Investments Flashcards
Lower Risk Investments
Cash and money market securities
Treasuries
Investment grade bonds (BAA or BBB and higher)
Higher Risk Investments
Stock
Junk Bonds
Options, Futures, and Forwards
Small cap and growth funds
Factors that influence an investor’s capacity for risk
Time horizon
Liquidity needs
Total investable assets
Probability of a return falling within 1 standard deviation of the average
68%
Probability of a return falling within 2 standard deviations of the average
95%
Probability of a return falling within 3 standard deviations of the average
99%
Positively skewed
many outliers in the upper, or right tail
Negatively skewed
many outliers in the lower, or left tail
Kurtosis
a statistical measure that describes when a distribution is more or less peaked than a normal distribution
mesokurtic
Normal distribution
leptokurtic
A distribution curve that is more peaked than normal (slender)
platykurtic
A distribution curve that is less peaked than normal (broad)
EMT, Strong Form
Technical analysis, fundamental analysis, and insider information do not work because the market is just that efficient
EMT, Semi-Strong Form
Technical and fundamental analysis do not work because everything except for insider information is priced in
EMT, Weak Form
Fundamental Analysis and Insider Information can allow an investor to outperform
Anomalies to the EMT
- Low P/E Effect
- Small Firm Effect
- Neglected Firm Effect
- January Effect
- Value Line Phenomenon
The efficient frontier curve
identifies the optimal amount of return given a unit of risk taken
Risk measure for the efficient frontier
standard deviation
points below the efficient frontier curve
inefficient
points above the efficient frontier curve
impossible
the curve for risk averse investors
steep - need more potential return for more risk
the curve for risk tolerant investors
flat - will take more risk for incremental potential return
What must be done to open a margin account?
- Make an application
- Broker accepts the application
