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Patrick CFP > Investments > Flashcards

Investments Flashcards

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CFP® flashcards
1
Q

Lower Risk Investments

A

Cash and money market securities
Treasuries
Investment grade bonds (BAA or BBB and higher)

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2
Q

Higher Risk Investments

A

Stock
Junk Bonds
Options, Futures, and Forwards
Small cap and growth funds

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3
Q

Factors that influence an investor’s capacity for risk

A

Time horizon
Liquidity needs
Total investable assets

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4
Q

Probability of a return falling within 1 standard deviation of the average

A

68%

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4
Q

Probability of a return falling within 2 standard deviations of the average

A

95%

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5
Q

Probability of a return falling within 3 standard deviations of the average

A

99%

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6
Q

Positively skewed

A

many outliers in the upper, or right tail

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7
Q

Negatively skewed

A

many outliers in the lower, or left tail

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8
Q

Kurtosis

A

a statistical measure that describes when a distribution is more or less peaked than a normal distribution

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9
Q

mesokurtic

A

Normal distribution

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10
Q

leptokurtic

A

A distribution curve that is more peaked than normal (slender)

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11
Q

platykurtic

A

A distribution curve that is less peaked than normal (broad)

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12
Q

EMT, Strong Form

A

Technical analysis, fundamental analysis, and insider information do not work because the market is just that efficient

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13
Q

EMT, Semi-Strong Form

A

Technical and fundamental analysis do not work because everything except for insider information is priced in

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14
Q

EMT, Weak Form

A

Fundamental Analysis and Insider Information can allow an investor to outperform

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15
Q

Anomalies to the EMT

A
  1. Low P/E Effect
  2. Small Firm Effect
  3. Neglected Firm Effect
  4. January Effect
  5. Value Line Phenomenon
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16
Q

The efficient frontier curve

A

identifies the optimal amount of return given a unit of risk taken

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17
Q

Risk measure for the efficient frontier

A

standard deviation

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18
Q

points below the efficient frontier curve

A

inefficient

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19
Q

points above the efficient frontier curve

A

impossible

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20
Q

the curve for risk averse investors

A

steep - need more potential return for more risk

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21
Q

the curve for risk tolerant investors

A

flat - will take more risk for incremental potential return

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22
Q
A
23
Q

What must be done to open a margin account?

A
  1. Make an application
  2. Broker accepts the application
24
Q

Collateral

A

The underlying securities for your borrowed money

25
Q

Margin interest

A

Indexed to broker call rate

26
Q

Minimum Equity

A

The FED sets maximum debt standards for initial margin purchase and ongoing margin equity levels

27
Q

Minimum federal stock initial margin requirements

A

50%

28
Q

Minimum federal maintenance margin requirements

A

25%

29
Q

Margin Call Price

A

(1 - initial margin) / (1 - maintenance margin) x Initial Purchase Price

30
Q

Yield Curve

A

plots the rates of fixed income securities vs length

31
Q

shape of the yield curve when rates of short-term and long-term paper are similar

A

flat

32
Q

normal yield curve

A

upward sloping (short term is lower than long term)

33
Q

downward sloping yield curve

A

inverted (rates of short term paper are higher than long term paper)

34
Q

area of focus for a yield curve inversion

A

2yr and 10 yr treasuries

35
Q

valuation of bonds is based on

A
  1. Coupon
  2. Market rate of interest
  3. Time to maturity
    (4. Maturity value)
36
Q

Teeter totter order of yields

A
  1. Coupon
  2. CY
  3. YTM
  4. YTC
37
Q

Nominal yield

A

stated or coupon yield

38
Q

Current yield

A

income / current price

39
Q

Bonds at a premium are ___ par value

A

above

40
Q

Bonds at a discount are ___ par value

A

below

41
Q

Duration

A

time to recoup your money on a bond investment

the weighted avg of the PV of the future CF of a bond/portfolio

42
Q

YTW

A

yield to worst, the lower of YTM and YTC

43
Q

YTM

A

yield to maturity

44
Q

YTC

A

yield to call

45
Q

Units of duration

A

years

46
Q

Normal bond duration

A

shorter than maturity

47
Q

Zero-coupon bond duration

A

same as maturity

48
Q

Duration ___ with maturity

A

Increases

49
Q

Higher coupons = ___ duration

A

Shorter

50
Q

Use for duration

A

estimate changes in bond prices based on hypothetical changes in prevailing rates

51
Q

Lower time to maturity = ___ duration

A

Shorter

52
Q

Relationship between interest rates and bond prices

A

inverse

53
Q

Longer duration, lower coupons are ___ sensitive to changes in rates

A

more

54
Q

Shorter duration, higher coupons are ___ sensitive to changes in rates

A

less

55
Q

The best indicator for changes in bond price

A

convexity, not duration

56
Q

Linear estimate of sensitivity to changes in rates

A

Duration

Patrick CFP (15 decks)

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