Investments Flashcards
What risks are undiversifiable?
PRIME
Purchasing power Reinvestment risk Interest rate risk Market risk Exchange rate risk
What is endogenous risk?
Risk generated with in the system due to participants being human
How many stocks does it take to remove unsystematic risk?
10 to 15
What are the risks with bonds?
DRIP
Default
Reinvestment
Interest rate
Purchasing power
Gov’t bonds don’t have default risk
R-squared gives…
Amount of systematic risk…the balance (to 1) is unsystematic
Growth rate equation
g = roe * rr
roe is return on equity
rr is retention rate
Semi - variance
Alternative risk measure that includes only returns below expectation
Coefficient of variation
Communicates the variability of an investment per unit of return (stdev/xbar)
Lower the CV, greater reliability
R or rho
Correlation coefficient (ranges:-1 to 1)
Think “Credence Clearwater Revival” - CC=R
R-squared
Coefficient of determination
Contrarian opinion rules (6)
BIOMOP
Barron's confidence index Investment advisory opinion Odd lot sales Mfd cash OTC vs NYSE volume Put/call ratio
Follow-the-smart money rules (2)
Confidence index
Short sales by specialists
Basic assumption of tech analysis
Irrational investors are an important element in stock prices
Return on equity
ROE = net_income/common_equity
Difference between quick ratio and current ratio
Current ratio is current_assets/current_liabilities
Quick ratio subtracts inventory from assets before dividing
Intrinsic value of a stock according to fundamental analysis
The discounted value of future dividends
Quick market price calc
Outstanding shares
Hierarchy of comparison testing
BATS
Beta
Alpha
Treynor
Sharpe
Black Scholes model of CALL option pricing relies on 5 variables
1) mkt price (incr)
2) time (incr)
3) stdev (incr)
4) risk-free rate (incr)
5) ex price (decr)
Venture capital stages (8)
1) seed
2) start-up
3) 1st stage
4) 2nd stage
5) mezzanine
6) bridge
7) acquisition
8) leveraged buy out LBO
Seed capital
Vc for product development & mkt research
Start up capital
VC for initial marketing but NO SALES
First stage financing
VC for manufacturing & sales
Second stage financing
VC for working capital
Mezzanine financing
VC for expansion or new products
Bridge financing
VC for expected IPO
Acquisition financing
VC for acquisition of other companies
LBO financing
VC for management to buy pastorally of a business
Margin call price
(Purchase price)(1-initial margin)/(1-maint. Margin)
Valuation of preferred stocks
V= Do/r
Constant dividend divided by current interest rate
Difference between T-bills, notes, & bonds
Maturity
Bill: 4, 13, 26, 52 weeks
Note: >1y to 10y
Bond: >10y
Eurodollars
Bonds issued by US companies oversees
Yankee bonds
Bonds issued in US by foreign companies
Key feature of a debenture
It is unsecured
Expectation theory of rates
Lt rates are the current st rate plus the expected future st rate
Liquidity preference of rates
Investors like liquidity so must be compensated with higher rates for lt bonds
Segmentation rate theory
Supply and demand with in ST and LT segments because investors like to stay within their segments
Efficient market assumptions
- Investors always act rationally and in their own best interests
- Investors cannot outperform the market as they don’t have better data
- info is rapid and available to all
- investors react quickly to news
- prices adjust immediately
- prices are not predictable (random walk)
Difference between CAPM & APT
CAPM is single factor model (beta), APT is multi-factor
4 factors that affectation stock in APT
Inflation
Industrial production and the GDP
Risk premium changes
Interest rate changes
Overconfidence bias
Believing you are smarter or have better information than others
Representativeness bias
Applying past experiences to current
Anchoring & Judgement bias
Using the initial value of all decisions and never adjusting it
Cognitive dissonance bias
Investors will only believe data that supports their desire
Self-attribution bias
Good decisions are the investor’s, bad ideas are the fault of others
Illusion of control bias
Belief that you can influence an outcome
Conservatism bias
Investor clings to prior views at the expense of new data
Ambiguity aversion bias
Investors dislike uncertainty more than risk
Endowment bias
Valuing an owned stock more than others
Self-control bias
Consume today rather than save for tomorrow
Mental accounting bias
Treating portfolio as different parts such as inheritance vs earned
Confirmation bias
Whatever an investor wants is believed to be correct…sometimes seems as “it has always been this way in the past.”
Hindsight bias
After something happens to believe that you saw it coming
Lass aversion bias
Cause investor to hang onto bad investments thereby avoiding loss
Recency bias
Current events/information is emphasized which creates ST thinking
Regret aversion bias
The fear that a decision will be the wrong one
Framing bias
To focus so much on one factor as to ignore other crucial factors
Status quo bias
Choosing the course that will keep things as they are
GDP
C + I + G + NE
Consumption, investment, govt spending, & net exports
NOI
Net Operating Income
Gross receipts
+ non-rental income (laundry)
=potential gross income
- vacancy & collection loses
= effective gross income - operating expenses
Value of RE based on cap rate
NOI / cap_rate
Gross Income multiplier calc
Sales_price/gross_income
