Midterm Review Flashcards
Market Order
An order to buy or sell stock at the best price available. It is the quickest way to fill orders because they are usually executed as soon as they reach the exchange floor. Because of the speed, an investor can be reasonably sure the price at which the order is transacted will be very close to the market price of the prevailing market.
Limit Order
An order to buy at or below a specified price, or to sell above a certain price.
Stop Order
Broker tells the market maker to sell a stock when its market price reaches or drops below a certain specified level.
Stop Limit Order
Sets a limit on the price an investor will receive. May not be filled if the price moves quickly.
Initial Margin
Amount of equity an investor must contribute to enter a margin transaction. Example: To purchase 100 shares of Starbucks trading at 50$ per share with an initial margin requirement of 75%, Joe must contribute 100x 50 x .75= 3750 and he will borrow 1250 from his broker.
Maintenance Margin
The minimum amount of equity required before a margin call.
How do you figure out the price at which investor receives a margin call?
Loan/1-Maintenance Margin
Example: Joe Purchased 100 shares of Starbucks trading at 50 per share with a maintenance margin requirement of 75 and a maintenance margin of 35. At what price would Joe receive a margin call. Answer 19.23
How do you calculate how much an investor must contribute in a margin call?
Actual Equity- Required Equity.
Primary Market
The market in which new issues are sold to the public. Includes the initial public offering, rights offering, and private placement.
Secondary Market
The purpose of the secondary market is to provide investors with a method to buy and sell securities issued in primary markets. Provides continuous pricing of securities and provides liquidity to shareholders. Includes NYSE, NASDAQ, OTC and AMEX
What are some ways investors can invest internationally
Indirectly- US Multinational Companies
Directly: Buying stock of a company on foreign exchanges, buying stock of company on us exchanges, american depository receipts, Yankee bonds.
What are some of the most important financial regulations in the US over the past century?
Securities Act of 1933- Regulates the issuance of new securities. Securities act of 1934- Regulates the secondary market and trading securities; created the sec as the regulator of the securities exchanges. Investment Company Act of 1940- Authorized SEC to regulate investment companies. Three Types- Open, Closed, Unit Investment Trusts. Investment Adviser Act of 1940- Investment advisers must register with SEC. Securities Investors Protection Act of 1970- Protects investors for losses resulting from broker firm failures, does not protect investors for incompetence or bad investment decisions.
Price-weighted
Dow Jones Industrial Average. Does not incorporate market capitalization
Value weighted index
Incorporates market capitalization of individual stocks into the average.
Holding Period Return
(Selling Price- Purchase Price +/- Cash Flows)/ Purchase Price. Not a compounded rate of return. There is no consideration for the time an investment was held. HPR questions will come from margin return or after tax rate returns
What are the three factors that must be taken into account when calculating weighted average portfolio return?
- Current market value of the securities held. 2. Total portfolio value. 3. The return of each security.
Coefficient of Variation
Useful when comparing two assets with different average returns. The higher the coefficient of variation, the more risky an investment and the less likely an investor is to achieve the average return. Standard Deviation/ Average Return
Covariance
The co-variance is the measure of two securities combined and their interactive risk. Measure of relative risk. Co variance= Standard deviation a times standard deviation b.
Correlation/Correlation Coefficient
Correlation and the co-variance measure movement of once security relative to that of another. Covariance is a relative measure. Correlation coefficiant is a relative measure.
(COVAB)/ (Standard deviationA*Standard DeviationB)
Co-relation Coefficient ranges.
Ranges from +1 to -1
+1 Denotes two assets are perfectly correlated
0 Denotes that the assets are completely uncorrelated
-1 Denotes perfectly negative correlation
Diversification begins with anything bellow +1
Beta
Beta is a measure of systematic risk or market risk, whereas standard deviation is a measure of total risk. Beta is the slop of the regression line (asset returns regressed against benchmark returns) Beta is an appropriate measure of risk for a well diversified portfolio.
Beta Coefficient
A measure of an individuals security’s volatility relative to that of the market. The beta of the market is 1. Anything above 1 fluctuates more than the market and has greater risk. A stock with less than 1 indicates that the security fluctuates less than the market.
R Squared
Also called coefficient of determination. Measures how much return is due to the market. If the correlation coefficient is .80 then its r squared is 64 percent. Which means 64 percent is due to the market. R squared tells us if beta is an appropriate measure of risk.
Systematic risk
The lowest risk one would expect a fully diversified portfolio to have. It is inherent in the system.
