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Securities Analysis > Midterm Text Book > Flashcards

Midterm Text Book Flashcards

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SIE Exam flashcards
1
Q

2 implications of CAPM

A

1 market portfolio is efficient

2 risk premium on risky asset is proportional to its beta

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2
Q

4 assumptions of CAPM

A

1 investors are rational, mean variance optimizers

2 investors use identical input lists

3 all assets are publicly traded

4 investors can borrow/lend at risk free rate

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3
Q

4 other assumptions of CAPM

A

1 investors planning horizon is single period

2 all info is publicly available

3 no taxes

4 no transaction costs

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4
Q

Illiquid assets will be sold…

A

Below fair market value

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5
Q

Ri = E(Ri) + BF + ei

What does each stand for 5

A

Ri = excess return

E(Ri) = expected excess return

Bi= sensitivity of firm I to that factor

F = factor

Ei= no systemic components of returns

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6
Q

3 propositions of APT

A

1 security return can be described by factor model

2 there are sufficient securities to diversify away idiosyncratic risk

3 well functioning security markets don’t allow for persistence
Of arbitrage opportunities

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7
Q

Efficient market hypothesis

A

Stocks already reflect all available information

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8
Q

3 forms of EMH

A

1 weak

2 semi strong

3 strong

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9
Q

Weak form EMH

A

Stock prices reflect all info derived from examining market trading data

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10
Q

Weak form EMH: market trading data 3

A

1 history of past prices

2 trading volume

3 short interest

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11
Q

Strong form EMH

A

All publicly available info regarding prospects of firm is already
Reflected in stock price

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12
Q

Prospects of firm (semi strong EMH) 6

A 
1 firms product line
2 quality of management
3 balance sheet composition
4 patents held
5 earnings forecasts 
6 accounting practices
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13
Q

Strong form EMH

A

Stock prices reflect all info relevant to firm, even info only available to insiders

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14
Q

Anomaly: PE effect

A

Low PE stocks provide higher returns than high PE stocks

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15
Q

Anomaly: small firm in January effect

A

Small firms outperform large firms

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16
Q

Anomaly: neglected firm effect

A

Firms with less analyst coverage will earn higher return

Due to risk of limited information

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17
Q

Anomaly: book to market ratio

A

High book to market stocks outperform low book to market stocks

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18
Q

4 information processing errors

A

1 forecasting errors
2 overconfidence
3 conservatism
4 representativeness bias

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19
Q

Forecasting errors

A

Placing too much weight on recent experience compared to historical

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20
Q

Overconfidence

A

People overestimate their forecasts and abilities

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21
Q

Conservatism bias

A

Investors are too slow in updating their beliefs in response to new evidence

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22
Q

Representativeness bias

A

Not taking into account a large enough sample size to get a sense of the population

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23
Q

Prospect theory

A

React more strongly to loss than gains

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24
Q

3 limits of arbitrage

A

1 Siamese twin companies

2 equity carve outs

3 closed end funds

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25
Q

Limits of arbitrage: Siamese twin companies

A

Companies might take to long to reflect correct prices

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26
Q

Equity carve outs

A

3 com should have sold for more than Palm, all palm shares were already sold short

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27
Q

Closed end funds

A

Sell at wide discount or premium due to fees on investors and investor sentiment

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28
Q

6 key variables of domestic macro economy

A 
1 GDP
2 unemployment rate 
3 inflation
4 interest rates 
5 budget deficit
6 sentiment
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29
Q

Demand shock

A

Event that affects demand for goods and services in economy

30
Q

4 examples of positive demand shocks

A

1 decrease tax rates
2 increase money supply
3 increase government spending
4 increase foreign export demand

31
Q

Supply shock

A

Event that influences production capacity and costs

32
Q

4 examples of supply shocks

A

1 changes in price of imported oil
2 weather that destroys crops
3 changes in educational level of economy’s work force
4 changes in wage rates in which labor is willing to work

33
Q

Fiscal policy is characterized as…

A

Demand side management

34
Q

Demand side policies

A

Fiscal and monetary

35
Q

Average weekly hours of production workers (manufacturing) is a…

A

Leading indicator

36
Q

Average duration of unemployment is a …

A

Lagging indicator

37
Q

Initial claims for unemployment insurance is a…

A

Leading indicator

38
Q

Manufacturers new orders (materials industries and consumer goods) is a …

A

Leading indicator

39
Q

Employees on nonagricultural payrolls is a …

A

Coincident indicator

40
Q

Ratio of trade inventories to sales is a …

A

Lagging indicator

41
Q

Fraction of companies reporting slower deliveries is a…

A

Leading indicator

42
Q

Change in index of labor cost per unit of output is a …

A

Lagging indicator

43
Q

New orders for non defense capital goods is a ..,

A

Leading indicator

44
Q

Personal income less transfer payments is a …

A

Coincident indicator

45
Q

Average prime rate charged by banks is a …

A

Lagging indicator

46
Q

New private housing units authorized by local building permits is a…

A

Leading indicator

47
Q

Yield curve slope 10 year treasury minus federal funds rate is a ….

A

Leading indicator

48
Q

Industrial production is a …

A

Coincident indicator

49
Q

Commercial and industrial loans outstanding is a …

A

Lagging indicator

50
Q

Ratio of consumer installment credit outstanding to personal income is a …

A

Lagging indicator

51
Q

Stock prices are a …

A

Leading indicator

52
Q

Money supply (m2) growth rate is a…

A

Leading indicator

53
Q

Index of consumer expectations is a…

A

Leading indicator

54
Q

Manufacturing and trade sales is a …

A

Coincident indicator

55
Q

Change in consumer price index for services is a …

A

Lagging indicator

56
Q

DOL 2 equations

A

Dol = % change in profits/%change in sales

Dol = 1 + (fixed costs/profits)

57
Q

Sector rotation

A

Shift portfolio into sectors and industries based on ones

Assessment of the business cycle

58
Q

Sector rotation, industries to by during an expansion 5

A 
1Technology
2 consumer discretionary
3 materials
4 industrials
5 energy
59
Q

Sector rotation: industry to buy at bottom of a recession

A

Financials

60
Q

Sector rotation: industries to buy in a contraction 3

A

1 healthcare

2 consumer staples

3 utilities

61
Q

4 stages of industry life cycle

A

1 rapid and increasing growth
2 stable growth
3 slowing growth
4 minimal or negative growth

62
Q

Life cycle: rapid and increasing growth, 2 characteristics

A

1 high risk

2 rapid profits/growth

63
Q

Life cycle: stable growth/consolidation stage 3 characteristics

A

1 industry leaders emerge

2 easier to predict market share growth

3 growth performance is closer to overall industry growth

64
Q

Life cycle: slowing growth, maturity stage 2 characteristics

A

1 growth is around rate of economy

2 pay dividends

65
Q

Life cycle: minimal or negative growth/ relative decline 1 characteristic

A

1 industry might grow slower than economy or actually shrink

66
Q

Michael Porter’s 5 determinants of competition

A 
1 threat of entry
2 rivalry btw existing competitors
3 pressure from substitute products
4 bargaining power of buyers
5 bargaining power of suppliers
67
Q

Threat of entry

A

New entrants to industry put pressure on price and profits

68
Q

Rivalry between existing competitors

A

Several competitors in an industry will cause more price competition leading to lower profit margins and market shares

69
Q

Pressure from substitute products 2

A

Industry faces competition from firms in related industry

Ex. Sugar producers compete with corn syrup producers

70
Q

Availability of substitutes…

A

Limits the prices that can be charged

71
Q

Bargaining power of buyers 2

A

If buyer purchases large fraction of industry output it has bargaining power to reduce prices

Ex. Car producers put pressure on suppliers of auto parts, making
auto parts industry less profitable

72
Q

Bargaining proper of suppliers

A

If supplier of key input has monopolistic control over product
It can demand higher prices, making industry less profitable

Securities Analysis (4 decks)

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