Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFP > Investments Danko > Flashcards

Investments Danko Flashcards

You may prefer our related Brainscape-certified flashcards:
CFP® flashcards
1
Q

What is Unsystematic Risk?

A

Known as Diversifiable Risk, may also be referred to a Non-systematic Risk.

  • Business Risk: Refers to the nature of the firm’s operations (i.e., possibility of loss due to new technology)
  • Financial Risk: Refers to how the firm finances its assets (i.e., the possibility of loss due to heavy debt financing)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is Systematic Risk?

A

Also known as Non-Diversifiable Risk.

  • This part of risk is inescapable because no matter how well an investor diversifies, the risk of the overall market cannot be avoided.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the Types of Systematic Risk?

A
  • Purchasing Power Risk: Loss of purchasing power through inflation.
  • Reinvestment Risk: Risk that proceeds available for reinvestment must be reinvested at a lower interest rate than the instrument that generated the proceeds.
  • Interest Rate Risk: The risk that a change in interest rates will cause the market value of the fixed income security to fall.
  • Market Risk: Risk of the overall market
  • Exchange Rate Risk: Risk associated with changed in the value of the currency.

Study Hint: Remember P.R.I.M.E.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

FDIC Insured Amounts (per bank/per type of account)

A
  • Individual: $250k
  • Joint (per owner): $250K
  • Trust (per beneficiary): $250k
  • IRA/Keogh: $250k
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

The Yield Ladder

A

Discounted Bonds (Yields Higher than coupon)

Yield to Call

Yield to Maturity

Current Yield

Nominal Yield (Annual Coupon Rate)

Current Yield

Yield to Maturity

Yield to Call Premium Bonds (yields lower than coupon)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the provisions of EE Bonds?

A
  • Non-marketable, Non-transferrable, can’t be used for collateral
  • Sold at Face Value
  • Interest Rate based on 10 yr Treasury Note Yields
  • Fixed Interest Rate that is in effect at the time of purchase
  • Subject to federal taxation when redeemed, unless used as education bonds
  • Not subject to state or local taxes
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the provisions of I bonds?

A
  • Non-marketable, non-transferrable, can’t be used for collateral
  • Sold at Face Value
  • Interest Rate is composed of two parts:
    • A Fixed Base Rate (remains the same for the life of the bond)
    • An Inflation Adjustment (adjusted every 6 months)
  • Subject to federal taxation when redeemed (unless used as education bonds)
  • Not subject to state or local taxation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the Types of Municipal Securities?

A
  • General Obligation Bonds (GO Bonds): Backed by the full faith, credit and taxing power of the issuer. GO Bonds are generally considered the safest types of municipal credit.
  • Revenue Bonds: Backed by a specific sources of revenue to which the full faith and credit of the issuer is NOT pledged. Because revenue bonds are backed by a single source of funds (like toll roads, hospitals, power plants, etc.), they have a greater credit risk than GO Bonds. As such, they trade at higher yields.
  • Insured Municipal Bonds: The insurers pay timely interest and principal when the issuer is in default. Municipal bond insurers are AMBAC and MBIA.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What do Indenture Agreements Cover?

A
  • Form of Bond
  • Amount of Issue
  • Property Pledged
  • Protective covenant, including any provision for a sinking fund
  • Working Capital and Current Ratio
  • Redemption Rights
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the Risks of Corporate and Municipal Bonds?

A
  • Default: A creditor may seize the collateral and sell it to recoup the principal
  • Reinvestment: As payments are received from an investment, interest rates may fall. When the funds are reinvested the investor receives a lower yield.
  • Interest Rate: Rising interest rates may cause bond prices to fall
  • Purchasing Power: Inflation may lower the value of bond interest payments and principal repayment, thereby forcing bond prices to fall.

Study Hint: Remember: D.R.I.P.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the Risks of Government Bonds?

A

RIP only! No default or credit risk.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the market values to define

Market Capitalizations of Companies?

A
  • Large: > $10 billion
  • Mid: $2-10 billion
  • Small: < $2 billion
  • Micro: < $300 million
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

American Depository Receipt (ADR)

A
  • Prices of ADRs quoted in US dollars
  • Dividends paid in US dollars
  • Dividends declared in foreign currency
  • Attain diversification and risk reduction due to lower correlation of foreign securities with US securities.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the NOI calculation for Improved Land/Real Estate?

A

Improved land is normally income producing.

Income properties include residential rental, commercial and industrial properties. The intrinsic value of a real estate property can be computed using a Net Operating Income (NOI) calculation.

Gross Rental Receipts plus Non-rental Income (laundry, etc.) equals Potential Gross Income (PGI) minus Vacancy and collection losses minus Operating Expenses (excludes interest and depreciation) = Net Operating Income (NOI)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are General Definitions for Options?

A
  • Intrinsic Value is the minimum price the option will command as an option. It is the difference betwen the market price and exercise price of the stock.
  • Exercise Price is the price at which the stock can be purchased or sold on exercise of the option.
  • Premium is the market price of an option. As the option approaches its expiration date the market price of the option (Premium) approaches its Intrinsic Value Time. Premium is the amount the market prices of an option exceeds its intrinsic value.

Study Hint: IV + TV = Premium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the Taxability of Call Options?

A

At the Time of Purchase: Non-deductible Capital Expenditure

To the Writer Due to Lapse: Premium received is a short-term gain

To the Writer Due to Exercise: Premium received is added to sale price (can be long term gain if underlying security was held more than 12 months, otherwise short term). Covered Call.

To the Holder: If the option is NOT exercised, then the option is considered sold (it expires) and it is a short-term loss. The option period is 9 months or less.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Define: Hedging Strategies - Straddles, Collar, Protective Put

A

Straddle: Buying a Put and Buying a Call - The buyer does NOT own the stock.

Collar: Selling a Call (out-of-the-money) at one strike price and buying a Put at a lower strike price; investor OWNS the stock.

Protective Put: Buying a stock (or already owning it) and a Put for the stock serving as insurance against the decline in the underlying stock. (Hint: A good answer for the exam)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Compare: Warrants vs. Call Options

A
  • Warrants are issued by corporations, whereas Calls are issued by individuals.
  • Warrants typically have maturities of several years.
  • Warrant terms are not standardized. Call options are standardized.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What are the Hedging Positions of Futures Contracts?

A

Long Commodity Position: If a farmer is long a commodity (for example, corn) he needs a short hedge and will sell a futures contract.

Short Commodity Position: If Kellogs is short a commodity (for example, corn), they need a long hedge and will buy a futures contract.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Compare: Reg D Accredited vs. Non-Accredited Investors

A

Accredited (Unlimited):

  • Net worth of $1 million or,
  • Individual with income of $200,000 or,
  • Couple with income of $300,000

Non-Accredited

  • Issue sold to a maximum of 35 investors
  • Must use a purchaser representative if not “sophisticated”
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Coefficient of Determination R2

A

The square of the correlation coefficient measuring the proportion of the variation in one variable explained by the movement of the other variable.

How is R2 used on the exam?

It describes the percentage of a fund’s movement that are explained by the movements in the S&P 500.

Index funds/diversified funds based on the S&P 500 will have R2 of very close to 100%, while sector funds (not diversified) will have very low R2 (typically 5% - 25%).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Risk Level Quantification

Compare: Standard Deviation vs. Beta

A

Standard Deviation: Measures variability of returns used in a non-diversified portfolio and is a measure of total risk.

Beta: An index of volatility used in a diversified portolio and is a measure of systematic risk.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Geometric Return vs. Internal Rate of Return (IRR)

A

Geometric Return or Time-Weighted Return: Evaluates the performance of a portfolio manager.

IRR or Dollar Weighted Return: Compares absolute dollar amounts.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

“Real” vs. Nominal Rate of Returns

A

Real: The inflation adjusted interest rate

Nominal: Actual returns not adjusted for inflation.

The “Real” rate is defined as the Nominal Rate of return adjusted for inflation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Holding Period Return (HPR)

A

The total return (income plus price appreciation and dividends less margin interest) over the entire period divided by the out of pocket cost of the investment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Taxable Equivalent Yield (TEY)

A

To make the returns on municipal bonds comparable to those of taxable bonds, the TEY can be calculated.

  • TEY = Tax Exempt Yield / (1-Marginal Tax Rate)

OR

  • TEY x (1-Marginal Tax Rate) = Tax Exempt Yield
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Duration (Principles to Remember)

A

Years to Maturity: Remember duration and maturity are positively related

Annual Coupon: Remember duration is inversely related to coupon rate

YTM: The current yield on comparative bonds (duration is inversely related)

Remember, Coupon and Yield are Interest Rates - Inversely Related.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Zero Coupon Bonds

A
  • Duration equal to Maturity
  • No coupon interest, yet produces “phantom” income
  • No reinvestment rate risk
  • Sold at deep discounts to PAR
  • Fluctuate more than coupon bond with the same maturities
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Rules for using Duration to Manage Bond Portfolios

A

If interest rates are expected to rise, shorten duration (Interest rates up, shorten Duration)

Remember: UPS: UP for “up” and S for “shorten”)

If interest rates are expected to fall, lengthen duration. Buy low coupon bonds with long maturities.

Interest rates fall → lengthen duration.

Remember: FALLEN - FAL for “fall” and LEN for “Lengthen.”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Conclusions to Fluctuations in Bond Prices

A
  • The smaller the coupon, the greater the Relative Price Fluctuation
  • The longer the term to maturity, the greater the Price Fluctuation
  • The lower the market interest rate, the greater the Relative Price Fluctuation
31
Q

Convexity

A
  • The degree which duration changes as the yield-to-maturity (YTM) changes.
  • Largest for low coupon bonds, long-maturity bonds and low-YTM bonds allows investor to improve the duration approximation for bond price changes.
32
Q

What is Return on Equity (ROE)?

A

ROE = Earnings Available for Common (EPS)

Common Equity (net worth or book value)

33
Q

How to Calculate Dividend Payout Ratio

A

Dividend Payout Ratio = Common Dividends Paid divided by Earnings Available for Common (EPS)

34
Q

What are three types of Efficient Market Hypothesis (EMH)?

A

Strong Form: Asserts that stock prices fully reflect all information, public and private. Not even access to inside info can be expected to result in superior investment performance over time. Neither fundamental analysis nor technical analysis can produce superior results over time on a risk-adjusted basis.

Semi-Strong Form: Asserts that all publicly known information is reflected in stock prices. Neither technical analysis nor fundamental analysis can produce superior results over time on a risk-adjusted basis. Only an investor with access to inside information may consistently achieve superior results (but such access is illegal)

Weak Form: Suggests that historical price data is already reflected in current stock prices and is of no value in predicting future price changes.

Technical analysis will not produce superior results. Fundamental Analysis may produce superior results.

35
Q

Types of Indexes / Benchmarks

A

Dow Jones: 30 industrial stocks, price weighted

S&P 500 (large caps): Broader measure of NYSE activity, value weighted

Russell 2000 (small caps): Smallest 2000 stocks of the Russell 3000 index, value weighted

Wilshire 5000: Broadest measure of the activity and movement of the overall stock market, value weighted.

Value Line: ±1700 stocks, equally weighted

NASDAQ: Broadest measure of OTC trading, value weighted

Europe, Australia and Far East (EAFE): Equity performance of the major foreign markets, value weighted.

Barclays Aggregate Bond: More than 5000 US Government, corporate and mortgage backed and asset backed bonds.

36
Q

Tax Basis of a Mutual Fund

A

First-in, First-out method treats shares acquired first as being sold first.

Specific ID requires the seller to identify the shares of the fund that are sold. Specific ID allows the investor to create gain, neutralize gain or create a loss (most flexible).

Average Cost allows the investor to divide the total cost of all shares held by the number of shares sold.

37
Q

Steps to Risk-Adjusted Measures of Performance (Sharpe)

A
  • Step 1: Look for a low R2 (less than 60), or a non-diversified portfolio.
  • Step 2: Look for the highest Sharpe number.
38
Q

Steps to Risk Adjusted Measures of Performance

Jensen (Alpha) / Treynor

A
  • Step 1: Look for high R2 (60+) or a diversified portfolio.
  • Step 2: Look for the highest positive Alpha. If no Alpha is given, then look for the highest Treynor.
39
Q

What is a Margin (Maintenance) Call?

A

The formula for calculating when an investor will receive a margin call is:

  • (1 - Initial Margin % ÷ 1 - Maintenance Margin %) x Purchase Price of stock

Shortcut: 2/3 of the purchase price if the minimum maintenance is 25%. If it’s 30%, take 2/3 and then choose the next highest number.

40
Q

Examples of Passive Investment Strategies

A
  • Buy & Hold (EMH)
  • Dollar Cost Averaging
  • Index Investing
  • Strategic Asset Allocation (revised every few years)
41
Q

Examples of Active Investment Strategies

A
  • Market Timing
  • Tactical Asset Allocation
  • Technical Analysis
42
Q

Arbitrage Pricing Theory (APT) Keys

A
  • Unexpected Inflation
  • Unexpected changes in industrial production
  • Unanticipated shifts in risk premium
  • Unanticipated changes in structure of yields.
43
Q

Depression

A

at least 6 quarters of decline in real GDP

44
Q

Monetary Policy

A

FED

  1. Reserve Requirements
  2. Discount Rate
  3. Open market operations
  4. Repo or reverse repo
  5. Margin
45
Q

PPI

A

LEADING INDICATOR

  1. Index of the price of various items such as farm products and industrial commodities
46
Q

Consumer Credit Protection Act

A
  1. Interest rate must be reported as percentage rate (APR)
  2. Credit terms disclosed - fees, points, prepayment penalties
  3. Lost or stolen cards limited of $50 per card
47
Q

CPI

A

Market basket of selected goods and services in varies cities across the country

Key words: GOOD’s & SERVICES

48
Q

Alpha

(Jensen)

A

Calculates the portfolio return actually attained & subtracts what return should have been based on the risk assumed

ap = rp - [rf + (rm - rf) Bp]

49
Q

Beta

A
  • volitile
  • knows the system
  • systematic risk
  • diversified
50
Q

Stock Risk Premium

A

(ER - RF) B

51
Q

Information Ratio

A

Measures portfolio managers ability to generate excess returns relative to a benchmark

Portfolio returns above a benchmakr to volatility of those returns

52
Q

Option Collar

A

Owns a stock — hedges for decline

Sells one call at one strike price (out of money call)

Buyting a put at a lower strike price (out of money)

3 POSITIONS

  1. Owns stock
  2. Sell a call
  3. Long a put
53
Q

Inflation

A

Rise of prices of goods and services

Likely when spending increases relative to supply of goods and services

Too much $ chasing few goods.

54
Q

Deflation

A

Decline in price of goods & services

55
Q

Stagflation

A

Combo of SLOW economic growth and HIGH unemployments

SLOW econ growth

HIGH unemployment

56
Q

Stagnation

A

RISING prices

HIGH unemployement

SLOW economic growth

57
Q

CAPM

A

Concerned with equilibrium relationship between the risk and return on risky assets

MARCO: CML Line

MICRO: SML Line

58
Q

GDP

A

Measure of economy’s total production of goods & services

Mercedes cars made in Alabama are included

GDP = Consumption + Investment + Gov Spending + ( Exports - Imports)

59
Q

Maintenance Margin Call

A

1 - initial margin % / 1 - maintenance %

Shortcut: 2/3 x $150 = $100

60
Q

Current Ratio

A

Current Assets / Current Liabilities

61
Q

Sharpe Ratio

A

Excess Return of portfolio to standard deviation

Rp - Rf / Standard deviation of portfolio

62
Q

Treynor Ratio

A

Excess return of a portfolio to its beta

rp - rf / beta

63
Q

I Bonds

A
  1. Inflation index accrual
  2. Issued by U.S Government
  3. Non marketable, non transferable
  4. Sold @ face value
  5. 6 Months track CPI
  6. Only Fed Income Tax
  7. Educaiton benefits same as EE’s
64
Q

Series EE Bonds

A
  1. Interest fully exempt from federal income if used for education
    - NO ROOM and BOARD
  2. Purchased in parents name 24+ at the time of issue
  3. Must redeem year in which owner pays qualified higher ED expenses
65
Q

Exchange Rate Risk

A

Initial investment $10,000 x Y = 900,000Y

Sells when Toyota up 50%

1.50 x 900,000

= 1,350,000

1,350,000 / 100 = $13,500

66
Q

Ratio Analysis

A
  1. Relationships between financial variables
  2. Comparing financials to firms in same industry
67
Q

Liquidity Ratio

A

Compares financial variables

Measue companies ability to meet its short-term debt obligations

68
Q

Profitability Ratios

A

Compare two or more financial variables providing a relative measure of a firms income earning performance

69
Q

APT

A
  1. Pricing of securities cannot differ for any significant lenghth of time
  2. Not explained by a risk vs. return relationship
70
Q

Black - Scholes Option Valuation Model

A

Valuation of call or put options non dividend paying stock

  1. Price
  2. Exercise and strike price
  3. Time remaing to the expiration
  4. Interest rate
  5. Volatility of underlying stock
71
Q

Binomial Option Pricing

A

Stock can be two values at experation

  1. either increase or decrease

If accurate investor formed a perfect hedge

72
Q

Bullets & Barbells

A

Bullets - Intermediate duration bonds only

Barbells - Half in short term, half in long term bonds

  • Perioidc rebalancing
73
Q

Dollar Cost Averaging

A

Average Cost = $5,000 / 190 shares = $26.31

CFP (16 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions