Overall CFP Flashcards
PRIME
Systematic risks (non diversifiable): Purchasing power risk Reinvestment rate risk Interest rate risk Market risk Exchange rate risk
Behavorial finance terms
Page 12 of Dalton investments book
Price weighted average index
Dow Jones Industrial Average
Value weighted indices
S&P 500
Russell 2000
Wilshire 5000
EAFE
What is the difference between price and value weighted indices?
Price weighted indices are simply an average of the prices of the holdings. They do not take into account the percent allocation of the position within the index- or market capitalization.
Unsystematic risks
A acctg risk B business risk C country risk D default risk E executive risk F financial risk G government/ regulation risk
What measure of risk does the Capital Market Line (CML) use?
Standard deviation
When is P/E ratio used?
To value a stock that does not pay dividends
P/E ratio
Price per share / EPS -or- Price per share= P/E x EPS
PEG ratio
Stocks P/E ratio
/
3-5 year growth rate in earnings
What does PEG ratio tell us?
Used to determine if the stock’s P/E ratio is keeping pace with the firm’s growth rate in earnings.
A PEG rate equal to 1 suggests that the stock is fairly valued bc P/E ratio is in line with earnings growth rate.
A PEG ratio greater than 1 suggests the stock is fully valued (or over valued) bc an expanding P/E ratio is contributing to the stock price appreciating more than the growth rate.
Dividend Payout ratio (not on formula sheet)
Common stock dividend
/
Earnings per share
The relationship btwn the amt of earnings paid to shareholders in form of a dividend, relative to EPS.
Usu the higher the dividend payout ratio, the more mature the company.
ROE
EPS
/
Stockholders equity per share
Measures overall profitability of a company
Dividend Yield
Dividend
/
Stock Price
What are tools used by technical analysts?
Charting, Dow Theory, Market Breadth, Market Volume, Short Interest, Odd Lot Trading
What do Fundamental Analysts look at?
Financial statements, ratio analysis, calculating liquidity & profitability, economic data (inflation, interest rates, GDP & unemployment).
Weak form of EMH
Prices reflect historical price data.
Refutes technical analysis-
Only advantage through fundamental analysis & insider info
Semi-Strong Form of EMH
Price reflects public information.
Only advantage through insider information.
Strong form of EMH
Price reflects all information.
No advantage- even from insider info.
Market anomalies
January effect
Small firm effect
Value Line effect
P/E effect
Market anomalies do not support the EMH in any of the three forms.
Are agency bonds backed by the full faith of the US government?
No- with one exception: GNMA- Ginnie Mae bonds (Government National Mortgage Association), division of Dept of Housing & Urban Development
3 types of muni bonds
1) General Obligation bonds- backed by full faith of issuing entity
2) Revenue bonds- backed by project revenue
3) Private Activity Bonds- used to finance construction of stadiums
Companies that insure muni bonds
American Municipal bond assurance corp (AMBAC)
-and-
Municipal Bond Insurance assoc corp (MBIA)
Corporate bond risks
Default risk
Reinvestment rate risk
Interest rate risk
Purchasing power risk
US Gvt bond risk
Reinvestment rate risk
Interest rate risk
Purchasing power risk
(Difference btwn corporate bonds is corp bonds also have default risk)
TEY
r
/
(1-t)
r= tax exempt yield t= marginal tax rate
Gives how much yield a corporate bond much would need to pay to be equivalent to a tax exempt muni
Tax Exempt Yield
Corporate rate x (1-marginal tax rate)
Bond duration
Duration is the wtd avg maturity of all cash flows.
The bigger the duration, the more price sensitive or volatile the bond is to interest rate changes.
Modified duration is a bond’s price sensitivity to changes in interest rates.
A bond portfolio should have a duration equal to the investor’s time horizon to be effectively immunized.
As coupon rate increases, what does duration do?
Decrease
True or False: There is a direct relationship between duration and the term of the bond?
True. As term increases, duration will increase.
True or false: there is an INverse relationship btwn CR/ YTM and duration?
True. Remember that CR and YTM are INterest rates and there is an INverse relationship.
What type of investor benefits most from the tax advantages of preferred stocks?
Corporate
NAV
Assets- Liabilities
/
Shares outstanding
UIT’s
Passively managed
Self liquidating
True or False:
ADR’s eliminate exchange rate risk
False
What option will provide the maximum gains if a stock price appreciates?
Buying a call
What option maximizes gains if a stock price falls?
Buying a put
Option premium consists of what 2 things?
Intrinsic value and time value
Intrinsic value:
Call option:
stock price-strike price
Put option:
strike price- stock price
Time value =
premium - intrinsic value
When trying to protect profits or lock in gains, what option should you do?
Buy a put
Call option vs Put option
Call is right to buy
Put is right to sell
Long straddle
Investor buys a put and a call option on same stock.
Short straddle
Investor sells a put and call option on same stock.
Zero cost collar
Investor owns underlying stock but wants to protect downside risk without paying the entire cost of the put option.
Investor sells a call option at a strike price that is slightly higher than the current stock price. This creates premium received.
Investor then buys a put option that is below the current stock price. The premium dollars received by selling the call are used to buy the put options.
Black Scholes model
Used to determine the value of a call option. Considers:
- price of underlying asset
- time until expiration
- risk free rate of return
- volatility of underlying asset
All variables have a direct relationship on price of the option, except strike price. As strike price increases, the option decreases in value.
Put/call partity
Attempts to value a put option based on the value of the corresponding call option.
Binomial pricing model
Explains prices based on underlying asset moving into 2 directions.
Taxability of options
Call option:
If contract expires, premium paid is a ST loss and premium rec’d is a ST gain.
If contract is exercised, premium is added to stock price to increase the basis. If held > a year, LT gain or loss. If held < a year, ST gain or loss.
For put option, if contract expires w/out being exercised, the premium paid is a ST loss and premium rec’d is a ST gain.
Call option intrinsic value
Stock - Strike price
What options strategy can cause the greatest loss for the investor?
Selling a naked call.
Long position benefits when price goes _______?
Up
Short position benefits when price goes _____?
Down
Who does not need to register with the SEC?
Publisher was Broke (broker- dealers) because he was LATE to US Bank (bankers)
L lawyers
A accountants
T teachers
Engineers
What does Series 6 allow you to sell?
Mutual funds, UIT’s and variables (life and annuities)
Also need a state license to sell variable life insurance or variable annuities
What does Series 7 allow you to sell?
Everything except commodities and futures
3 main goals of Federal Reserve
Maintain long term economic growth
Maintain price levels supported by the economy
Maintain full employment
BEST
Buy securities- increase money supply- decrease interest rates = Expand
Sell securities- decrease money supply- increase interest rates = Tighten
Current Ratio
Current assets
/
Current liabilities
Shows clients ability to meet ST obligations
Housing ratio
< 28%
Monthly housing costs (PITI)
/
Monthly GROSS income
Students are considered independent if they are:
Over age 23
Have legal dependents other than a spouse
Are married
If req’d rate of return decreases, stock price will increase.
If dividend is expected to increase, stock price will increase.
If the req’d rate of return increases, the stock price will decrease.
If the dividend is expected to decrease, the stock price will decrease.
