PASSING 82 Flashcards
Sharpe ratio
The formula for the Sharpe ratio is: (actual rate of return minus the risk-free rate of return) divided by the standard deviation of the security. Beta is not a component.
The Sharpe ratio is used to measure risk-adjusted performance of either a portfolio or an individual security. The Sharpe ratio uses standard deviation as the denominator in its formula: the higher the Sharpe ratio, the better the portfolio or security has performed on a risk-adjusted basis.
Capital asset pricing model (CAPM) is used by many to assess the expected return of a security.
The formula for this computation is as follows: 10% (the return on the market is a beta of 1.0) minus the risk-free rate of 2% or 8%. Then, multiply that by the beta of this stock (1.5) to arrive at 12%. That is, the stock should return 12% above the risk-free rate, or 14%. The standard deviation is not relevant to this computation.
Current yield
Current yield is determined by dividing the annual dividend of $4 ($1 per quarter × 4 = $4) by the current stock price of $60 ($4 ÷ $60 = 6.7%).
Keynesians
Keynesians advocate government intervention in the workings of the economy through increased government spending, which in turn increases aggregate demand.
Marginal tax rate
The IRA defines marginal tax rate as “the highest rate that you will pay on your income.” Basically, as you make more money, you pay tax at a higher rate incrementally. The effective tax rate is the average that you pay on all of your income.
Customer pays
In an agency trade, the customer–buyer or seller–pays a commission. In a principal trade the buying customer pays a markup, the seller a markdown. The acquisition cost of a mutual fund is the sales load.
Margin account
The original call for funds is the Reg. T or margin call. But, when the call is for additional money, it is known as maintenance margin.
Monetarists
Monetarists believe that the economy and inflation are best controlled through the management of the money supply rather than through fiscal policy stimulation.
Structured products. complex instruments
As unsecured obligations, their safety is only as good as the financial strength of the issuer and because these tend to be one-of-a-kind products, they do not have liquidity. A particular hazard of investing in these is that there is a low level of pricing transparency; another concern is that the returns are generally not fully realized until the maturity date.
Under the CAPM, using the SML
We can determine the expected return of any given stock by taking the risk-free rate and adding to that the product of that stock’s beta coefficient and the difference between the expected return on the market and the risk-free rate.
Tactical approach.
The approach to asset review that intentionally deviates from the normal asset mix to take advantage of market opportunities is the tactical approach. Investors using this approach try to use market timing to beat the market, so this approach requires a great deal of predictive ability.
The Consumer Price Index (CPI)
Is the average cost of goods and services (market basket) purchased by consumers as compared to those same goods and services purchased during a base period.
Net present value NPV
Net present value is a computation taking into consideration future cash flows, discounted to the present, and comparing that to the capital investment necessary to obtain those flows. It is always expressed in monetary units and, if positive, indicates a potentially worthwhile investment.
Positive margin
The rate of return on the investment exceeds the interest cost on the borrowed money.
Long call option
Those who are bullish on a stock, but don’t have sufficient funds at this time to purchase the stock, can “lock-in” their future cost by going long a call. Income is generated only through selling options. Since a long call is on the same side of the market as long stock, there is no hedge. A spread involves a long and short option.
Lock in future cost.
Exempt security
Several types of securities are specifically exempt under the act, including equipment trust certificates issued by a state-regulated or federally regulated railroad. High-quality (receives a rating in one of the three highest rating categories from a nationally recognized statistical rating organization) commercial paper is exempt if the term is nine months or less and it is issued in denominations of $50,000 or more.
SEC adviser’s registration
Under the Investment Advisers Act of 1940, registrations become effective 45 days after filing, unless delayed by the SEC, and remain effective until withdrawn by the adviser or canceled, suspended, or revoked by the SEC. The SEC will cancel a registration if the adviser is no longer in existence or in the business. Although the ADV-W is the form for withdrawal, it becomes effective upon acceptance by the IARD, provided however that the investment adviser’s registration continues for a period of 60 days after acceptance solely for the purpose of commencing a proceeding regarding any violation of the Act.
Capital Asset Pricing Model (CAPM)
CAPM is built on the theory that investors must receive a return commensurate with the amount of risk taken over a specified period of time.
Private placement & preorganization
No money changes hands in the sale of a preorganization certificate or subscription, while the seller receives payment in the case of a private placement. The state will consider a private placement an exempt transaction if it is anticipated that individual (noninstitutional) investors are purchasing for investment only, not immediate resale.
No holding period restrictions are placed on preorganization certificates. Only in the case of a sale of a private placement to an institutional client is it permissible to pay commissions. Finally, choice I has it backwards. When referring to retail (noninstitutional) investors, there is a limit to the number of offers (10), while in the preorganization certificate, the number of sales (subscribers) is limited to 10 regardless of whether they are retail or institutional.
investment policy statement (IPS),
The investment policy statement (IPS), although not required under Department of Labor (DOL) rules, is generally found in corporate qualified plans, such as the defined benefit or defined contribution plan. Because the investor manages the IRA, there is no need to prepare an IPS for participants to review.
Dividend discount model (DDM
The dividend discount model (DDM) calculates the present value of the future dividends that a company is expected to pay its shareholders. It uses that calculation to arrive at a projected market value of the common stock.
Treasury Bills T-Bill
Treasury Bills are always issued at a discount from their face value. At maturity, the investor receives par. No interest
Filing dates
For S corporations, the filing date is March 15 (assuming it is a weekday). For partnership returns (including LLCs with more than one member), the due date is also March 15. For C corporations, the due date is the 15th day of the fourth month following the close of the corporation’s year; this date is April 15th for a calendar-year filer. One effect of this is that LLCs, partnerships, and S corporations all have the same filing deadline.
Shareholders’ equity
Total assets minus total liabilities equals shareholders’ equity ($780,000 − $370,000 = $410,000).