Investments Flashcards
A __________ is a deposit in any foreign bank that is in dollars
Euro Dollars
Treasury Bills (Tbills)
-riskless
-can mature in 3 mos
-sold by competive bids
-can sell in 1,000,000 increments
EE & Ibonds may receive tax benefits upon redemption for qualified education expenses
GNMAs Government National Mortgage Association
(Add data)
Large Cap
10 billion+
GICs
CDs issued by insurance company
*Interest rate risk
What is daily limit?
Max permissable price increase/decrease relative to settlement prev day
What is non-diversafiable risk?
Systematic risk
Negative correlated w/ returns on financial assets?
Collectibles (antiques)
Precious metals (gold stocks)
Natural resources (oil & gas private placement)
Yes Fed Tax on Fed Ibond, no state/local tax. See ex
5% x (1-.25). 25% Fed, 5% coupon bond
= 3.75%
Anomalies
Neglected Firm Effect
Value Line Phenomenon
Small Firm Effect
Current Ratio =
Current Ratio = cash equiv + MM +Ckg+GNMA / AP + C/C debt
Stock
Resistance Lvl. High $
Support Lvl Low $
Dow Jones is price weighted
Put
Call
Locking in sell price
Only exercise if stock is selling at lower price
Call locks in buy price
REITs (add data)
- /. 500. /50
per person. all incident. prop dmg
$300k $500k $50k
$75k claim w/ no deduction would be covered 100%
DNI
-provide trust deduction for amount distributed to benes
-limit the portion of the distribution that is taxable to benes
-ensure character remains the same
Black Scholes (add data). capstone quiz inv #31
Systematic Risk (non-diversifiable risk)
P-urchasing power
R-einvestment rate
I-nterest rate
M-arket
E-xchange
Investment companies -closed end fund can trade at a premium of discount to their ________
NAV
REITs are not redeemable. They are negotiable and traded on exchanges
What to do if you’re bearish on a stock?
Buy a put and Sell the stock short
Find standard deviation of portfolio:
Stock A: Risk 9.5%, return 10%
Stock B: Risk 12.5%, return 8%
Choose answer below 11%
Shortcut: take average of risk and choose the number just below that
9.5 + 12.5 = 22, divided by 2 = 11
Which stock is riskier?
Stock A: average mean 8%, std dev 10%
Stock B: average mean 4%, std dev 6%
Stock B:
To determine riskier, we need relative meaure of variability.
Stock 1: 10/8=125% (std dev divided by mean)
Stock 2: 6/4=150%
What is the callable duration of a BB rated bond with 10 year call provision and 20 year maturity? The bond has 5% coupon and is selling for $990 when comparable bonds are paying 6%
A. 7.82
B. 8.02
C. 9.90
D. 10.00
C 9.90
*D 10.00 is WAY TO CLOSE (way to close) to 10 year call.
Efficient Markets - Strong Form
Stock prices fully reflect all information, both public and private.
NOTHING CAN HELP
Efficient Markets - Semi Strong Form
All publicly known information is fully reflected in stock
prices.
INSIDE INFO MAY HELP
Efficient Markets - Weak Form
historical price data is already reflected in current stock prices and is of no value in predicting future. No technical analysis.
FUNDAMENTAL MAY HELP
Large cap ____ billion
Mid cap ____ billion
Small cap _____ billion
Micro cap _______ million
10 billion +
2 - 10 billion
< $2 billion
<$300
Preferred stock acts like a _________
Bond. $25 or $100 par
Pays in perpetuity
What is a GICs?
like CDs issued by insurance companies.
Not subject to interest rate risk? NO
REITs
-at least 75% of REIT’s income must come for real estate investments
-must distribute 90%+ of income
-cannot invest in limited partnerships
RELP - passive income
non publicly traded
illiquid
What files with SEC?
Corporate Annual Report
10Q
10K
Form 1120
10Q and 10K
Annual report goes to stockholders
Form 1120 is corp federal income tax return
Call up (right to buy), expect to go UP
Put down (right to sell), expect to go DOWN
A put with exercise price of $30. Market Price of $25. Intrinsic value is $30-$25 = $5. It’s $5 in the money.
Conversely, exercise price of $30. Market Price of $35. Intrinsic value cannot be zero so it has no intrinsic value
Call option taxation is always short or long term cap gain?
**not sure about this. Investments 3-6
Short if it lapses, calls are 9 mos.
UNLESS there are both gains…then you have to keep separate.
UNLESS the covered call was exercised…then you can net them.
IF IT GETS CALLED AWAY, the character is tied at the hip
Always $100 lots
LEAPs
Long term equity antiicpation securities
usualy on an index like s&P 500
if you have the Crop…You are going to go long or short?
Short
If you need the crop…go ______-
LONG. if you’re longing for it, go long!
Protect your profit, you buy a ______
PUT
Company issues warrants. Not standardized.
Maturities of several years
No intrinsic value
Collectibles are taxed at long term _____% rate
28%
Private Placement (reg D). What is 1-2-3 test
1mil (accredited investor)-$200k (single)-$300k (joint)
35 or less non accredited
Buying a “call” girl - unlimited profit potential
In rising market: buy a call-girl and sell one who is putting out
Buy a call. and. Sell a put
If you have a lot of the commodity - go SHORT (sell)
The most buyers of call and sellers of call can make it the premium
Immunizing a portfolio
match duration to time horizon
Stock collar option
hedging.
Sell a call at one price (out of the money strike price)
Buy a put at a lower strike price (out of the money put)
Investor hows 3 positions simultaneously:
1. long in the stock (owns it)
2. sold call and rec’d premium
3. owns stock and paid premium
Brian Brave buys 1,000 shares of high-flying Internet stock at $60. The initial margin is 50%. His broker/dealer requires a 30% maintenance margin. Below what trade price do you tell Brian to expect a margin call?
A. $18
B. $30
C. $40
D. $44
E. $42.85
$42.85
1-.50 x $60 = .5 x 60 = $42.85
1-.30 .7
Margin requirement= (1-initial margin %) x purchase price of stock
(1-maint margin %)
Risk Tolerance
vs
Risk Capacity
Tolerance: how fast you prefer to go
Capacity: how fast they need to go
Beta is the measure of volatility
lower Beta - lower volatility
Arbitrage pricing theory (APT)
changes are due to unexpected changes
if factor is ZERO then it is expected or anticipated
CAPM
CML - Risk/return relationship (sigma)
macro view
SML - quantified risk/return (beta)
micro view
r(i) = r(f) + [r(m)-r(f)]B
Black Scholes - valuation model
increase in exercise price of a call, decreases the call’s value
Call option - what is intrinsic?
COME
Call option Market - Exercise
Intrinsic value is Market $ minus Exercise $
Binomial option
this model is alternative to black scholes.
says stock can be two possible values at the option expiration
Systematic Risk - PRIME
This Beta
Purchasing power risk (inflation)
Reinvestment risk
Interest rate risk
Martket risk
Exchange risk
Unsystematic Risk
can largely be eliminated.
Business risk
Financial risk
Total Risk is measured by
Sigma
MPT Modern Portfolio Theory
Diversification is your buddy
MPT. *Mix portfolio!
Risk adverse - steep indifference curve
*chickens need more incentive to take the risk
Modern portfolio theory expresses a risk-return relationship based on which of the following?
CML
What is the most important consideration relative to the Markowitz efficient frontier?
Risk
The Random Walk Hypothesis suggests which of the following:
That the next price change of a stock is unrelated to the last price.
What is the NOI? Net operating income?
Rental Income + Coin Income - vacancy - operating expenses = NOI
What is the Intrinsic value if cap rate is 12%?
$1,196,666. (NOI / Cap rate (12%)
Headge
When do you buy short hedge?
long?
Short -stop the slide. You fear prices will go down
Long - lock it in. You fear prices will go up
*Hedge the nightmare
Processors go long (buy the futures contract)
Growers go short (sell the futures contract)
Coefficient of Variation is Std Dev divided by the Average
Pos 1 - high correlation coeff (P-rho)
Neg 1 - opposite correlation coeff (P-rho)
*If question ask if p/f mgrs need -1’s to build diverse p/f that is WRONG!
They actually look for low positives
Beta measures -
addresses systematic risk. How volatile is this?
Standard deviation measures
variability
What is the Z score?
return outcomes within 1 std dev have Z scroe of 1
2 =2
3=3
What is the geometric mean over the 3 yrs if returns were 18%, 10%, -30%?
-3.14%
.9086 is the result of multiplying the three returns 1.18 x 1.10 x .70. that is FV, the -1 PV, 3N = -3.14
Holding period return (HPR)
Doesn’t consider time of return.
HPR = what you sold it for + what happened - what you paid
________________________________________________________
what you paid
Short cut for duration
Bond with coupon - duration is shorter than maturity
no coupon - duration equals maturity
*Longer duration, the greater volatility
gift leaseback is more for transferring income to a family member (not property)
What is max % of AGI for CASH charitable gifts?
What about securities?
60% for cash
Max is 50% if appreciated securities are valuated at basis. If FMV is used for appreciated securities, the 1st year deduction is limited to 30% of AGI.
Given the increased standard deduction, which, if any, of the following strategies would enable a charitable minded client to get the most productive tax deduction from charitable giving?
Bunching charitable deductions and DAF
The 2017 Tax Cuts and Jobs Act repealed the dependency exemption.
No casualty/insurance coverage due to theft (only federally declared) even with an articles floater
Sole prop operator can claim a below the line deduction of ___% of QBI
Phase out threshold is $483,900 (taxable income) and it moves to lessor of _______?
20%
20% OR 50% of W2 wages
Child Tax Credit of $2k Joint adjusted income phase is what joint income?
$400k
Mortgage rates are reset by using the SOFR (secured overnight financing rate)
Provisional Income chart
————-50% 85%
sgl. 25k 34k
mfj 32k 44k
*Couple making 82k, they are at 85%. 85% of SS income!! (not PI)
*Single person making 22k, they are at 50% of SS income
Provisional income =. AGI. + Muni Bd int. +. 1/2 SS benefits
