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CFP Supplement > Investments > Flashcards

Investments Flashcards

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1
Q

3 Forms of Effecient Market Hypothesis

A 
x = rejects, already reflected
✓ = helps, advantageous, not reflected, benefit, higher returns

fundamental analysis - P/E ratio

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2
Q

debenture

A

unsecured corporate debt

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3
Q

annual yield formula

A

annual income
purchase price

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4
Q

appreciation formula

A

end of year price
purchase price

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5
Q

original issue discount bond

A
  • sold at discount to par
  • bond basis increases set rate each year
  • owner pays income tax on “phantom income” (unless tax exempt)
  • upon maturity, owner receives face value and pays no tax b/c already paid
  • OID = maturity value - OID price
  • ex) zero coupon bond
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6
Q

correlation = 1

correlation < 1

A

Standard Deviation of returns of portfolio = weighted average of standard deviation of individual securities

Standard Deviation of returns of portfolio < weighted average of standard deviation of individual securities

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7
Q

intrinsic value

A

according to fundamental analysis…
dicounted value of all future dividends

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8
Q

what action can result in unlimited loss?

A

selling a naked call

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9
Q

if market risk premium were to rise, value of common stock would…

A

decrease due to lower risk-free rates

????

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10
Q

unit investment trust (UITs)

A
  • passively managed
  • self liquidating (easily LIQUID)
  • equity or fixed income
  • additional securities not added to trust
  • units (not shares) are held until maturity NOT sold on exchange
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11
Q

YTM Problem

A

N= years
I= YTM = ?
PV=market price
PMT=1000(par) x coupon rate
FV=1000(par)

semiannual coupons

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12
Q

YTC Problem

A

N= years until callable
I= YTC = ?
PV=market price
PMT=1000(par) x coupon rate
FV=price at call

semiannual coupons

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13
Q

American Depository Receipts (ADRs)

A
  • foreign securities all else US
  • US dollars…trade, denomination, dividends
  • US exchanges
  • do NOT eliminate currency/exchange rate risk (PRIME)
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14
Q

substitution bond swap

A

takes advantage of perceived yield differential b/w bonds that are similar w/ respect to coupons, maturities, and industry

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15
Q

rate anticipation bond swap

A

based on forecasts of general interest rate changes

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16
Q

yield pickup bond swap

A

designed to change cash flow of portfolio by exchanging similar bonds that have different coupon rates

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17
Q

tax bond swap

A

offset bonds with capital gains and losses

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18
Q

index fund

A

tracks market indexes
passive

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19
Q

growth funds

A

equities with high P/E
seeks capital appreciation

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20
Q

growth and income funds

A

equities and income producing assets
seeks capital appreciation and income

not good for college savings for young family

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21
Q

balanced fund

A

more bonds than typical equity fund

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22
Q

global fund

A

US and international securities

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23
Q

international fund

A

only non-US securities

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24
Q

Bond Risk

A
  • ALL bonds subject to inflation rate (purchasing power risk) Long > Short
  • Muni bonds have low default risk high quality < low quality
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25
Q

selling a call

A

give opportunity to participate in additional participation before being called out

???

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26
Q

immunization

A

investment time horizion = average weighted duration

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27
Q

TEY

A

r

  • don’t get thrown off my “does not itemize”, if itemizes, more info would have to be provided

(1-tax you save)

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28
Q

after tax yield

A

corporate rate x (1-marginal tax rate)

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29
Q

duration of a bond is a function of…

A
  • Current Price - bottom half of formula, PRICE^TIME^RATESvDURATION^
  • time to maturity
  • yield to maturity
  • coupon rate
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30
Q

closed investment companies

A
  • fixed initial market cap
  • trade on orgnized exchange, major secondary markets
  • trade at premium or discount to NAV
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31
Q

open investment companies

A
  • unlimited initial market cap
  • bought/redeemed from fund family
  • trade at NAV
  • mutual funds
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32
Q

yield summary

A
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33
Q

High Reinvestment Rate Risk

A

Higher Coupon Rate

Why?
high now, but who knows later?

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34
Q

Greatest interest rate risk

A

Long/High Duration

Why?

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35
Q

reinvestment rate risk

vs

interest rate risk

A

risk an investor will not be able to reinvest at same rate of return, mostly impacts bonds

risk that changes in interest rates will impact price of equities and bonds (inverse relationship)

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36
Q

stand alone risk

A

single asset ownership

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37
Q

buy and hold & interest rate risk

A

eliminates because you aren’t buying and selling as price changes (and therefore interest rate changes)

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38
Q

energy sector fund risk

A

Systematic Plus Gov’t/Political

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39
Q

nominal rate of interest

A
  • interest rate w/o inflation
  • includes default premium, liquidity premium, and risk free rate of interest
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40
Q

spot markets

A

classified by time

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41
Q

equity markets

A

classified by type of claim

debt vs equity

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42
Q

mortgage/bond markets

A

classified by participants

short, intermediate, long term participants along yield curve

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43
Q

money markets

A

categorized by time constraits

short term or current price

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44
Q

Constant Dividend Growth Model
Intrinsic Value
Dividend Discount Model

A

may have to solve for r (required rate of return) using CAPM

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45
Q

r = (D1/P) + g

provided

A

expected rate of return based on current price

vs req rate of return

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46
Q

serial bonds

A

issued in series and mature in series

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47
Q

registered bonds

A

paid interest based on to whom bonds are registered, regardless of ownership

i.e. treasury bonds

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48
Q

bearer bonds

A

pays interest to holder/owner of bond

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49
Q

reset bonds

A

interest rates can be reset

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50
Q

increase inflation rates leads to increase interest rates…

A

increase demand for high returns (increase required rate of return)

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51
Q

income bonds

A

high risk bonds issued by financially troubled firms

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52
Q

high yield bonds

A

lower quality and cost issuer more in interest pmts

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53
Q

BILL wrote a NOTE to james BOND

A
  • Treasury Bills - less than 1 year
  • Treasury Notes - 2-10 years
  • Treasuy Bonds - greater than 10 years
    fbond
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54
Q

lowest investment grade bond

A

BBB

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55
Q

mortgage-backed securities

A

lack of definite maturity date
uncertain cash flows

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56
Q

market anomalies and EMH

A

exist but no impact

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57
Q

who sets margin requirements for all security transactions?

A

Federal Reserve

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58
Q

margin call price

A

Loan
1-MM

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59
Q

margin call

how much do you need to add in

A

Re - Ae
Required Equity - Actual Equity

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60
Q

options

warrant

A

written by investors

  • *shorter** expiration (<=9m)
  • *standardized**

issued by corporations

  • *longer** expirations (5-10yrs)
  • *NOT** standardized
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61
Q

buyers of options…

A

call - up
put - down

*seller’s are opposite

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62
Q

Long straddle

short straddle

A

buys a call AND a put on same security at same exercise price for same period of time
investor expect volatility, not sure which direction

sells a call AND a put
investor does NOT expect volatility, just wants to keep premiums

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63
Q

spread

A

purching put/call at different price

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64
Q

strip

A

price and time are same
BUT two puts and one call

65
Q

strap

A

price and time are the same
two calls AND one put

66
Q

selling a naked call

A

selling right to buy
expect market to drop
don’t actually have security
limitless loss potential because market has no ceiling to rise if doesn’t drop

67
Q

options diagram

A
68
Q

buy a call

  • maximum gains if stock price rise

sell calls & buy puts

  • “market may correct” wants to 1) increase income 2)protect against drops

sell call

  • “good thing CANNOT go on forever”, not worries about downside

buy a put

  • maximize gains if prices drop
  • “possible market decline”, does NOT want to incur cost of selling or mistime market
  • concerned of downturn in short term, prefers not to sell
  • “optimistic about growth”, wants to “lock in” minimum price incase price drops
  • “protect profits” , “lock in gains”
A

buy a call

  • maximum gains if stock price rise

sell calls & buy puts

  • “market may correct” wants to 1) increase income 2)protect against drops

sell call

  • “good thing CANNOT go on forever”, not worries about downside

buy a put

  • maximize gains if prices drop
  • “possible market decline”, does NOT want to incur cost of selling or mistime market
  • concerned of downturn in short term, prefers not to sell
  • “optimistic about growth”, wants to “lock in” minimum price incase price drops
  • “protect profits” , “lock in gains”
69
Q

strategic asset allocation

A

allocating the wealth of a client among various asset classes, consistent with the clients’ investment objectives, time horizons and risk preferences.

buy and hold strategy (vs active)

70
Q

tactical asset allocation

A
  • shifting wealth between asset classes to take advantage of expected price level changes (timing) arising from broad movements in the business/economic cycle.
  • rebalances her portfolio frequently to take advantage of perceived opportunities in other market sectors
  • active
71
Q

Investment Advisory Agreement: Arbitration Clause

A

Required by SEC and FINRA if voluntary negotiation fails

72
Q

private placement of securities

A
  • Sale of securities in a single block to a public pension fund.
  • Sale of an entire issue of securities to a single investor.
  • Sale of securities in a single block to a publicly-traded mutual fund.
73
Q

public placement (IPO)

A

requires registration under disclosure rules with the Securities and Exchange Commission

74
Q

red herring

A
  • *preliminary prospectus** issued by managing house of an offering
  • *red lettering** notifies prospective investors of status as prospectus w/o prices
75
Q

Securities Investor Protection Corporation (SIPC)

A

insures investors against losses due to bankruptcy or insolvency of brokerage firms. There is NO protection against investment losses.

76
Q

neglected firm effect

A
  • market anomaly
  • security in question is allowed greater potential for movement as a result of the lack of scrutiny by analysts
  • stock that has produced superior earnings and rates of return but has gone mostly unnoticed by securities analysts and is often considered underpriced
77
Q

P/E effect

A

market anomaly
low P/E stocks produce higher risk-adjusted returns than high P/E stocks.

78
Q

size effect (small firm effect)

A

tendency for small cap stocks to outperform large cap stocks over time

79
Q

which bond has greateset interest rate risk?

A

one with longest duration…most price sensative to interest rate changes
lowest coupon if term equaal

80
Q

duration

A

time remaining when a security’s discounted future cash flow remains at risk
longer duration = greater sensativity, greater risk

81
Q

stock dividend

A

favorable sign
retain capital growth related activities
increased research and dev’l
fend off takeovers

82
Q

high net worth and ee savings bonds

A

phase outs for

83
Q

when are physcial assets suitable for investors?

A

hedge against inflation…leading to price appreciation and potential capital gains

84
Q

ladder bond strategy

A

staggers maturities and in doing so, reduces the exposure to interest rate risk

vs immunization…eliminates interest rate and reinvestment rate risk

85
Q

roth ira and bonds

A

no need for a muni in a roth

86
Q

bond barbell strategy

A

involves both very long-term bonds and very short-term bonds for a portfolio, and very few intermediate-term bonds

vs bond laddering - proportional staggering of maturity dates

87
Q
A
88
Q

bond swap strategy

A

trade different and varied maturities to meet the objective of the portfolio.

89
Q

debt instruments and economic peak

A

excellent time to sell fixed (and generally lower return) instruments

90
Q

gold

A

hedge against inflation
negatively correlated to market

91
Q

protecting bonds against interest rate risk

A

options
put - lock in the price at which the security may be sold may be used to protect an investor from a drop in bond prices caused by rising interest rates.

92
Q

limited general obligation bond

A

restricted revenue base as compared to general
ability to tax more limited
tax authority for school district vs state

93
Q

geometric rate of return
how do you solve?

A

tvm

94
Q

value weighted average indexes

simple price weighted average indexes

geometric average indexes

A

NASDAQ, Wilshire 5000

Dow Jones Industrial Average

Value Line Average

95
Q

S&P 500

A
  • less dramatic fluctuations than DJIA (only 30 stocks)
  • reflections of sectors broad
  • value weighted
  • narrower base measure
96
Q

fourth market

A

where corporation and institutional investors deal directly with one another

exchange and broker dealer services are eliminated entirely

97
Q

primary market

A

investment bankers and corporations meet to arrange offerings to the public.

98
Q

secondary market

A

where previously issued securities are sold (exchanges, etc.)

99
Q

third market

A

exchange-listed securities being traded over-the-counter between non-exchange listed brokers and institutional investor

100
Q

market risk premium increase, value of common stock…

A

decrease in order to compensate investor for increased risk

????

101
Q

unissued shares

A

have never been held by investors

102
Q

authorized shares

A

unissued or outstanding shares but haven’t been repurchased

103
Q

treasury shares

A

shares that have been repurchased by a company/corporation

104
Q

converstion ratio

conversion price

conversion value (expect to pay)

A

PAR
conversion price

PAR
shares

PAR x stock price
shares or CV

105
Q

holding period yield

A

different than holding period return, no cash flows

SP-PP
PP

106
Q

Dividend Discount Valuation (variable growth)

A
  1. Determine $ dividend for each year
  2. apply constant div formula
  3. Determine NPV
107
Q

intrinsic value of a bond

A

equals it’s PV (TVM)

108
Q

reason company would call a bond

A

bonds currently selling at premium…interest rates have decreased. Can retire/call higher yield bonds and issue new bonds at lower market interest rates

109
Q

ideal correlation for portfolio construction

A

-1, any two investments move exactly opposite

110
Q

best index

A

highest r (correlation) or r2 (coeffecient of determination)

111
Q

correlation

1 - undiversified
<1 - diversified
-1 - most diversified

A
112
Q

standard deviation of portfolio and correlation (r)

A

r=1=standard averge
r<1=less than standard average

113
Q

correlation coefficient and covariance

A

measure two stocks movements relative to one another

114
Q

MPT: optimum portfolio

A

point of tangency b/w indifference curve and effecient frontier

115
Q

coeffecient of determination r2

A

% of fund’s return due to market

116
Q

adding new investments to portfolio

A

lowest correlation (closest to -1) coeffecient is best…provides most diversification

117
Q

capital market line (CML)

security market line (SML)
capital asset pricing model (CAPM)

A

standard deviation

beta
beta

118
Q

Geometric mean is ___ to arithmetic mean

A

less than or equal to

119
Q

what makes cash flow projections and valuations for real estate difficult?

A

changes in economic and demographic variables

120
Q

equity REITs

mortgage REITs

A

receive income from rental or lease of RE properties
provide more opportunity for capital gains
invest in commercial properties

receive monthly income from investing in real estate loans

121
Q

belief perseverance

A

similar to anchoring in that people are unlikely to change their views given new information.

122
Q

anchoring

A

results in buying securities that have fallen in value because it “must” get back up to that recent high.
inability to objectively review and analyze new information.

123
Q

Representativeness

A

thinking that a good company is a good investment without regard to an analysis of the investment.

124
Q

Cognitive dissonance

A

form of overconfidence because an investor’s memory of past performance is better than the actual results

125
Q

naive diversification

A

process of investing in every option available

126
Q

overconfidence leads to…

A

overtrading

127
Q

12b-1 fees

A

charged based on the average daily fund assets and used principally to meet marketing and distribution expenses

128
Q

less effecient market

A

more risk, more return, more opportunity for profit

international markets are less effecient than US markets

129
Q

dividend reinvestment plans

A
  • taxable
  • help firms raise new capital
  • provide invesetors systematic way to accumulate capital
  • companies build goodwill
130
Q

Return of Equity (ROE)

A

Net Income
Equity

higher the equity…lower the ROE

131
Q

Technical Analysis: Price Indicator

A

utilizes Advances and Declines of price (also known as Breadth of the Market)

132
Q

Technical Analysis: Volume Indicator

A

number of shares traded

133
Q

technical analysis: market indicators

A

directions of market and related averages

134
Q

intrinsic value of share of common stock (fundamental analysis)

A

discounted value of all future dividends

135
Q

company status

A

publically or privately held

136
Q

top down managers

A

look at big picture economic factors

group rotation managers
market timers

137
Q

bottom up managers

A

value managers
technicians

138
Q

GNMA

A
  • government backs the issue against default, NOT against investor loss
  • amount received by the investor each month may vary due to prepayment by homeowners.
  • realized yield somewhat variable because of the principal prepayments.
  • If mortgage rates decrease, prepayments may increase.
139
Q

rate of return determined by CAPM is

A
  • rate of return used in Jensen’s Alpha
  • security market line (SML) equation and an indicator of the required rate of return by an investor on any given security, not a market or portfolio’s return.
140
Q

preferred stocks

A
  • non-voting shares
  • covertible - can convert to c/s
  • participating - additional or extra dividends declared, the preferred shareholders have the right to share in the profits.
  • cumlative - If dividends are not paid in a given cycle, they cannot be paid to anyone else until they are paid to preferred shareholders.
  • has equity and debt features
  • stated par value
  • stated dividend rate
  • price of bond moves with price of c/s
  • dividend does not fluctuate like c/s dividend, pays fixed income like bond
  • NO maturity date like bond
  • 50% dividends recevided deduction - corporations 65%
  • NOT same level as risk as debt
  • subject to interest rate and purchasing power risk
141
Q

devaluation of foreign currency

A

foreign currency falls in value in relation to Dollar

cost less dollars to buy foreign currency

142
Q

revaluation/appreciation of foreign currency

A

foreign currency raises in value in relation to Dollar
cost more dollars to buy foreign currency

143
Q

riding the yield curve

A

purchase of debt instruments in anticipation of fluctuations in the rates of return on both long and short-term instruments

144
Q

yield curve

A

Shows the term structure of interest rates on government debt.
shows relationship between long-term and short-term government debt

145
Q

time weighted return

A

best for evaluating return of two invesment managers

careful, evaluating investment managers not investors…managers don’t make decision on whether to buy another stock

146
Q

firm commitment

A

investment bank, NOT issuing corporation, bears risk if entire issue is not marketed

147
Q

best effort agreement

A

The investment banker agrees to sell a minimum number of shares before the offering closing date.

corporation bears risk

vs firm commitment

148
Q

dividend payout ratio

A
  • portion of earnings which a company pays its investors.
  • The balance of earning retained by the company comprises its retention ratio.
  • Percentage of net income paid out as dividends.
  • A measure of a company’s earnings retention philosophy.

DPS/EPS

149
Q
A
150
Q

how to know if portfolio “follows” S&P500

A

highest r or r2

higer the r2 the less non-systematic risk

151
Q

client wants to avoid certain types of securities

A

use of individual stock/bonds allows client to pick and choose

152
Q

Exchange Traded Funds (ETFs)

A
  • purchased anytime during day (mutual funds-end of day)
  • can be purchased on margin or shorted (mutual funds-NO)
  • more readily track underlying index (mutual funds-incur transaction costs, fund CFs)
  • can trade at discount to NAV (mutual funds-always trade at NAV)
153
Q

selling covered call

A

income producing strategy

sell/write call options against what you already own

154
Q

best index to capture overall (small, mid, large) US Market

A

Wilshire 5000

155
Q

best way to control volatility

A

r<0

negative correlation…assets move opposite each other

156
Q

securities with interest rate risk

A

CDs, Treasury Bonds, CMOs

157
Q

High or Low NPV

A

Higher the better if risk is acceptable

158
Q

same expected return and low correlation of two assets

A

The expected return of the portfolio will remain the same, and the standard deviation of the portfolio will decrease.

CFP Supplement (6 decks)

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