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Investments 1 > PP 2 - 10 Financial Market Phenomena & Investment Return Measurement > Flashcards

PP 2 - 10 Financial Market Phenomena & Investment Return Measurement Flashcards

1
Q

how many stock exchanges are there in the US?

A

more than 13

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2
Q

if you buy a stock , you can purchase in which exchanges?

A

any

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3
Q

you can trade a stock in what exchanges?

A

multiple, but might have different prices

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4
Q

when you purchase a stock, what price would it be executed at?

A

the lowest

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5
Q

when you sell a stock, what price would it be executed at?

A

the highest

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6
Q

because the price is constantly moving, a ____ is used

A

regulation system (Reg NMS)

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7
Q

tick size is the…

A

minimum price variation

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8
Q

what is the tick size after 2001?

A

1 cent

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9
Q

lower tick size results in lower…

A

transaction costs

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10
Q

why can the tick size not be decreased any further?

A

it was tested, but SEC is worried it would reduce IPO #s

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11
Q

priority rules determine…

A

what’s orders are executed first

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12
Q

exchanges usually use which priority?

A

price-time

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13
Q

in price-time priority, what goes first?

A

best price, but if multiple have the same price, the earliest goes before

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14
Q

how do brokers earn commission?

A

charging commission fees from investors

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15
Q

example of a broker that uses $0 commission

A

Robinhood

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16
Q

how do $0 commission brokers make money?

A

wholesalers provide $$ equity to the market

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17
Q

the money market is a…

A

wholesaler

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18
Q

customer sends stock trade $ to who?

A

broker

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19
Q

broker sends the customer stock trade to who?

A

wholesaler

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20
Q

after receiving the stock trade, the wholesaler…

A

sends a small fee and customer’s proceeds to the broker

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21
Q

traditionally, we can only buy a multiple of…

A

one share of a stock

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22
Q

example of busying a fraction of a share

A

purchasing 1/1000 of a share

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23
Q

why do brokers allow for fractional share trading?

A

makes trading more accessible and allows for a more diverse portfolio

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24
Q

order types specify…

A

how your orders get executed

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25
Q

MARKET ORDER will be executed…

A

immediately with the best price in the market

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26
Q

LIMIT ORDER will be executed…

A

only when the best price is better or at your specified price

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27
Q

how many order types are on the market?

A

300

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28
Q

when would you use a limit order?

A

if you are more patient

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29
Q

what are dark pools?

A

alt trading systems (ATS) provided by brokers and investment banks that show no price or volume information

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30
Q

who are dark pools mostly used by?

A

institutional investors (large company)

31
Q

in a dark pool, the only prices used are…

A

from exchanges

32
Q

in a dark pool, you do not know…

A

when and how much your orders will be executed

33
Q

why do institutional investors use dark pools rather than stock exchanges?

A

to avoid affecting the market when these large block orders are placed

34
Q

stock exchanges provide transparency about order information such as….

A

price and volume in the market

35
Q

in an efficient market, prices…

A

fully reflect available information about securities

36
Q

publicly available information cannot…

A

be used to improve investment performance

37
Q

anomalies are…

A

the pattern of returns that seem to contradict the efficient market hypothesis

38
Q

three anomaly effects

A

size effect, value effect, and momentum effect

39
Q

what effect: firms with higher book value to market value have earned abnormal returns

A

value effect

40
Q

what effect: small firms have earned abnormal returns

A

size effect

41
Q

what effect: firms with higher returns in the past 12 months continue to perform better

A

momentum effect

42
Q

if these firms are misplaced, why can’t professional arbitrageurs exploit them away?

A

if markets are efficient, there would be no such opportunities to profit

43
Q

if markets are efficient, there would be no such…

A

opportunities to profit

44
Q

in an IPO, investment banks facilitate the transaction by…

A

acting as underwrites

45
Q

who are the underwriters in IPO?

A

investment banks

46
Q

in IPO, how to firms grow further?

A

raising capital

47
Q

what do IPO firms returns look like?

A

high first-day, but low long-term

48
Q

direct listing takes a form public by…

A

removing underwriters from going public process

49
Q

SPAC takes a form public by…

A

merging with them

50
Q

SPAC sponsors…

A

take the role of identify the private firm to merge with

51
Q

what types of firms go public with direct listing?

A

larger, more well-known, straight-forward companies (i.e. Spotify)

52
Q

what types of firms go public with SPAC?

A

smaller companies

53
Q

stocks have a ____ average return than bonds and bills

A

higher

54
Q

smaller stocks have a _____ average return than larger stocks

A

higher

55
Q

why do stocks have higher returns?

A

they are riskier (risk-return tradeoff)

56
Q

what type of investment has the lowest average annual return?

A

treasury bills

57
Q

highest to lowest types of investments annual returns

A

small stock, S&P 500, corporate bonds, treasury bills

58
Q

why do people still buy treasury bills and not invest in all small stocks?

A

because treasury bills are low risk, highly liquid, and predictable. if you only invest in small stocks, you are at a higher chance of risk and your portfolio will not eb as diverse

59
Q

what is the motivating question of measuring investment returns?

A

how does a security perform as an investment?

60
Q

how can you compare to securities bought in the beginning of the year with different initial prices, but the same dividends paid and increase in current price at the end of the year?

A

sale dollars earned by the initial investments using HOLDING PERIOD RETURNS (HPR)

61
Q

holding period return is the…

A

rate of return over a given investment period

62
Q

(worded equation) HPR =

A

dollars earned (price appreciation plus dividends) per dollar invested

63
Q

capital gains yield is the…

A

rise in the price of an investment

64
Q

dividend yield is…

A

a ratio that shows what return an investor would receive from an investment solely on dividend payments

65
Q

a higher HPR is ____ than a lower HPR

A

higher

66
Q

when comparing investments in different investment horizons, you would use…

A

annualizing returns

67
Q

what is the simple interest approach of annualizing returns?

A

annual percentage rate (APR)

68
Q

APR ignores…

A

compound interest

69
Q

the count interest approach when annualizing returns is…

A

effective annual rate (EAR) (aka APY)

70
Q

APR is used by..

A

loan officers and in mortgages

71
Q

APR seems ____ than it really is

A

lower

72
Q

EAR seems ___ than it really is

A

bigger

73
Q

EAR is used by..

A

banks wanting you to save with them

74
Q
A

Investments 1 (4 decks)

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