Investments Flashcards
Margin Trigger Price Shortcut
Maintenance 25% = 2/3 buy price
Maintenance 30% = 2/3 buy price, then pick next highest #
Margin Call Formula
(1-initial margin % / 1-maintenance %) x Purchase price of stock
Holding Period Return Formula
[Sold for +- (What happened while holding) - OOP Cost] / OOP Cost
Identify Forumla & Symbols
COVij / σiσj
Correlation Coefficient
COVij = covariance
σ = stock standard deviation
Choosing between Sharpe, Treynor, Alpha
R squared > 60: Choose Highest Alpha
(If no Alpha, highest Treynor)
R squared <60: Highest Sharpe
Current Yield Formula
Annual Int. in $ / Current Market Price
Real Estate Intrinsic Value Formula
NOI / Cap Rate
DDM Shortcut: 1st Grow Rate > 2nd Grow Rate
- Apply D(1+g) / (r-g) to 2nd rate
- Choose next HIGHEST answer from 1. calc
REMEMBER: 1st rate HIGHER, next HIGHER answer
DDM Shortcut: 1st Grow Rate < 2nd Grow Rate
- Apply D(1+g) / (r-g) to 2nd rate
- Choose next LOWEST answer from 1. calc
REMEMBER: 1st rate LOWER, next LOWER answer
DDM for Stock Value
D(1+g) / (r-g)
D = this year’s div.
r = req. ROR
g = growth rate
*Use decimals
Identify Formula & Symbols
rf + (rm-rf)B
Required Rate of Return AKA SML
rf = risk-free rate
rm = market return
B = Beta
Is used for the “r” in D(1+g) / (r-g)
*Use whole numbers
Identify Formula & Symbols
[D(1+g) / P] + g
Required Rate of Return
D = this years div
g = growth rate
P = stock price
Use when rf, rm not given
*Use decimals
-D[∆y / 1+y]
Change in bond price
D = duration
∆y = change in interest rate
y = YTM
Duration always entered as negative
*Use decimals
Stock Standard Deviation
(Covariance given)
σj = COVij / Pijσi
COVij = covariance
Pij = correlation coefficient
σi = stand dev of known stock
solve for σj
CML vs SML
CML = expected return on fully diversified portfolio
SML = expected return on any asset, security
Bond Conversion Value Formula
(Par value / conversion price) x FMV of stock
Covariance v. Correlation Coefficient
Covariance tells the direction of a relationship (positive or negative)
Correlation Coefficient tells direction and strength
Duration Relationships
Duration ↑ YTM ↓
Duration ↑ Mkt. Int. Rate↓
Duration ↑ Coupon↓
Duration ↑ Yrs. to Maturity↑
NOI Formula
Gross Rental
+ Non-rental income
- Vacancy/collection loss
- Operating expense
= NOI
Geometric Mean Calc
“Time Weighted Return”
Step 1: +1 to all decimal returns
Step 2: multiply returns together = A
FV = A
PV = -1
N = Yrs. of investment
Solve for = I/YR
Risk Adjusted Return Formula
Return / β
Identify Formula & Symbols
Pijσiσj
Covariance
P = correlation coefficient
σ = stand dev of stock(s)
Identify Formula & Symbols
Pijσi / σm
Beta
Pij = correlation coefficient
σi = stand dev of stock
σm = stand dev of market
Standard Deviation Calc
(single investment)
*Year return ± ∑
Gold, 8 key = stand dev
*apply for each year return given
What does Sharpe ratio measure?
Excess return over standard deviation
Must be used in comparison to another portfolio/fund
EMH
- Strong
- Semi-strong
- Weak
- All known info reflected in stock price - fundamental/technical analysis no good
- All public info reflected in stock price - only insider info can beat mkt.
- Price reflects past results only - fundamental analysis can beat mkt.
Elements of systematic risk?
Diversification won’t eliminate!
“PRIME”
Purchasing power
Reinvestment
Interest Rate
Market
Exchange Rate
When is a Call Option…
1. In the money
2. Out of the money
- MP > EP = IN
- MP < EP = OUT
When is a Put Option…
1. In the money
2. Out of the money
- MP < EP = IN
- MP > EP = OUT
What creates greater bond price volatility?
SMALLER coupon
LONGER term to maturity
LOWER mkt interest rate
Call option Intrinsic Value
MP - EP
Put Option Intrinsic Value
EP - MP
What does Treynor ratio measure?
Excess return over portfolio Beta
Higher Treynor # is better
Jenson/Treynor Keys
- Risk measured in BETA
- Volatility
- Systematic risk
PE Ratio Formula
Price / EPS
ROE Formula
EPS / Book Value
Note: Book Value = Assets - Liabilities
Bond Intrinsic Value Calc
(END MODE) (2 P/YR)
FV = Face Value (par)
PMT = (annual coupon/2)
N = Yrs to maturity
I/YR = Comprable yield
Solve for PV
Coefficient of Variation Formula
Stand Dev / Mean Return
Relative risk per unit of return; ↑# = More Risk
IRR Calc
“Dollar Weighted Return”
- Enter Purchase Price (-), CFj
- Enter all Inflows/Outflows ±, CFj;
- Gold, IRR/YR
Sharpe Ratio Keys
- Risk measured in Standard Deviation
- Variability
- Unsystematic risk
Real ROR Formula
[(1 + return) / (1 + inflation)] -1 x 100
Note: “1 +” always use decimal
Identify Forumla & Symbols
rp - [rf+(rm-rf)β]
Alpha
rp = portfolio return
rf = risk-free return
rm = market return
β = beta
Note: (rm-rf) = “market premium”
*Use whole numbers
Dividend Payout Ratio Formula
Dividend Paid / EPS
Bond YTM Calc
(END MODE) (2 P/YR)
PV = (-)FMV of Bond
FV = Face Value (par)
PMT = (annual coupon/2)
N = Yrs to maturity
Solve for I/YR
Accredited Investor Qualifications
“1-2-3”
$1mil net worth (no primary residence)
or
$200k income SINGLE
$300k income MFJ
Corporate & Municipal Bond Risk
“DRIP”
Default
Reinvestment
Interest Rate
Purchasing Power
Options
1. Bullish
2. Bearish
Bullish:
1. BUY CALL / SELL PUT
Bearish:
2. SELL CALL / BUY PUT
What does Jenson measure?
“Alpha”
Contribution of a portfolio manager - requires a diversified portfolio
Government Bond Risk
“RIP”
Reinvestment
Interest Rate
Purchasing Power
Yield Ladder
“YMCA”
Bond at Discount:
Y - Yield to Call
M - Yield to Maturity
C - Current Yield
A - Annual (nominal) yield
Bond at Premium:
A - Annual (nominal) yield
C - Current Yield
M - Yield to Maturity
Y - Yield to Call
Tax Equivalent Yield (TEY) Formula
Fed/Muni Yield / (1-tax you don’t pay)
Example: Muni yield / (1- Fed tax rate)
After-tax Yield Formula
(Tax Exempt Yield)
TEY × (1-marginal rate)
Reg. D Keys
(Private Placement)
- Unlimited accredited investors
- Max. 35 non-accredited
- Accredited = $1mil. net worth (no primary residence)
- $200k AGI single; $300k AGI MFJ
- Non-accredited must sign investment letter or need purchaser rep.
Futures Hedge Keys
- Selling a commodity in the future
- If ABUNDANT, hedge SHORT
- Buying a commodity in the future
- If SCARCE, hedge LONG
LEAP Keys
- Expiration 9mo - 3yr
- After exercising, must hold stock >1yr for LTCG
REIT Tax Keys
- Conduit Status
- Min. 75% of income from Real Estate
Investments - Min. 90% net income distributed
- Min. 75% of income from Real Estate
- Income dist. are ordinary dividends
- May qualify for QBI deduction up to 20%
- Good for tax-deferred accts.
UIT Keys
- Generally unmanaged
- Passive investments, assets are frozen
- Self-liquidating, funds are distributed to Unit holders, not reinvested
CMOs Keys
- Payments distributed on “Cash Flow” basis
- Z Tranche
- No coupon, most risk
- Receives PMT last
- High duration
I Bond Keys
- Non-marketable, nontransferable, can’t be used for collateral
- Two Interest rates
- Fixed base rate
- Inflation adjusted rates (every 6mo.)
- Sold at face value
GNMA v. FNMA/FHLMC
G-NMA: Guaranteed by Fed. gov’t
F-NMA/FHLMC: Fucked. Not guaranteed
Treasury Maturities
- T-BILL: 3, 6, 12mo.
- Notes: 1-10yr.
- Bonds: 10-30yr.
Identify Forumla & Symbols
COVim / σm^2
BETA
- COVim = Covariance of stock to market
- σm = Standard Dev. of market
Risk Tolerance v. Risk Capacity
Risk Tolerance = Risk investor is comfortable taking
Risk Capacity = Risk investor must take to reach goals
Bond Duration Shortcut
If you have a coupon, duration has to be less than maturity (you’re getting $ before the bond matures)
Choose a duration that makes common sense relative to coupon PMT
Bond Immunization
Avg. duration (not maturity) is = Goal time horizon
Efficient Frontier Keys
- Points along the frontier are efficient portfolios; highest return for risk taken
- Points below the frontier are feasible but not efficient
- Points above the frontier are not feasible
- Indifference curve = Investor preference, tangent to frontier; Optimal portfolio for that investor
What is the intersection of the CML called?
Rf (Risk-free, 100% T-Bills)
What is the point of tangent on the CML?
Optimal risky portfolio (proportional % of all risky assets)
What happens if a portfolio moves from point of tangency to Rf?
Investor sells risky assets & buy T-Bills
Relationship of assets to SML
OVER the line = Undervalued; BUY
UNDER the line = Overvalued; SELL
Identify Forumla & Symbols
(rm-rf)β
Stock risk premium
rm = market return
rf = risk-free return
β = Beta
*Use whole numbers
Identify Forumla & Symbols
(rm-rf)
Market risk premium
rm = market return
rf = risk-free return
*Use whole numbers
Random Walk Theory
- Price changes are unpredictable
- Patterns are accidental
Efficient Market Anomalies
- P/E Effect: Low P/E outperform
- Small-firm: Small COs = Higher returns
- Jan. Effect: Stocks rally in January
- Neglected Firm: Less-followed earns extra
- Value Line: Top-rated predicts outperformance
Technical Analysis Approaches
- Dow Theory
- Barron’s Confidence Index
- Mutual Fund Cash Position
- Advance/Decline Line
- Moving Avg. (200 Day)
- Investment Advisor opinions
Formula & Symbols
βσm / σi
Correlation Coefficient
β = BETA
σi = Standard deviation of investment
σm = Standard deviation of market
GIC Keys
Guaranteed Insurance Contracts
- Like a CD, Issued by an Ins. Co.
- 2-5yr Term
- Popular with DB Plans
- No interest rate risk
Bond Duration Shortcut
If you have a coupon, duration has to be less than maturity.
Choose a duration that makes common sense relative to the coupon PMT
Bond Immunization
Average Duration (not maturity) = Goal time horizon
Formula & Symbols
[D(1+g)/P] + g
Required Rate of Return
D = This year’s dividend
g = growth rate
P = Stock price
Use when rf, rm not given
Preferred Stock Keys
- Issued at $25 par or $100 par
- Pays FIXED dividend rate
- Cumulative preferred = missed dividends must be made up
- Suitability: Corporations with excess funds
(Dividend is 50% tax-excluded)
REIT Keys
- Invest in income-producing properties
- Can’t invest in LPs
- Income generated from rental
Mortgage REIT Keys
- Make loans to develop property, finance construction
- Vulnerable to purchasing power risk
- Produce substantial taxable income
CALL Option Taxation
SELLING:
- Option Lapses: Premium = STCG
- Option Exercised: Premium + Sale Price
BUYING:
- Not Exercised: Premium Paid = STCL
- Exercised: Premium + Basis
Formula & Symbols
σj = COVij / Pijσi
Standard Deviation
COVij = Covariance
Pij = Correlation Coefficient
σi = Stand Dev of known investment
What is the basic concept of MPT
Quantify the relationship between risk and return
