QBANK Flashcards
Compared with a direct investment in real estate, investing in real estate investment trusts (REIT) most likely offers a distinct advantage regarding
REITs are PLCs that invest in a portfolio of commercial or residential properties, typically relying on leverage to finance and hold larger portfolios that can enhance returns. In REITs, shares are publicly traded and the investment portfolio is diversified, providing two key advantages:
Liquidity and Income Stability
What is a REIT, RMBS, CMBS
Real estate Investment Trust
Residential mortgage backed security
Commercial mortgage backed security
Explain the efficient market hypothesis
Three forms of markets
Weak, Semi Strong and Strong.
Weak: Markets reflect historical data only
Semi strong: Markets reflect historical and public information
Strong: Markets reflect private, public and historical information
Calculate and explain a continuous uniform distribution
A situation with an infinite equally likely possible outcomes between A and B
Formula =
F(X) =
x - a
/
b - a
a= startpoint
b= endpoint
x= observation
What is a utility function.
What is an indifference curve
What is the assumption for indifference curves
What is the preference for a risk averse investor
Investor’s utility functions represent their preferences regarding the trade-off between risk and return (i.e., their degrees of risk aversion).
An indifference curve is a tool from economics that, in this application, plots combinations of risk (standard deviation) and expected returns among which an investor is indifferent
They are plotted based on returns and risk, so the assumption is these are the only important factors
Less risky
Standard II(B) - What is required to be guilty?
An action that distorts the securities price that was INTENDED to decieve
What is a production function?
Explain the formula, its components
What is the most important factor in a production function
They are used to identify sources of economic growth and estimate an economy’s stable GDP growth rate
Y = A x F(L,K)
Y= agregate economic output (income or GDP)
A= technology
L = Supply of labour (num workers x hours worked)
K - capital stock (all equipment and structures used in prod)
Increased total factor productivity (technological improvemen) results in production processes capable of making more higher-quality goods per unit of input
Technological impact is most important for developed countries
What is capital rationing
What is post auditing
What is project sequencing
the process of allocating funds to projects when companies do not have enough funds for all profitable projects
process of comparing a completed project’s results to it’s expected results
This is when the ability to undertake one project is contingent on the success of another
Explain and calculate du pont 3 and 5 stage
The DuPont system of analysis is an approach that can be used to analyze return on equity (ROE). It uses basic algebra to break down ROE into a function of different ratios, so an analyst can see the impact of leverage, profit margins, and turnover on shareholder returns. There are two variants of the DuPont system: The original three-part approach and the extended five-part system.
- Return on Equity = NI / Average SH Equity
NI / Revenue x Revenue / Average sh equity
- Return on Equity = Net Profit margin x Total asset turnover x Leverage
NPM = NI / Revenue
Total Asset Turnover = Revenue / Avg Total Assets
Leverage = Average total assets / average sh equity
NI / Revenue =
NI / EBT (tax burden)
EBT / EBIT (interest burden)
EBIT / Revenue (ebit margin)
Calculate Spot Price from Forward Price
Forward Price / 1+R + Cost of carry
Calculate Forward price from spot price
FV Spot Price - FV (benefit - cost)
How does a profession maintain trust?
When members conduct reflects the professions ethical principles
Explain how interest, dividends and tax are treated for US GAAP and IFRS.
Category US GAAP IFRS
Interest Received CFO CFO / CFI
Interest Paid CFO CFO / CFF
Dividende Received CFO CFO / CFI
Dividends Paid CFF CFO / CFF
Tax CFO Any (mostly CFO)
What is the capital allocation line?
What is the efficient frontier?
The capital allocation line represents a combination of risk-free assets and risky assets, reflecting various risk-return trade-offs in a portfolio.
In contrast, the capital market line represents the efficient frontier of portfolios that maximize return for a given level of risk, assuming a risk-free rate.
Calculate a percentile
(N+1) x percentile / 100
Explain pricing vs valuation of a swap
Pricing: Setting the terms so that the contract has an initial value of 0.
Valuation: Deciding the contracts value after initiation
Calculate the expected return of an asset, based on the capital asset pricing model
E(R) = Rf + B (Rm - Rf)
E(Ri) = Estimated Return on an asset
Rf = Risk free rate
B = Beta
Rm = Market return
(Rm - Rf) = market risk premium
Calculate the market risk premium, based on the capital asset pricing model
Market Risk Premium = (Rm - RF)
Re - Rf
/
B
Re = Cost of equity capital
Rf = Risk free rate
B = Beta
Explain how the treatment of an impaired asset with a finite life (e.g a patent).
- Impairment analysis is done after a significant event acts as a trigger
- Impairment treatment is the same as for tangible assets
- The impairment will flow through the INCOME STATEMENT and be reflected in NET INCOME
- Impairment will reduce the value of the asset on the BALANCE SHEET
Calculate the Treynor ratio
Rp - Rf
/
Bi
Rp = Stock or portfolio return
Rf = Risk Free rate
Bi = Beta
Calculate the Sharpe Ratio
E(Rp) - Rf
/
SDp
E(Rp) = expected return portfolio
Rf = Risk free rate
SDp = Portfolio standard deviation
Explain the change in polarity principle
The change in polarity principle asserts that once breached, a support level becomes a resistance level. Similarly, resistance levels become support levels upon a breach
Describe bond credit enhancements and uses
Internal
Subordination - credit tranches
Overcollateralization
Reverse accounts - excess cash received from financed asset deposited in safe accounts
External
letter of credit - guarantees from financial institutions (not insurers)
surety bonds - payment guarantees issued by insurers
cash Collateral accounts - cash deposited by guarantor for issuer to borrow
Explain the different types of risk for a company
Macro, Business, Financial
Macro - E.g Fiscal policy - affects most companies
Business E.g competition, execution risk - affects a company’s operating profit
Financial - affects a firm’s net income and is impacted by the proportion of debt in the capital structure.
Financial risk is affected by a firm’s capital structure, which exposes a firm to variability in it’s net income, which is in turn affected by macros and business risk. therefore, financial covers all risks.
Explain a pull vs a drag in liquidity
Pull = Speedup of cash OUTFLOWS
Drag = Slowdown of cash INFLOWS
Explain the different monetary policies from the central bank
- Open market operations
Trade Securities (normally gov)
Expansionary: Buy Securities
Contractionary: sell securities
- Policy interest rate
Set Rate used to signal markets
Expansionary: lower
Contractionary: raise
- Reserve Requirements
Set reserve requirements for bank deposits
Expansionary: decrease
Contractionary: increase
