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 AKA “R”
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
What about Cap rate?:
NOI/Intrinsic Value
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
- Diversified
- Standard Deviation
SML
- All assets, diversified or not
- BETA
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: MULTIPLE 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
- Total risk (unsystematic + systematic)
- Non-diversified portfolio
Must be used in comparison to another portfolio/fund
Elements of systematic risk?
Diversification won’t eliminate!
“PRIME”
Purchasing power
Reinvestment
Interest Rate
Market
Exchange Rate
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
(return per unit of systematic risk)
Higher Treynor # is better
Jenson/Treynor Keys
- Risk measured in BETA
- Volatility
- Systematic risk
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
↑# = BAD
(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
- Total 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
Corporate & Municipal Bond Risk
“DRIP”
Default
Reinvestment
Interest Rate
Purchasing Power
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
Muni Yield / (1-tax you don’t pay)
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.
LEAP Keys
- Expiration 9mo - 3yr
- After exercising, must hold stock >1yr for LTCG
Futures Hedge Keys
- Selling an asset
- Potential price decline, hedge SHORT
- Buying an asset
- potential price increase, hedge LONG
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
- Units are sold, not shares
- 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
Identify Formula & Symbols
COVim / σm^2
BETA
- COVim = Covariance of stock to market
- σm = Standard Dev. of market
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 Formula & Symbols
(rm-rf)β
Stock risk premium
rm = market return
rf = risk-free return
β = Beta
*Use whole numbers
Identify Formula & Symbols
(rm-rf)
Market risk premium
rm = market return
rf = risk-free return
*Use whole numbers
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
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
- Max 15% income from GNMAs
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
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
T-Bill Keys
- Maturity: 3mo, 6mo, 12mo
- $100 - $1mil.
- NO RISK
- No coupon, sold at discount
Treasury Note Keys
- Maturity 1yr. - 10yr.
- $1000 - $100k
- RIP risk
- Semi-annual coupon
Liquid Securities
- CDs (short maturity)
- Money market fund
- Life insurance cash value
Marketable Securities
- REITS
- ETFs
- closed end mutual funds
- Stocks, bonds
- Brokered CDs
Standard Deviation vs. BETA
Standard Deviation:
- TOTAL RISK (unsystematic + systematic)
- Variability in a non-diversified portfolio
BETA:
- SYSTEMATIC RISK
- Volatility in a diversified portfolio
Correlation Coefficient/Standard Deviation Shortcut
If Pij < +1
Then Standard deviation will be < weighted average
Shortcut: Add risks and divide by # of investments, choose next LOWEST answer
Wash Sale Keys
30 days ← Date of Sale → 30 days
- Disallowed loss added to the basis of stock purchased during wash period
- Spouse purchases and buying calls count toward disallowance
Ex-Dividend Timeline
Purchase Deadline → Ex-Div Date → Record Date
- Watch for holidays/weekends
When do you use RROR?
When you see “today’s dollars” in a question. Otherwise, disregard inflation.
Time-weighted v Dollar Weighted
Time-weighted evaluates manager performance, disregards cash flows
- How well the INVESTMENT did
Dollar-weighted (IRR) considers additions and withdrawals as part of the return
- How well YOU did
Real return definition
Spread between rates and inflation
