggressive?
The downside risk is larger than upside potential.
Inv. 5.6 client 24% tax bracket bought 1k shares for 40k. Paid 1k dividend. After 1 year sold for 60k. What was her after tax holding period return?
44.63%
21kx.85%
Inv. 5-12 Client lives in a state with state income tax of 6% and federal income tax of 24%. Which of the following bonds has the best return?
A. Muni issued in his state 5.2%
B. Treasury bond paying 7%
C. Corp bond paying 7.8%
D. Muni bond paying 6.4% issues out of state
D
Inv 5-14 Bought house 5 years ago. Paid 50k plus repairs of 10k. Then repairs of the following 5k, 3k, 10k, and 8k then selling in year 5 for 110k but additional 5k of repairs. What’s the return on investment?
4.87%
CFj everything then gold IRR/Yr
Inv 6.1 what is duration inversely related to?
Yield to maturity
Inv 6-2 What risks can you offset by matching duration of a bond to clients time horizon?
Reinvestment risk and interest rate risk
Inv 6-4 for duration questions, what must you always look for?
Matching the bonds duration to the time horizon. If a zero has a 10yr maturity and time horizon was 10…then that’s perfect. All other coupons that have 10 year maturity must have shorter than. 10 year duration.
Inv. 6-5 what is the approx change in the price of a 1k par bond when interest rates decline by .75% the YTM is 6.75% and the bond duration is 10 yrs?
-10[-.0075/1+.0675] = .07 or 7%
7% of 1000= $70
Inv 6-6 What’s the equation for zero growth model?
Price = Div/ required rate of return
Inv 6-6 What’s the equation for constant growth model?
Price = D1/ r-g = Do(1+g)/r-g
R= required rate of return
G = growth rate of dividends
Inv. 6-10 How to calculate price of the stock using PE ratio and no dividend?
Price = Earnings x P/E ratio
Inv 6.11 What’s the free cash flow equation?
Identical to DDM.
FCFo(1+g)/ r-g
Inv 6-11 How to calculate Return on equity?
Earnings available for common (EPS)/ common equity (net worth or book value)
Inv 6-12 How to calculate dividend payout ratio?
Dividend payout ration= common dividends paid/earnings available for common (EPS)
Inv 7.6 What is the formula for sml? Also known as capital asset pricing model or CAPM and can also be used for required rate of return.
Ri= Rf + (Rm- Rf) Bi
Inv. 7-6 How do you determine market risk premium?
It’s embedded in the required rate of return formula.
(Rm-Rf)B
Inv. 7-9 What does semi strong form of the efficient market theory reflect?
Current prices reflect past prices and factor all publicly available information. Key is all publicly known information.
If 8-8 what is the purpose of a sinking fund requirement?
The purpose of the sinking fund is to reduce default risk. Allows the issuer to retire a portion of the debt each year until the entire issue matures. Periodic payments to the sinking fund are generally the same each period.
Inv. 8-13 If the Date of Record for a stock is Friday Jan 19th, when is the ex dividend date? Purchase date? What if it was Monday Jan 22nd?
Jan 17th purchase date, Jan 18th ex dividend date.
Thursday Jan 18th purchase date, Friday Jan 19 dividend date.
Inv 8-14 What’s the sharpe ratio?
Sp= Rp-Rf/SD
Rp= risk of portfolio
Inv 8-14 What is the treynor ratio?
Tp= Rp-Rf/Bp
Inv 8-14 What is the Jensen ratio? What is it usually referred to as? What is it measuring?
Alpha=Rp- [rf - (Rm-Rf) Bp)
Alpha
Contribution of portfolio manager
INV 8-16 How do you determine R^2?
Take the square of the correlation coefficient.
Inv 8-16 if R^2 is less then 60 what number should you look at? Keys?
Sharpe
- RISK is measured in standard deviation
- variability
- contains systematic and unsystematic risk
Inv 8-16 What if R^2 is greater than 60? Keys?
- Look for highest positive alpha (Jensen), if alpha/jenson is not a choice look for the highest treynor number.
Keys
- Risk is measured in terms of beta
- Volatility
- Contains systematic risk
Inv 8-18 What is the information ratio? What does it measure?
IR= Rf-Rb/SD
Measures a portfolio returns above benchmark to the volatility of those returns.
Inv 9.4 What is the margin requirement formula?
Margin requirement= (1- initial margin percentage)/ (1- maintenance margin percentage) c purchase price of the stock
Inv 9.5 Client purchased 200 shares of X at 150 per share on margin. The initial margi. Requirement is 15k (borrows up to 15k). If the maintenance margin is 25% what is the amount of maintenance call if the stock drops to $90.
1500
200shares x 90 = 18k
25% c 18k = 4,500
18k - 15k = -3k (actual equity)
4500-3000 = 1500
Inv 9.2 what makes up a stock option collar?
- A long position in the stock (own it)
- A short position in the call (wrote [sold] the call and received premium)
- A long position in the put (owns it and paid premium)
Inv. 9-5 A client buys 100 shares of stock at $75 per share. The initial margin is 50%. The maintenance margin rate is 30%. Below what trade price will the margin call start?
53.57
1-.5/1-.3 x $75 = 53.57
Inv 9.5 100 shares at 75 bought 50% on margin. Drops to 40$. Maintenance margin is 30%. What dollar amount is the maintenance call?
950$
.3x 4000 = 1200
4000-3750(original margin)=250
1200-250= 950
Inv 10-6 For Blaco wholes option valuation model. What is the relationship between the exercise price of a call and the calls value? What about the exercise price of a put and the puts value? What about all the other variables?
Exercise price of call increases, calls value decreases
Exercise price of put increases, puts value increases
All other variables and a direct relationship to calls or puts.
Inv quiz 2 what are some generalities of UITs?
Can be self liquidated, can trade on secondary market.
Isn’t actively managed, no continuous offerings and redemptions.
Inv quiz 2 Which type of investment can always be purchased at NAV?
No load funds
Inv quiz 1 How are EE bonds purchased?
At face value
Inv quiz 1 Which of the following are not directly guaranteed by the us government? strips, GNMA, CMO, EE bond
STRIPS
Inv Quiz 1 Grandma is in the 35% tax bracket. She lives in NYC. Bought EE bonds for her grandchildren. All of her grandchildren live in NYC. If she redeems the bonds for her grandchildren educations, how will it be taxed?
The interest will be taxed at the federal rates for grandma.
Inv quiz 1 What is generally used to finance import export transactions?
Bankers acceptance
Inv quiz 3 A pit option has a strike price of $110 and is selling for 3.5 premium. Price of the stock is 108. What’s the intrinsic value?
2
Inv quiz 3 Dec 55 call with premium of 6.5 and trading at $58. What’s the intrinsic value?
3 intrinsic value
Inv quiz 4 What are the examples of Systematic risk or non diversifiable risk?
prime
Purchasing power, reinvestment, interest rate, market, exchange rate
Inv quiz 4 What does beta measure in a portfolio?
Volatility, diversified portfolio, systematic risk.
Inv quiz 4 what impact does a negative correlation coefficient have on Beta and the portfolio?
It will reduce risk of portfolio and make beta negative.
Inv quiz 5 The annual returns for a stock are 8%, 12%, -6%. What is the geometric return?
4.37%
1.08 x 1.12x .94 = 1.137 FV
-1 is PV, 3n
Inv Quiz 5 Buys 20k stock on margin. Deposits 10k. Interest on margin is 12% quarterly. Sells stock 1 year later for 25k, how much did he make?
$3,745
Set calc for 4p/yr
-10k PV, 1 gold XP/YR, 12i, FV
11,255-10k = 1,255 interest
25k-21255
Inv Quiz 6 How are duration and maturity related?
They are positively correlated.
Inv Quiz 6 What is the approx price change of a 1000 bond when interest rates go up by 1.56%, duration is 8 years and YYM is 4%.
-120
-8(.0156/1.04)=-12%
1k x 12%= 120$
Inv quiz 7 If Rm is 10% and Rf is 6% then what is the stock risk premium if the security has a beta of 1.4?
5.6%
(10%-6%)1.4
Inv quiz 8 what is the index that is price weighted?
DJIA
Inv quiz 8 why is the financial ratio considered to be the most useful?
Several ratios with the same industry over time.
Inv Quiz 8 If an investor wants to immunize a bond portfolio, what is immunization most likely to reduce?
Interest rate risk
Inv quiz 8 How does a straddle work?
Buying a put and call on the same stock with the same exercise price and expiration date.
Inv.Quiz 8 How would you determine mutual fund capital gain sale using average cost method?
Take the total money spent and divide by the total number of stocks.
Inv quiz 10 In the APT model, when the factor is zero, what can you conclude?
The factor has no impact on the return because it is expected or anticipated.
Inv Quiz 10 Binomial option pricing is ____ model?
Valuation
Inv when calculating intrinsic value of a bond what must they give you in the problem and what are you solving for on the calc?
They have to give me comparable debt interest that I plug in as “I” and I need to solve for present value.
Inv UIT highlights….who offers, who handles, passive/active, are assets traded?, are new securities purchased?, are securities sold?, how does it liquidate?, who do distributions go to?, how does the sponsor redeem?, can it trade on secondary market?
Sponsor offers, independent trustee handles, passive, assets are not traded, no new securities, securities originally purchased are rarely sold, self liquidation, distributions go to unit holders, sponsor redeems at NAV, there is an informal secondary market between brokers and dealers
Rev I 14. What’s a benefit of a reit over actually investing in real estate?
Marketability
Rev iv 17. What should I remember for black scholes option model?
5 variables to value a non dividend paying stock. All have a direct relationship for calls except for exercise price.
Exercise price, time remaining, interest rate, volatility, price of underlying stock.
Rev IV 18. How is an option taxed to the writer due to lapse? How about due to exercise?
- Premium received is short term gain (9 months or less).
- Covered call- premium received is added to the sale price. Becomes long term if underlying security was held more than 12 months, otherwise short term.
Rev INV 20 Differences between warrants and options?
- Warrants issued by corporations
- Warrants typically have maturities of atleast several years whereas listed calls expire within 9 months.
- Warrant terms are not standardized whereas call options are standardized
Rev IV 21 Examples of short and long positions for futures?
Short- you want to sell a commodity/financial that I own in the future. You take a short position if there is excess amount of that commodity available. (Farmer planted corn- to much corn planted)
Long - you want to buy the commodity/financial in the future, then you take a long position if there is a shortage of that commodity available. (General mills needs corn- to little corn planted)
Rev IV 22 How is full disclosure of a private placement given to investors?
Offering memoranDum
Rev INv 22 If a non accredited investor can’t sign the investment letter because they can’t evaluate the issue on their own, what must they do?
They use purchaser representative (a lawyer or an accountant)
Rev INV 22 In regards to a private placement, what is a qualified purchaser?
Owns atleast 5 mill in investments.
Rev IV 23 What is covariance?
Measures the extent to which stocks (2 stocks) are related to each other or how the price movements of one of the securities is related to the price movements of the secondary security.
Rev IV 24 what is a correlation coefficient of +1 mean? What doesn’t mean for risk?
Perfectly positively correlated. Means maximum risk.
Rev INV 24 What does it mean if the coefficient coorelatioon is somewhere between 0-1.0? What does it mean for risk?
The risk of the portfolio as a whole is less than the risk of the individual assets.
Rev. Inv 24 What does it mean if the correlation coefficient is -1.0? Risk?
Perfectly negatively correlated. Securities move exactly opposite of one another. In theory risk is completely eliminated. Standard deviation is 0. However, seldom found in actual portfolios.
Rev INV 25 What does Coefficient of variation measure? How do you solve for CV?
Measures relative variability to compare investments with widely varying rates of return and SD. SD divided by the average/mean.
CV indicates risk per unit of expected return.
Rev. INV 26 what does standard deviations measure? What does Beta measure
Absolute measure of variability of returns around the average or mean of this returns, no diversified portfolio and is considered a measure of total risk
Beta- measures the volatility of returns used in a diversified portfolio and is a measure of systematic risk.
Rev Inv in your own terms give an example that differentiates between SD and Beta.
If a stock is at $50 and has a SD of $5 then it should trade in a range of 45-55$. If that same stock has a Beta of 1.5 then it would move 1.5 times the market up or down.
Rev Inv 29 What are the main differences between using time weighted and dollar weighted?
Time weighted factors percentages and measures the performance of portfolio manager. Dollar weighted factors cash flow.
Rev INV what does YTM calculation measure
Reinvestment risk.
Takes into account both the market price of the bond as well as any gains or losses on the bond if held to maturity.
Rev INV What is the intersection of the CML called? What is point B called? What happens if the portfolio moves from the point of tangency to Rf?
- Rf or risk free
- The optimal risky portfolio, a proportional percentage of all risky assets, or the tangent of the CML and the markowitz efficient frontier.
- The investor sells risky assets (like stocks and long term bonds) and buys t bills
Rev INV 45- EMH What does random walk mean?
Price changes are unpredictable and that patterns are accidental. Means an active strategy does not add value.
Rev Inv 47 What’s the issue with ratio analysis and what should an investor do?
Ratios by themselves can be misleading. Investors should compare individual ratios for a firm over a period of time or establish norms for the firm, or compare the individual firms ratios to an industry average.
Rev INV 47 what is R^2 and how is it determined?
R^2 is the coefficient of determination. It is the square of the correlation coefficient R.
Inv 3-10 What’s the tax rate for collectables?
28%
Does Beta represent total risk, systematic risk, unsystematic risk, systemic risk?
Systematic risk
Inv 4-7 Describe the difference between liquid and marketability
Liquid- transaction speed and stability of price (emergency funds)
Marketability refers only to the speed of a transaction.
Inv 5-2 What’s the difference between dollar weighted return and time weighted return?
Time weighted return is geometric return and measures performance of portfolio manager.
Dollar weighted return measures changes in total dollar value. Same as IRR and NPV. Manager to manager comparison is not possible.
Inv. What’s the market risk premium and stock risk premium?
(Rm- Rf)
(Rm-Rf)B
Rev Inv 6 - Gloria and Jay Pritchett are interested in purchasing EE bonds for their daughter in her UGMA acc. Which one of the following is not true?
A. The bonds are sold at face value
B. Interest is not actually paid on the bonds until maturity or redemption
C. The bonds are not marketable
D. Interest at redemption is tax free if the parents AGI is under 100k and the proceeds are used for eligible education expenses.
D is not true because it’s an UGMA
Rev Inv 7 Marty purchased TIPs. He is questioning the tax ramifications of the securities. Which of the following statements is false?
A. The interest is subject to federal taxation when received
B. The inflation adjustment to principal is also subject to federal taxation in the year the adjustment is made
C. The interest and inflation adjustment may be deferred until the bond is redeemed or maturity is reached
D. He should acquire them for his retirement accounts
C is false.
Rev Inv 15 Which type of entity below is most likely to purchase REITs?
A. SEP
B 2503c trust
C. UTMA account
D. 529 plan
Sep because it would defer the taxable income
Rev INv 19 If client bought a call option and then decided to sell it before it expired, how is his premium gain or loss treated?
It’s considered STCG/L
Rev Inv 22 which of the following is least likely to achieve the objectives of 1. Reducing income taxes and 2. Increasing cap gains?
A. Fine art
B. Coin collection
C. Growth stock
D. Zero coupon
Zero coupon
Rev Inv 22 which of the following is least likely to achieve the objectives of 1. Reducing income taxes and 2. Increasing cap gains?
A. Fine art
B. Coin collection
C. Growth stock
D. Zero coupon
Zero coupon
Rev Inv 24 You hold 2 funds in equal portions in your portfolio. Their covariance is 0. Fund A has a return of 5.5% and a risk of 9.5%. Fund B has a return of 6% and a risk of 12.5%. What is the standard deviation of your portfolio?
A. 7.85%
B 10%
C 11%
D 11.29%
7.85
Shortcut add the two risks and decide by two. Pick an answer below 11%. Correlation is low the risk has to be substantially less than 11%. 10 would be to close.
Rev INV 26 of Stock A has SD of 6.12 and mean of 6.66 and stock B has SD of 2 and mean of 8. Which one would you recommend and why?
Stock B because of low SD around mean.
Rev INV 27If the SD of the stock is 18% and the SD of the market is 10%, what is the beta of the stock if the covariance of the stock to the market is .009?
.9
Rev Inv 31 if client sells a stock at 11 months and was paid 1,000 in dividends. Tax rate is 37%. How much will taxes be in the dividends?
Taxes at 37%. Only use cap gain rates if the problem states that it was a qualified dividend.
Rev INV 36 what happens when the inverted yield curve moves higher?
Interest rates go up
Rev INV 37 If you hold bonds in equal amounts. Bond A has duration of 5.6 and bond B has a duration of 9. You need the money in 7 years. How would you immunize?
60% A, 40% B
Rev 38 Tom has 121,000 invested in a single bond. The yield to maturity is 7.5%. The bond has a duration of 12.4. What can Tom expect to happen to the dollar value of the bond if interest rates increase by 1%
-13,951.30
Rev INV 44 what is true about the CML and SML?
A. They are both based on variability of returns
B. They are both used to analyze a single security
C. They are both components of the capital asset pricing model
D. They are both based on total risk
C.
CML factors total risk while sml factors BETA (Sytematic risk)
Differentiate between Beta, Standard Deviation, Systematic risk and unsystematic risk.
Unsystematic risk is Diversifiable
Systematic risk is undiversifiable and is measured by Beta
Total risk is measured by SD
Rev IV 53 Clients are going through separation. Husband calls to
Move favorable stocks into his individual account from their JNT account. What should I do?
Tell the husband I need to meet with both of them before I proceed.
Rev INV are tax exempt OIDs subject to phantom income tax? How about TIPs?
Tax exempt OIDs are not but TIPs are. The increase on the principal is taxed to the holder every year even though it’s not being paid out.
Rev Inv Which of the following statements about investments companies is true?
A. Closed end funds can trade at a premium or discount to their NAVs
B. UITs can be purchased on one of the national exchanges
C. Open end funds are negotiable securities
D. UITs offer a limited number of shares when issued
D is wrong because they’re units, not shares
A is correct because closed end mutual funds trade like stocks…
Rev Inv Which of the following statements are not true?
A. REITs normally distribute 90% of all net investments
B. REITs are listed and trade on stock exchanges
C REITs issues are redeemable shares. Issuers make a market
D REITs must invest 75% of their assets in real estate related activities to qualify for conduit treatment.
C REITs are not redeemable they are negotiable and trade on exchanges
Rev INV what’s the difference between a liquid investment and a marketable investment?
Liquid, they can be converted to cash without risk of loss.
Marketable, they can be sold on an exchange quickly and potentially converted to cash.
Rev INV 56 Of the following stocks, which is riskier?
A mean of 8% and standard deviation of 10%
A mean of 4% and a standard deviation of 6%
Stock 2 .06/.04= 150%
Stock 1 .1/.08 =125%
Rev INV 56 Mr Roth lives in NYC. His federal tax rate is 35%, NY state tax is 7%, and his NY city tax is 2%. If he bought treasury bonds with a 6% coupon, what is his after tax yield?
3.9%
Rev INV is Modern Portfolio Theory considered active or passive?
Active because it’s looking for the optimal amount of risk for return.
Exam 100% bond portfolio. Which risk/s are they susceptible to?
A. Interest rate risk
B Reinvestment rate risk
C Market risk
D purchasing power
All…interest rate risk causes market risk
Exam Input variables needed to create portfolios under the markowitz model do not include which of the following?
A. Covariance
B correlation coefficient
C SD
D Return
E beta
Beta…
Markowitz efficient frontier model uses return and SD which would then include covariance, correlation coefficient
Exam if the normal positive curve moves upward, which is true?
A. Duration has increased
B duration has decreased
C interest rates have decreased
D only long term bonds have increased
Duration has decreased
Exam What does a bond put feature allow?
Allows the client to redeem the bond back to the issuer at par even when the market price of the bond drops
Exam What’s the riskiest option?
Writing a naked call
Uncovered short call
Exam Which investment below could provide both leverage and a reasonable hedge against inflation?
A. Equity mutual fund
B equity reit
C mortgage reit
D blind pool
Equity reit- can be leveraged, typically property increases during inflationary times. Mortgage REITs don’t do well in inflation
C- $1.40 dividend. .07x20….
All other dividends are really close to their earnings
Buy Canadian futures and sell US dollar futures.
It’s expecting Canadian dollars to rise and American dollars to fall…
Exam how would you determine the current yield? Current tax equivalent yield?
Take the interest and divide it by the current value of the bond. If on a case, look at the financial statement.
Take the CY and divide it by 1-Tax Rate
