Series 66 Chapter 6: Investment Analysis Flashcards
Three Contrarian Investing strategies
Odd Lot Theory Short Interest Put/ Call Ratio
Current Yield Formula
Annual Interest or dividends / Market (purchase) Price
If an investor reduces risk by selling an option they are?
Producing income or creating a partial hedge
Short Interest Theory
Short sellers must eventually buy back, therefore when short interest increases, Bullish
Risk adjusted return compared to standard deviation. Compares the actual rate of return to the risk free return on a T-Bill and to the standard deviation.
Sharpe Ratio
Sharpe Ratio Formula
SR = (actual rate of return - risk free rate of return) / SD
A method of evaluation an investment by estimating future cash flows while taking into consideration the time value of money.
Discounted Cash Flow
an imaginary portfolio of securities that are not actually held by the investor
Benchmark Portfolio
Used to create an optimal portfolio or efficient frontier (highest rate of return for the amount of risk in the portfolio)
Modern Portfolio Theory
Measure the rate of return on an investment company portfolio compared with a benchmark portfolio or index.
Active Rate of Return
Measure volatility of a stock in relation to the S&P 500
Beta
When must a margin account risk disclosure account be signed?
At or prior to opening account.
Who creates Forward Contracts? How are they traded?
Investors or traders. Privately, OTC. Not liquid or marginable
Put/ Call Ratio
More calls than puts - Bearish More calls than puts - Bullish
CAPM formula
CAPM = T-Bill Return + [(S&P 500 expected return - T-Bill) x Beta]
Percentage return that would be realized if an investment is held for a full calendar year.
Annualized Return
Total Return Formula
Net gains + income + appreciation - depreciation / amount invested
Formula for Annualized Return?
ROI x (365/days held)
Evaluates percentage earned on investments in one year period. Considers the gains made on the investment, the appreciation, and the amount of income received.
Total Return
Estimated rate of return based on the probability of a bullish, bearish, or normal market?
Expected Return
A trial and error process to calculate IRR without a calculator.
Iteration
the percentage of earned investments over an entire holding period. In this case, the investment is held over 1 year.
Holding Period Return
Used to compare actual rate of return to required rate of return.
Net Present Value
Passive Rate of Return?
Index rate of return
Contracts that allow institutional investors to exchange risk on loans or bonds?
SWAP
What is maintenance call is cash account?
25%
Measures price volatility of bonds.
Bond Duration
What is the formula for Future value?
FV= PV x (1 + R) (raised to the t)
The rate of return necessary to obtain the future value required with the money presently invested.
Internal Rate of Return
Risk Adjusted Return formula?
Stock appreciation - T-Bill with shortest maturity
Formula for Alpha
Alpha = ROI / Beta
Look at Page 97 and 98
Look at page 97 and 98
If you have to find the investment with the highest NPV look for what?
The investment that pays the most in the shortest amount of time.
Holding Period Return Formula
Gain-Loss / amount invested
If an investor reduces risk by buying an option they are?
Hedging or protecting
A transaction between two entities to buy or sell a specific commodity at a specific time in the future. Not liquid.
Forward Contracts
the rate of return on an investment compared to the market risk of the security and is one way to measure risk adjusted return.
Alpha
Based on the rate of return on T-Bills
Risk Free Rate of Return
Odd Lot Theory
As odd lot volumes increase - Bearish As odd lot volumes decrease - Bullish
Real Rate of Return formula
Actual return on investment - inflation
What is maintenance call is margin account?
30%
Rate of income return based on the market price of the security.
Current Yield
Percentage earned compared to inflation
Real Rate of Return
Risk of investing in stocks vs US Gov.bonds
Risk Adjusted Return
