Investments Flashcards
Indifference Curve: Where is the optimum portfolio located?
At the tangent of the indifference Curve and the efficient frontier.
Indifference Curve: What indicates a conservative investor?
The steeper the curve, means the investor wants more return for any additional risk.
Capital Market Line: What is a lending portfolio?
A combo of 90 day t-bill and diversified portfolio.
Capital Market Line: What is a Borrowing Portfolio?
Leverage and diversified.
Efficient Market Hypothesis: Nonbeliever, what info is reflected in price and what infos useful?
Price: None
Useful: T, F, I
Efficient Market Hypothesis: Weak Form Believer, what info is reflected in price and what infos useful?
Price: T
Useful: F, I
Efficient Market Hypothesis: Semi-Strong Form Believer, what info is reflected in price and what infos useful?
Price: T, F
Useful: I
Efficient Market Hypothesis: Strong Form Believer, what info is reflected in price and what infos useful?
Price: T,F,I
Useful: None
Bond Yield: When a bond is selling at Par, how are CY, YTM and YTC ranked?
They are all the same
Bond Yield: When a bond is selling at a premium, how are CY, YTM and YTC ranked?
Highest to lowest: CY, YTM, YTC
Bond Yield: When a bond is selling at a discount, how are CY, YTM and YTC ranked?
Lowest to Highest: CY, YTM, YTC
What is one of Technical Analysis’ Mantra’s?
A trend once established is more likely to continue then reverse
What is the lowest rating of an investment grade bond?
BBB and above is investment grade
What is the current yield formula?
CY=Ann Int Pmt/ Current Price
When using TVM on calc to find YTM remember:
Adjust N, I/Y and Pmt
When using TVM on calc to find YTC remember to adjust:
N and Pmt
What is convexity?
The degree to which duration changes
What is a zero coupon bond’s duration
It’s maturity
What is duration?
The weighted average number of years until investment is recovered?
How are coupon payment and duration correlated?
The higher the coupon, the lower the duration
Duration is a measure of?
Interest sensitivity
Convertible Securities: What is the Conversion Ratio?
Par value/Conversion Price
Convertible Securities: What is the Conversion Value?
Conversion Ratio * Market Price of stock
When should time-wighted returns be used?
To analyze a portfolio managers performance
When should dollar-weighted returns be used?
To assess an investors actual performance
What is considered an aggressive allocation?
<=25% bonds, 15% SC and 5% EM
Benchmarks: What R^2 do you want?
High, it means the benchmark is correlated?
What is the small cap benchmark?
Russell 2000
What is the International benchmark?
MSCI EAFE (Europe, Australia, Far East)
What is the overall US Market Benchmark?
Wilshire 5000
What is Reinvestment Rate risk?
What is Interest Rate Risk?
When rates fall
When rates rise
What is a barbell?
Short and long term bonds
What is a bullet?
Bonds purchased slowly with maturities around date needed.
Concentrated Portfolio Strategies: What are the 4 strategies for dealing with a concentrated portfolio?
ESOP, CRT, Put Options Exchange Fund
Concentrated Portfolio Strategies: How does and ESOP help?
Creates makes when shares can’t be sold on the market. May be able to sell to ESOP, receive the proceeds and pay no tax.
Concentrated Portfolio Strategies: How does a CRT help?
A charitable deduction is available for the present value of assets that will pass to the charity.
Assets transferred to CRT can be sold without tax impact because nontaxable.
Concentrated Portfolio Strategies: How does an exchange fund help?
contribute stock to a fund in exchange for shares of the fund which is diversified
Margin Terms: Initial Margin, Debit balance
I M: % of purchase price that is provided by investor.
DB: Amount owed: Amt borrowed + interest
Margin: At what price will a margin call occur?
Debit balance( 1-initial margin)/ 1-maintenance margin
Margin: How much is required when a margin call occurs?
Run-Away(Required-Actual)
Required: New stock price* maintenance margin
Actual: New stock price -loan amount
Futures Questions:
What is their natural position? Do they naturally want the price to increase or decrease?
Options: How to determine the value of an option?
Time value + intrinsic value
Options: How to determine if in the money?
COM-E, POE-M
How to determine what option to have as the market goes up or down:
Puts Can Save Fortunes: Up arrow(market): P in short part and CSF in long part, opposite for down market
Options: What is a cashless collar:
Short a call and long a put
What is R, what does it measure and what is the range and goal?
R is the Correlation coefficient
It measures price movements, not the magnitude of the correlation
-1 to +1, the goal is low correlation not necessarily -
What is COV and what does it measure?
Covariance, the extent to which two variable move together, either positively or negatively
What is B and what does it measure?
Beta is a relative measure of systematic risk
What is R^2 and what does it measure and what is the appropriate level?
R^2 is the Coefficient of Determination, it explains the price movements in my security or portfolio that are explained by changes in the market (systematic). As long as R^2=.75 you are okay to use Beta. Remember that if R=.8 R^2=.64
What is the coefficient of variation, what does is measured, how do the variable impact?
Standard Dev/r Looking for the the lowest; higher St.Dev. =higher number, higher r=lower number; Return adjusted risk is what is being measured
What does Standard Deviation measure?
Measures total risk, where Beta only measures systematic risk. An absolute measure
Z-Score=
The # of standard deviations away from the mean
Kurtosis Facts:
Plat is fat, Lep is less risky
Sharpe Ratio measures:
The portion of return that has risk associated with it. Higher return=higher sharpe ratio, the higher the Stand. Dev. the lower the sharpe ratio. Higher is better
Jensens Alpha:
Actual return- expected return
Information Ratio measures
Consistency with which a manager beats a benchmark. Standard deviation of historical alpha’s.
