Investments Flashcards
Accredited investors
(appendix)
FINANCIAL CRITERIA
Net worth over $1 million, excluding primary residence (individually or with spouse or partner), or, Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year.
PROFESSIONAL CRITERIA
Investment professionals in good standing holding the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82), or, Directors, executive officers, or general partners (GP) of the company selling the securities (or of a GP of that company), or, Any “family client” of a “family office” that qualifies as an accredited investor, or, For investments in a private fund, “knowledgeable employees” of the fund.
Benchmarks
Large US stocks: S&P 500
Small US stocks: Russell 2000
All pub traded US: Wilshire 5000
Developed nonUS: MSCI EAFE
Emerging nonUS: MSCI EM
US Bonds: Barclays cap agg bong
Public traded REITS: DJ US Select REIT
Commodities: Deutsche bank liquid comm
Cash: 3 month Tbill
Lg US stocks & bonds: Vang Bal Index VBIAX
Bond prices Sensitivity to changes in rates
The longer the duration and the lower the coupon the more sensitive to changes in rates
The shorter the duration and the higher the coupon the less sensitive to changes in rates
Bond relationships
The smaller the bonds coupon,
the greater the relative price fluctuation
The lower the reinvestment rate risk
The lower the interest rate the greater the relative price fluctuation
The longer the term to maturity the greater the relative price fluctuation
Higher inflation = higher interest rates = lower bond values
Bond yields and pricing
Think about that seesaw!
Cy = annual income or interest /current mkt price
Ytm and ytc use TVM, compute I/y
When deciding to invest take ytw yield to worst the lower of ytc or ytm
Remember yield to call is at the end of the seesaw on the right
When the bond is trading at a discount yield to call is the highest figure
when the bond is trading at a premium yield to call is the lowest figure
Bonds: discount and premium
Remember if the current yield is more than the coupon it is a discount Bond
That is it would be trading for less than par now since the coupon is less than what you can currently get in the market
Mean and std deviation: Calculate
(And beta and r if two data sets )
2nd 7 (Data)
Enter data set
If only 1 set hit down arrow two times
If two sets can enter both
When done 2nd8 (stat)
Down arrows
N is number in set
X mean (simple average)
Sx is std deviation
Further down is beta and r when entering a 2nd data set
CAPM
A model to price an individual security or portfolio
An investors expected or required rate of return
CAPM components
Risk-free rate plus the stock risk premium equals capm
Market risk premium
Market rate minus risk free rate
Stock mkt premium is
market risk premium times beta
Options: Collar
“zero cost” collar
Bullish
Protective put + short the call
Long the stock, long the put, short the call
$ from selling the call goes towards paying for the put
So I own the stock, buy/own a put and I sell a call
This is probably done because the investor has concentrated their position and the financial planner thinks it’s risky so they do this since since the client won’t diversify more
It’s not really zero cost cuz puts are generally more expensive than calls. So I’m paying more for the put then I’m generating from selling the call but premiums earned on selling call does help offset it
They also say a collar strategy is writing out of the money calls and buying out of the money puts
Stocks. Correlation. R
Used to compare two stocks or a stock and the market therefore it can give you a stock’s return relative to the market
I can calculate DATA function
Options. Covered call
Know it
Long the stock, short the call
Generate income for the portfolio
I own the stock and with my call I have an obligation to sell but I don’t think the price is going up in near term
I’m bearish in near term but bullish in long term that’s why I’m keeping my stock.
Bonds: Current yield on a bond
Annual income divided by market price
Also remember the seesaw and if price is at or below par and order of yields. Can often get right without calculating. Plus use as a sanity check after calculating!
Bonds: Dividend calc
If they simply ask to calculate the dividend at the end of the year. Take the current dividends divided by the shares times 1 plus the growth rate.
Bonds. Duration
Calculate change in bond price based on duration
CFP provided formula
Y in denominator is ytm
Bonds. Duration relationships
Higher coupon =lower duration= lower interest rate risk
As interest rate decreases, duration increases.
As interest rates increase duration decreases.
Generally speaking, for every 1 percentage-point change in interest rates, a bond will rise or fall in the opposite direction by an amount equal to its duration number
Bonds. Duration shortcut
Don’t choose the answer closest to the number of years to maturity select one down from the closest . Example from Zahn below
if the years to maturity are 5 and the answers are
5 4.6 4.17 and 3.18
…select 4.6
Dwrr/IRR
Affected by timing and size of cash flows
CF wksht
CF, 2nd clr work
Watch signs!
Cf0 = initial outflow
Cf1 etc
Then down arrow
IRR CPT
Investments negative
Dividends, selling price positive
Sometimes two CF in that same last year. Enter net.
Map it out on paper first
Economic Indicators: coincident
(Appendix)
Coincident indicators tend to change at the same time as the economy:
Employees on non-agricultural payrolls Personal income less transfer payments Industrial production Manufacturing and trade sales
Economic indicators: Leading
(Appendix)
Leading indicators tend to rise and fall in advance of the economy:
Average weekly hours of production workers (manufacturing) Initial claims for unemployment insurance Manufacturers’ new orders Percentage of companies reporting slower deliveries New orders of non-defense capital goods New private housing starts Yield curve S&P 500 Money supply (M2) growth rate Index of consumer expectation
Bonds. Effective rate on bonds
2nd 2
Arrows to scroll through
Enter nominal rate
Enter comp per /year
Hit CPT when on effective rate
Efficient Frontier
Return relative to Std deviation
Inefficient below curve
Impossible above curve
Risk averse have flatter curves
where you plot depends on risk tolerance
Steeper part at bottom is for the risk averse. They need more coaxing to get in. Approaching 100% bonds at bottom
Flattered at top is for the risk tolerant . Approaching 100% stocks
Bonds. Using duration to estimate change in price
For each percentage change in the market rate
Percent *years = approx change in price
Use negative for decreasing rates
Holding period return
Basically profit/cost
Includes Price appreciation and dividends in profit
Sometimes asks for just capital appreciation return or dividend return
Numerator
Price-cost+ div - margin interest
Denominator
Cost - $ committed on margin
So on margin your return will be higher bc your cost is lower
