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CFP July 2022 > Investments Lesson 1 > Flashcards

Investments Lesson 1 Flashcards

1
Q

Best Efforts:

A

Underwriter agrees to sell as much as possible

Risk resides with the firm

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2
Q

Firm Commitment:

A

Underwriter buys entire issuance

Risk resides with inderwriter

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3
Q

Prospectus:

A

Outlines: risks, management, business operations, fees, expenses
Must be issued prior to selling shares

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4
Q

Red Herring:

A

Preliminary prospectus
Before SEC approval
Determines interest

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5
Q

10K vs 10Q vs Annual Report:

A

10K: annual report of financial statements filed with SEC; audited
10Q: quarterly report filed with SEC; not audited
Annual Report: message from chairman on progress in past year & outlook in coming year; sent directly to shareholders

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6
Q

Liquidity vs Marketability:

A

Liquidity: how quickly turned into cash
Marketability: ready-made market for something

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7
Q

Market Order:

A

Timing & Speed more important than price

Appropriate for stocks not thinly traded

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8
Q

Limit Order:

A

Price more important than timing

For extremely volatile & not frequently traded

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9
Q

Stop Order:

A

Price hits certain level & turns into market order

Primary risk: investor May receive significantly less if market moving too quickly

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10
Q

Stop-Limit or Stop-Loss Limit Order:

A

Sets 2 prices: stop loss & limit
Risk if market moves to quickly order may not fill & left with stock at a significantly lower price
Appropriate with significant gain in stock but May not want to sell during significant volatility based on short-term news

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11
Q

Short Selling:

A

Sell at high price with hopes to buy at lower price
Profit when asset’s price decreases in value
Must have margin account
No time limit
Dividends paid by corporation must be covered by short seller

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12
Q

Initial Margin:

A

Amount of equity investor must contribute

Assume 50% set by Fed unless otherwise stated

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13
Q

Maintenance Margin:

A

Minimum amount of equity required before a margin call

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14
Q

Margin Position:

A

Current equity position

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15
Q

Margin Call Formula:

A

Loan / (1-maintenance margin)

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16
Q

Investor must restore their equity position to __?

A

Maintenance margin

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17
Q

Example Exam Question:
Purchased 500 shares XYZ trading at $40/share. Initial margin requirement of 60%. Maintenance margin of 30%. What price receive margin call?

A. $20
B. $22.86
C. $57.14
D. $80

A

B

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18
Q

Example Exam Question:
Purchased 1,000 shares CWC for $80/share. Initial margin requirement of 65%.
Maintenance margin of 40%. If stock price falls to $30/share, how much equity must be contributed?

A. $2/share
B. $8/share
C. $10/share
D. $12/share

A

C

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19
Q

Value Line Research Report:

A

1-5 ranking for stocks

1: highest for timeliness & safety (buy)
5: lowest (sell)

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20
Q

Morningstar Research Report:

A

1-5 star ranking for mutual funds/stocks/bonds

1: lowest
5: highest

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21
Q

Example Exam Question:
MSFT declared dividend payable on record date of Wednesday, May 15. What is last possible date investor could purchase & still receive dividend?

A. May 13
B. May 12
C. May 11
D. May 10

A

A

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22
Q

Qualified dividends receive __?

A

Capital gains treatment

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23
Q

Stock dividends are not taxable to shareholder until __?

A

Stock is sold

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24
Q

Stock splits:

A

Increase shares outstanding

Reduce stock prices

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25
Q

Example Exam Question:
If June 4 is date of record, when must purchase stock to receive dividend?

A. June 1
B. June 2
C. June 3
D. June 4
E. May 31
A

B

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26
Q

Securities Act of 1933:

A

Regulates issuance of new securities (primary market)

Requires new issues have prospectus

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27
Q

Securities Act of 1934:

A

Regulates secondary market & trading

Created SEC to enforce

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28
Q

Investment Company Act of 1940:

A

Authorized SEC to regulate investment companies

3 company types: open, closed, unit investment trusts

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29
Q

Investment Advisers Act of 1940:

A

Requires advisors to register with SEC or state

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30
Q

Securities Investors Protection Act of 1970:

A

Established SIPC to protect investors resulting from brokerage firm failures (regardless of citizenship)

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31
Q

Insider Trading & Securities Fraud Act of 1988:

A

Insiders cannot trade on non-public information

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32
Q

Treasury Bills:

A

Maturities up to 52 weeks

Denominations in $100 incriminating up to $5M per auction - larger available through competitive bid

33
Q

Commercial Paper:

A

Short term loans between corporations
Maturities of 270 days or less; do not have to register with SEC
Denominations of $100,000 & sold at discount

34
Q

Banker’s Acceptance:

A

Facilitates imports/exports
Maturities of 9 months or less
Can be held until maturity or traded

35
Q

Eurodollars:

A

Deposits in foreign banks that are denominated in US dollars

36
Q

Investment Policy Statement establishes __?

A 
RRTTLLU
Risk
Return
Taxes
Time-horizon
Liquidity
Legal
Unique circumstances
37
Q

Dow Jones Industrial Average:

A

Simple, price-weighted average

Does not include market capitalization

38
Q

S&P 500

A

Value weighted index

Incorporates market capitalization of individual stocks

39
Q

Russell 2000

A

Value weighted index of smallest market capitalization stocks in Russell 3000

40
Q

Wilshire 5000

A

Broadest index; measures 3,000 stocks

Value-weighted

41
Q

EAFE

A

Value weighted index

Stocks in Europe, Australia/Asia, & Far East

42
Q

Traditional Finance:

A

Investors are rational
Markets are efficient
Mean-variance portfolio theory governs
Returns determined by risk

43
Q

Behavioral Finance:

A

Investors are normal
Markets are not efficient
Behavioral portfolio theory governs
Risk alone does not determine returns

44
Q

Affect Heuristic:

A

Judging something based on non/financial issues

45
Q

Anchoring:

A

Reference point that may not be logical

Also called conservatism or belief perseverance

46
Q

Availability heuristic:

A

Relies on knowledge readily available in memory

47
Q

Bounded rationality:

A

Rationality limited by available information/tractability of decision problem/cognitive limitations of minds/time available
Seeking a satisfactory solution rather than an optimal one

48
Q

Confirmation bias

A

Focus on information supporting your opinions

49
Q

Cognitive dissonance

A

Tendency to misinterpret information that is contrary to existing opinion

50
Q

Disposition effect

A

Regret avoidance or faulty framing

Mark value even after price has changed

51
Q

Familiarity bias

A

Overestimate/underestimate risk of investments they are familiar/unfamiliar with

52
Q

Gambler’s fallacy

A

Incorrect understanding of probabilities

53
Q

Herding

A

Follow the masses

54
Q

Hindsight bias

A

Looking back after a fact ks know & assuming future can be predicted as readily as past explained

55
Q

Illusion of control bias

A

Overestimate ability to control events

56
Q

Overconfidence bias

A

Listens to self, rely on own skills & capabilities, overstate risk tolerance

57
Q

Overreaction

A

Emotion toward receipt of news/information

58
Q

Prospect theory

A

People value gains & losses differently
Will base decisions on perceived gains rather than perceived losses
Loss averse
Over insured against risk

59
Q

Recency

A

Too much weight to recent observations or stimuli

60
Q

Similarity heuristic

A

Decision or judgement made when apparently similar situation occurs even though situations may have very different outcomes

61
Q

Example Exam Question:
James states investment philosophy is as a contrarian: buys securities losing favor & sells gaining favor. Review track record - equal with market. Investments are typically in a security that has lost 10% from most recent high. What type of bias is James exhibiting?

A. Anchoring
B. Herding
C. Overconfidence
D. Hindsight bias

62
Q

Naive diversification:

A

Investing in every available option

63
Q

Representativeness

A

Thinking good company is good investment without analysis of investment

64
Q

Familiarity

A

Investment in companies that are familiar

65
Q

Example Exam Question:
Kevin subscribed to investment magazines & data resources, reads & analyzes. Utilizes this analysis to make shifts in high beta portfolio on daily basis. Which behavior finance bias is Kevin subject to?

A. Hindsight bias
B. Overconfidence
C. Regret avoidance
D. Herd mentality

66
Q

Loss aversion

A

Prefer avoiding losses more than experiencing gains

67
Q

Socialization

A

Process of acquiring values, beliefs? Behaviors acceptable or expected by society

68
Q

Multicultural pshychology

A

Extension of general psychology that recognizes multiple aspects of identity influence a person’s worldview

69
Q

Social consciousness

A

Awareness & sense of responsibility for problems/injustices within society

70
Q

Lesson 1 Review:
Which would you use to ascertain chairman’s perspective for progress completed & expected for the coming year?

A. 10k report
B. Annual report
C. 10q report
D. Quarterly report

71
Q

Lesson 1 Review:
Own 1000 shares of stock. Purchased for $25/share on margin with 50% initial margin requirement & 25% maintenance margin requirement. Price dropped to $13/share. Will there be a margin call? If so, how much?

A. $1500
B. $2750
C. $3250
D. No margin call required

72
Q

Lesson 1 Review:
How do stock split & stock dividend impact shareholders without bringing about any changes in value of company on balance sheet?

A. Value of stock split & value of stock dividend are generally small enough that impact on balance sheet is minimal
B. Value of stock split & value of stock dividend increase the number of shares but not the total value of those shares
C. Value of stock split & value of stock dividend cause dilution which keeps the value of the stock up without increasing the overall value on the balance sheet
D. Value of stock split & value of stock dividend offset one another thereby eliminating any change that might occur to the balance sheet

73
Q

Lesson 1 Review:
Which would serve as analytical tool to provide information to client regarding small cap growth stocks?

A. Wilshire 5000
B. S&P 500
C. Russell 2000
D. Dow Jones Small Cap Average

74
Q

Lesson 1 Review:
Which broad market index would be more appropriate when conducting comparisons between large cap, blue chip, & securities market?

A. S&P 500
B. DJIA
C. Russell 5000
D. Value Line 300

75
Q

Lesson 1 Review:
Buys for $50 using initial margin of 75% & maintenance margin of 40%. What price will receive margin call?

A. $13.12
B. $20.83
C. $25.25
D. $66.67

76
Q

Lesson 1 Review:
Which is true regarding Securities Investors Protection Act of 1970?

A. Protects investors from losses arising from bad investment decisions
B. Requires prospectus to accompany all new issues
C. Protects investors from negligence on part of investment advisor
D. Act protects investors from losses arising from brokerage firm failures

77
Q

Lesson 1 Review:
Which is not a value-weighted index?

A. DJIA
B. S&P 500
C. Russell 2000
D. Wilshire 5000

78
Q

Lesson 1 Review:
Tells about amazing portfolio performance experiencing double digit returns in a matter of days. Lost on a few but not much. Impressed decide to invest some money with him.
What behavior finance bias does he portray?

A. Overconfidence
B. Anchoring
C. Cognitive dissonance
D. Belief perseverance

79
Q

Lesson 1 Review:
Old Wall Street is saying “cut your losses & let your profits run”. However investors often do the opposite. Seems people are reluctant to admit they made a mistake in purchasing a stock that subsequently performs poorly. Behavior most consistent with:

A. Anchoring
B. Herd mentality
C. Regret avoidance
D. Representativeness

CFP July 2022 (24 decks)

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