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CFP Exam: March 2013 > Investments > Flashcards

Investments Flashcards

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1
Q

What are the Two Forms of Underwriting?

A

Best Efforts & Firm Commitment

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2
Q

What is Best Efforts Underwriting?

A

The underwriter sells as much of the offering as possible and the company bears the risk

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3
Q

What is Firm Commitment Underwriting?

A

The underwriter buys the entire issuance and bears the risk

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4
Q

What is in a Prospectus?

A

Outlines the risks, management team, business operations, fee & expenses

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5
Q

What is a Red Herring?

A

Preliminary prospectus before SEC approval to gauge investor’s interest

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6
Q

What is a 10k?

A

Annual report of financial statements, is audited

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7
Q

What is a 10Q?

A

Quarterly report of financial statements, not audited

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8
Q

What is an Annual Report?

A

Message from the Chairman of the board summarizing the year and projecting outlook for upcoming year to shareholders

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9
Q

What is Liquidity?

A

How quickly something can be turned to cash without suffering price concession

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10
Q

Are Stocks, Bonds, and Mutual Funds Liquid?

A

No, because they could suffer price concession

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11
Q

What is a Market Order?

A

Timing and speed are more important than price, appropriate for high volume stocks

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12
Q

What is a Limit Order?

A

When you name your buy or sell price and will only accept that or better, appropriate for volatile, thinly traded stocks

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13
Q

What is a Stop Order?

A

The price hits your threshold and turns into a market order

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14
Q

What is a Stop-Limit or Stop-Loss Limit Order?

A

When you set both a stop price and a limit price, when the stop price is met, it turns to a limit order

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15
Q

What is Initial Margin?

A

The amount of equity an investor must have to enter a margin transaction. Typically 50%

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16
Q

What is Maintenance Margin?

A

The minimum amount of equity an investor can have before a margin call

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17
Q

How is Margin Position Determined?

A

Equity (FMV - loan) / FMV = Margin Position

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18
Q

What is the Formula for Determining a Margin call?

A

Loan / (1-maintenance margin)

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19
Q

How does Value Line Rank Stocks?

A

On a scale from 1 to 5. 1 being the best

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20
Q

How does Morningstar Rank Mutual Funds?

A

With 1 to 5 Stars. 5 Stars being the best

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21
Q

What is the Ex-Dividend Date?

A

Two days before the date of record

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22
Q

What is the Date of Record?

A

The day you must be a registered owner to receive the dividend. You must purchase the stock 3 days before this date to get on the records, or 1 day before the ex-dividend date

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23
Q

What Does the Securities Act of 1933 Do?

A

Regulates issuance of new securities & requires new issues are accompanied with prospectuses before purchased

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24
Q

What Does the Securities Act of 1934 Do?

A

Regulates the secondary market & created the SEC to enforce compliance with the law

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25
Q

What Does the Investment Company Act of 1940 Do?

A

Authorizes the SEC to regulate investment companies (open, closed, & UITs)

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26
Q

What does the Investment Advisers Act of 1940 Do?

A

Requires Investment Advisors to register with the SEC or State

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27
Q

What Does the Securities Investors Protection Act of 1970 Do?

A

Establishes the SIPC to protect investors for losses resulting from brokerage firm failures

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28
Q

What Does the Insider Trading and Securities Fraud Enforcement Act of 1988 Do?

A

Defines an insider as anyone with information that is not available to the public.

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29
Q

What are Treasury Bills?

A

Matures in < 1 year & denominations of $1k

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30
Q

What is Commercial Paper?

A

Short term loans between corporations. Matures in 270 days or less, no SEC registration. Denominations of $100k and are sold at a discount.

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31
Q

What are Bankers Acceptances?

A

Facilitates importing/exporting. Matures in 9 months or less. Can be held to maturity or traded.

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32
Q

What are Eurodollars?

A

Deposits in foreign banks that are denominated in US dollars

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33
Q

Name the Topics in an Investment Policy Statement

A 
RRTTLLU
Risk
Return
Taxes
Timeline
Liquidity
Legal
Unique circumstances
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34
Q

How is the Dow Jones Averaged?

A

By price weighting (averaging the prices of all the stocks)

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35
Q

How are the S&P 500, Russell 2000, Wilshire 5000, and EAFE Averaged?

A

Value weighted (market cap incorporated into the average)

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36
Q

What are the Effects of Overconfidence?

A

Increased risk taking & over trading

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37
Q

What is Hindsight Bias?

A

When an investor believes they had predicted an event that they hadn’t. Client may have hindsight bias and be upset their advisor didn’t anticipate events the client “knew” where coming.

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38
Q

What is Anchoring?

A

Investor’s inability to objectively analyze new information. They are “anchored” to the first information they analyzed.

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39
Q

What is Belief Perseverance?

A

People are unlikely to change their views and 1) are reluctant to search for contradicting evidence, and 2) are skeptical of contradicting evidence if they are faced with it

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40
Q

What are the Effects of Regret Avoidance?

A

Selling winners too soon & Holding onto losers too long

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41
Q

What does Herd Mentality Lead to?

A

Buying high and selling low

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42
Q

What is Loss Aversion?

A

Investors prefer avoiding losses more than experiencing gains (avoiding selling a losing investment in hopes it will turn around)

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43
Q

What is Representativeness?

A

Thinking that a good company is also a good investment without analyzing the investment

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44
Q

What are the distances for 1, 2, & 3 Standard Deviations from the Average?

A 
1 = 68%
2 = 95%
3 = 99%
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45
Q

How is Standard Deviation Calculated on a 12C?

A

Return of Years 1-5 = 10%, 13%, 8%, -2%, 14%
Enter: 10 E+, 13 E+, 8 E+, 2 CHS E+, 14 E+, g s
= 6.39

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46
Q

How is Expected Return Calculated Based on Probable Returns?

A

Multiply the returns by their probabilities, then sum them together. (Probability of 5% return is 80% and probability of a 10% return is 50%: 5 x .8 [4%] plus 10 x .5 [5%] = 9% Expected Return)

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47
Q

What is the Coefficient of Variation?

A

A measures of the amount of risk for every unit of return received by dividing the SD into the average return. (SD / average return)

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48
Q

What is Kurtosis?

A

The variation of returns on a distribution curve

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49
Q

What is Leptokurtic?

A

The distribution curve has a high peak and fat tails

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50
Q

What is Platykurtic?

A

The distribution curve has a low peak and thin tails

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51
Q

What is Covariance?

A

The measure of how two securities are related to each other.

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52
Q

When do the benefits of Diversification Begin Measured by the Correlation Coefficient?

A

When the Correlation Coefficient is less than 1

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53
Q

What is Beta?

A

A measure of systematic risk. A securities volatility relative to that of the market.

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54
Q

What is the Easy Calculation of Beta?

A

Securities return / Market return = Beta

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55
Q

When is Beta the Appropriate Measure?

A

For a diversified portfolio with R squared => 70%. SD is for R2 < 70%.

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56
Q

What is the Coefficient of Determination, or R squared?

A

A measure of how much return is due to the market

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57
Q

How is R squared calculated?

A

The correlation coefficient squared

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58
Q

What is the Quick Way of Eliminating Answer Choices from a Portfolio SD Calculation?

A

Use the simple average of the SDs, anything greater than that is wrong.

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59
Q

What is Systematic Risk?

A

Market based, nondiversifiable, economy based risk

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60
Q

What is Unsystematic Risk?

A

Company specific, diversifiable, unique risk

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61
Q

Which Types of Risks are Systematic?

A 
PRIME
Purchasing power
Reinvestment rate
Interest rate
Market
Exchange rate
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62
Q

Which Types of Risks are Unsystematic?

A 
ABCDEFG
Accounting
Business
Country
Default
Executive
Financial
Government/Regulation
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63
Q

What is Purchasing Power Risk?

A

Inflation will erode the amounts of goods & services a dollar can buy today

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64
Q

What is Reinvestment Rate Risk?

A

The risk that an investor will be locked into rates that are lower than current rates

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65
Q

What is Interest Rate Risk?

A

The risk that interest rates will change and impact the price of equities and bonds

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66
Q

What is Market Risk?

A

Impacts all securities in the short term

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67
Q

What is Exchange Rate Risk?

A

Change in exchange rates will impact the price of international securities

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68
Q

What is Accounting Risk?

A

The risk that an auditing firm is too closely tied to the management of a company (e.g. Enron)

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69
Q

What is Business Risk?

A

Risks that are inherent of a particular industry

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70
Q

What is Country Risk?

A

Risks associated with doing business in certain countries

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71
Q

What is Default Risk?

A

The risk of a company defaulting on their debts

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72
Q

What is Executive Risk?

A

The risk associated with the moral & ethical character of the management of a company

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73
Q

What is Financial Risk?

A

The amount of leverage deployed by a firm

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74
Q

What is Government/Regulation Risk?

A

The risk of companies facing new tariffs or restrictions

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75
Q

What is the core of Modern Portfolio Theory?

A

The acceptance of a certain amount of risk for the maximum amount of expected return

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76
Q

What are Indifference Curves?

A

Illustrates the level of return an investor needs to accept certain levels of risk

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77
Q

What Will a Risk Averse Client’s Indifference Curves Look Like?

A

Steep

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78
Q

What will a Risk Seeking Client’s Indifference Curves Look Like?

A

Flat

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79
Q

What is an Optimal Portfolio?

A

The tangent point where the efficient frontier and the client’s indifference curves meet

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80
Q

What is the Capital Market Line?

A

Specifies the relationship between risk and return in all possible portfolios

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81
Q

What measure of risk is used by the CML?

A

Standard deviation

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82
Q

What is the Capital Asset Pricing Model?

A

Calculates the required rate of return using the beta of a security and the expected returns of the market

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83
Q

What is the Market Risk Premium?

A

market return - risk free rate of return

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84
Q

What is the Security Market Line?

A

CAPM defines the relationship between risk and return, the graphically plotted results make up the SML

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85
Q

What is the Information Ratio?

A

Measures the excess return and consistency provided by a fund manager relative to a benchmark

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86
Q

How is the Information Ratio Calculated?

A

(Portfolio return - Benchmark return) / SD of difference between portfolio and benchmark

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87
Q

What is the Treynor Index?

A

A performance measure of how much return was achieved for every unit of risk using beta

88
Q

How is the Treynor Index Calculated?

A

(Portfolio return - Risk free rate) / Beta

89
Q

What is the Sharpe Ratio?

A

A performance measure of how much return was achieved for every unit of risk using SD

90
Q

When would you use either the Sharpe Ratio or Treynor Index?

A

If a fund is not well diversified, use Sharpe. Both are relative measures and must be compared to other Sharpe or Treynor ratios

91
Q

What is Jensen’s Alpha?

A

A measure of how well the fund manager outperformed or underperformed the market

92
Q

How is Jensen’s Alpha Calculated?

A

Portfolio return - CAPM

93
Q

How is Holding Period Return (HPR) Calculated?

A

(Selling price - purchase price +/- cashflows) / purchase price or equity invested

94
Q

How is HPR Calculated when Buying on Margin?

A

Same formula, but purchase price is the owner’s equity and the loan + interest must be subtracted in the numerator. The denominator must be the owner’s equity

95
Q

What is the Arithmetic Average?

A

The simple average (1+2+3/3=2)

96
Q

What is the Geometric Average?

A

The time weighted, compounded rate of return

97
Q

How do you Calculate Geometric Average?

A

Multiply: (1+return x 1+return x 1+return…), then however many returns you enter, enter that number in the 12C and press the 1/x button, then the yx to the left of it

98
Q

What is the Geometric Mean for 3 Years:
Year 1 = 12%
Year 2 = 5%
Year 3 = -2%

A

Keystrokes: 1.12 Enter, 1.05 x, .98 x, 3, 1/x, yx = 4.8%

99
Q

How do you Calculate the Weighted Average Share Price?

A

Sum of all purchase prices / total shares

100
Q

What is Net Present Value?

A

Used to evaluate capital expenditures that will result in differing cash flows over the useful life or investment period

101
Q

How is NPV Calculated?

A

Initial cash flow is entered as CFo, the rest are entered as CFj. The last year should combine the income produced plus the sale price. The discount rate is entered as i, then press the NPV button

102
Q

What is Internal Rate of Return?

A

The discount rate that turns NPV to zero. The compounded rate of return for uneven cash flows

103
Q

How is IRR Calculated?

A

Initial cashflow is CFo, then each cash flow is CFj. The last cash flow should include both the income produced and the sale price. Then press the IRR button.

104
Q

What is the Relationship Between IRR and NPV?

A

If NPV is positive, then IRR > discount rate
If NPV is zero, then IRR = discount rate
If NPV is negative, then IRR < discount rate

105
Q

What is the Dollar Weighted Average?

A

The IRR of an investors cash flows

106
Q

What is the Time Weighted Average?

A

The IRR of an investments cash flows. Mutual fund report on a time weighted average

107
Q

What is Arbitrage Pricing Theory?

A

Pricing imbalances can’t exist for a significant period of time because investors would exploit the imbalances until back to equilibrium

108
Q

What is the APT Model?

A

APT is a multi factor model. Returns are more sensitive to certain factors. SD and Beta are not inputs

109
Q

What are the Steps for Foreign Currency Translation?

A
  1. Determine the cost in foreign currency and convert that to dollars
  2. Determine the gain in foreign currency then convert to dollars
  3. Divide the dollar gains by the dollar cost
110
Q

What is the Dividend Discount Model?

A

Values a company’s stock by discounting future cash flows

111
Q

What is the Dividend Discount Model also known as?

A

The intrinsic value model

112
Q

How is the Dividend Discount Model Calculated?

A

D1 / (required rate - dividend growth rate)

113
Q

How is the Next Period’s Dividend Figured?

A

Current Dividend x (1 + growth rate)

114
Q

What is the Expected Rate of Return formula?

A

(D1 / market price) + growth rate

115
Q

If the Required Rate of Return Decreases, the Stock Price will…

A

Increase

116
Q

If the Required Rate of Return Increases, the Stock Price will…

A

Decrease

117
Q

If the Dividend is Expected to Decreases, the Stock Price will…

A

Decrease

118
Q

If the Dividend is Expected to Increase, the Stock Price will…

A

Increase

119
Q

How do you Determine the Value of a Stock who’s Dividend Payments have a Variable Growth Rate?

A

Use the DDM to value the stock up to the last dividend change. Then use the NPV function in your 12C. The first Cf = 0, the last Cf = dividend + DDM value

120
Q

What is the P/E Ratio?

A

The measure of how much people are paying for every dollar of earnings.

121
Q

When is the P/E Ratio Useful?

A

To value a stock that doesn’t pay dividends

122
Q

How is the P/E Ratio Calculated?

A

Price / EPS

123
Q

What is the PEG Ratio?

A

Compares the stocks P/E Ratio to the company’s earnings growth for the past 3 to 5 years

124
Q

How is the PEG Ratio Calculated?

A

P/E Ratio / 3 to 5 year earnings growth

125
Q

What does a PEG ratio of 1 suggest?

A

The stock is fairly valued
Over valued if > 1
Under valued if < 1

126
Q

What is Book Value?

A

The amount of stockholder equity, or how much shareholders would receive if the company was liquidated

127
Q

How is Book Value Useful?

A

If the stock price is significantly above the book value per share, the it suggests the firm is overvalued

128
Q

What is the Dividend Payout Ratio?

A

The amount a company pays in dividends to the amount of earnings.

129
Q

How is the Dividend Payout Ratio Determined?

A

Common stock dividend / EPS

130
Q

What does a High Dividend Payout Ratio suggest?

A

The company is mature and/or the possibility of the dividend being reduced

131
Q

What is Return on Equity?

A

The overal measure profitability of a company

132
Q

How is ROE Determined?

A

EPS / Shareholder equity per share

133
Q

What is the Dividend Yield Formula?

A

Dividend / Stock Price

134
Q

What is Dollar Cost Averaging?

A

Investing the same amount of money on a periodic basis regardless of the stock’s price

135
Q

How is the Average Cost Per Share Determined?

A

Total the cost over the period, and divide by the number of shares bought over the same period

136
Q

If Trading Volume is High and the Market Goes Up, Investor Sentiment is…

A

Positive

137
Q

If Trading Volume is High and the Market Goes Down, Investor Sentiment is…

A

Negative

138
Q

If Trading Volume is Low and the Market Goes Up, Investor Sentiment is…

A

Negative

139
Q

If Trading Volume is Low and the Market Goes Down, Investor Sentiment is…

A

Positive

140
Q

What is “Short Interest”?

A

The amount of shares sold short. If there are a lot, there is a “pent up” demand to make the short position whole

141
Q

What is Odd Lot Trading?

A

Trades less than 100 shares, done by small investors. Assuming most small investors are wrong, then do the opposite of what they are

142
Q

What is Breadth of the Market?

A

The number of rising stocks in a market vs declining stocks

143
Q

What is the Advanced Decline Line?

A

The difference between stocks that closed up vs stocks that closed down

144
Q

What is Acceptable to Weak Form EMH?

A

Fundamental analysis and inside information

145
Q

What is Acceptable to Semi-Strong Form EMH?

A

Only insider information. Rejects fundamental analysis.

146
Q

What is Acceptable to Strong Form EMH?

A

States that stock prices reflect all available information and reacts immediately to any new information. Rejects fundamental analysis and inside information.

147
Q

What is Tactical Asset Allocation?

A

When an investor determines the expected returns for asset classes and rebalances to take advantage of those returns

148
Q

Which US Treasury Securities are nontaxable at State and Local Levels?

A

All

149
Q

Name the Nonmarketable US Treasury Issues

A

Series EE/ Series E Bonds
Series HH/ Series H Bonds
Series I Bonds

150
Q

How often does a Series EE Bond Pay Interest?

A

Never, sold at 50% discount and redeemed at face value

151
Q

When is Interest Taxed for a Series EE Bond?

A

Not until redeemed, and only at the Federal Level

152
Q

How often does a Series HH Bond Pay Interest?

A

Semiannually

153
Q

What is a Series I Bond?

A

Inflation Indexed, the interest payment is adjusted for inflation every 6 months

154
Q

Name the Marketable US Treasury Issues

A

US Treasury Bills
US Treasury Notes
US Treasury Bonds

155
Q

How often Does a Treasury Bill Pay Interest?

A

Never, bought at discount and mature at par

156
Q

What is the Maturity of a Treasury Note?

A

2 - 10 years

157
Q

What Denominations are US Treasuries Sold?

A

$1,000

158
Q

What is Phantom Income?

A

With a zero coupon bond, tax on interest must be paid every year even though no interest is actually received until maturity

159
Q

How do Treasury Inflation Protected Securities Work?

A

The principle is adjusted for inflation while the coupon rate stays the same

160
Q

What are Separately Tradable Registered Interest and Principle Securities (STRIPS)?

A

When the coupons and the principle are sold separately as zero coupon bonds

161
Q

Which One Federal Agency’s Securities are Backed by the Full Faith and Credit of the US Government?

A

GNMA Securities

162
Q

What is the Biggest Risk with Mortgage Backed Securities?

A

Prepayment risk

163
Q

How do CMOs Mitigate Prepayment Risk?

A

Investors are divided into tranches A-Z. Tranche A will get prepayments first, so this is the riskiest tranche, next B, next C, …

164
Q

What do Bond Rating Agencies Look at in a Firm?

A

Liquidity
Total amount of debt
Earnings and stability of those earnings

165
Q

What are the Investment Quality Bond Ratings at Moody’s and S&P?

A

Moody’s: Aaa - Baa/ Ba & below are junk

S&P: AAA - BBB/ BB & below are junk

166
Q

What is a Guaranteed Investment Contract?

A

Issued by an insurance company with a guaranteed rate of return. Yield is higher than treasuries.

167
Q

What are General Obligation Bonds?

A

Bonds backed by the full faith, credit, and taxing power of the municipality that issues it

168
Q

What are Revenue Bonds?

A

Bonds backed by the revenues received from a specific project, not the full faith, credit, and taxation of the municipality

169
Q

What are Private Activity Bonds?

A

Used to finance the construction of stadiums

170
Q

Which Two Companies Insure Muni Bonds?

A
  1. American Municipal Bond Assurance Corp

2. Municipal Bond Insurance Corp

171
Q

Which Risk is Subject to Corporate Fixed Income, but not US Gov’t Fixed Income?

A

Default

172
Q

Which Risks are Associated with Both Corporate and Gov’t Fixed Income?

A

Reinvestment Rate
Interest Rate
Purchasing Power

173
Q

How is the Tax Exempt Yield Calculated?

A

Corporate rate x (1 - marginal tax rate)

174
Q

How is the Tax Equivalent Yield Calculated?

A

Muni rate / (1 - marginal tax rate)

175
Q

What is the TEY if the Investor Lives in the State of the Muni and Itemizes Deductions?

A

Muni rate /

1 - (federal rate + (State rate (1 - federal rate)))

176
Q

How is the Coupon Rate Entered into a Financial Calculator?

A

A dollar amount entered as PMT

177
Q

How is the Coupon Rate or Nominal Yield Calculated?

A

Coupon Payment / Par

178
Q

How is the Current Yield Calculated?

A

Coupon Payment / Current Price of Bond

179
Q

Calculate YTM:
Selling for $950
Coupon Rate of 11.25%
Maturing in 7 years

A 
n = 14 (7 x 2)
PV = -950
PMT = 56.25 (1000 x 0.1125 / 2)
FV = 1000
i = 6.17 x 2 = 12.34%
180
Q

What is YTM?

A

The compound rate of return an investor would get if held to maturity

181
Q

What is YTC?

A

The compounded rate of return an investor would get if the bond was called at the earliest possible date

182
Q

How is Calculating YTM & YTC Different?

A

Only the periods & FV are different

183
Q

What is Accrued Interest?

A

When buying a bond in between interest payments, the buyer must pay the seller the amount of interest he would have received up to the sale date, then the buyer receives the whole interest payment and deducts the accrued interest paid

184
Q

What is Liquidity Preference Theory?

A

The yield curve is lower at short maturities because some investors prefer liquidity and are willing to pay for it by earning less yield. Also, long-term maturities should yield more because of additional risks associated with long-term maturities

185
Q

What is Market Segment Theory?

A

The yield curve depends on supply & demand at a given maturity. When supply is greater than demand at a maturity, rates are low and will have to increase to for demand to increase

186
Q

What is Expectations Theory?

A

Yields are higher for longer maturities because of the expectation of inflation

187
Q

What is Duration?

A

The weighted average maturity of all cash flows

188
Q

What is the Relationship Between Duration and Interest Rates?

A

The higher the duration, the more sensitive it is to changing interest rates

189
Q

What is the Relationship Between Duration and Immunization?

A

If an investor reinvests all interest paid and liquidates at the duration point, then interest rate & reinvestment risk are eliminated

190
Q

How are Convertible bonds Converted into Common Stock?

A

Par / Conversion price x Price of common stock

191
Q

What is Capitalized Value?

A

The amount an investor would be willing to pay for a property given a required rate of return

192
Q

How is the Capitalized Value Determined?

A

Net Operating Income / Capitalization Rate

193
Q

How is Net Operating Income Determined?

A 
Gross Rental Receipts
\+Non-rental Income
=Potential Gross Income
-Vacancy and Collection Losses
=Effective Gross Income
-Total Expenses
=Net Income
\+Interest Expense
\+Depreciation Expense
=Net Operating Income
194
Q

What is a Unit Investment Trust?

A

An investment company that is passively managed and self-liquidating

195
Q

Why are Index Funds Tax Efficient?

A

Because there is a low turnover in the portfolio, so there aren’t a lot of capital gains distributions

196
Q

What are Sector Funds?

A

Funds that invest in specific sectors. These are not well diversified with an R squared of around 0.5 - 0.6

197
Q

Which Type of Share can be Converted to Another Type?

A

B shares can be converted to A shares

198
Q

What is a REIT and what are its Advantages?

A

Real Estate Investment Trust. Good for diversification because low correlation to the stock market and is a hedge against inflation

199
Q

Name the Three Types of REITs

A
  1. Equity - Invests in real property for income and capital appreciation
  2. Mortgage - Invests in mortgage & construction loans
  3. Hybrid - Combo of both
200
Q

Do ADRs Eliminate Exchange Rate Risk?

A

No, they only trade and pay dividend in dollars

201
Q

What is a Long Straddle?

A

When you buy a call and a put on the same security.

202
Q

Why Would you Use a Long Straddle?

A

When you believe there will be volatility, but don’t know which direction

203
Q

What Option Strategy Locks in Profits?

A

Buying a put on an owned stock

204
Q

What is a Short Straddle?

A

When you sell both a call and a put option on a security

205
Q

Why Would you Use a Short Straddle?

A

When you think a stock is going to stay the same and you can generate income by selling the options

206
Q

What is the Zero Cost Collar Strategy?

A

When you own a security and want to buy a put to lock in profits, you buy the put with money received from selling a call

207
Q

What is the Black/Scholes Model, and What Variables does it Consider?

A 
Used to valuate call options
Current price
Time until expiration
risk free rate
volatility of underlying security
208
Q

What is Put/Call Parity?

A

Attempts to value a put option based on the value of a corresponding call option

209
Q

What is the Binomial Pricing Model?

A

Assumes a security can only move two directions and can be extrapolated from there

210
Q

How are Calls Taxed if it Lapses?

A

The premium paid is short term loss and the premium received is short term gain

211
Q

How are Calls Taxed if Exercised?

A

The premium is added to the stock to increase the basis

212
Q

How Long can LEAPS Last?

A

Up to two years vs 9 months for a traditional option

213
Q

What are the Two Types of Futures Contracts?

A

Commodity & Financial

214
Q

How is the Capitalization Rate Determined?

A

Net operating income / cost

215
Q

What is the Correlation Coefficient?

A

A measure of the movement of one security to another expressed as +1 to -1.

CFP Exam: March 2013 (7 decks)

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