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ISA > Term 1 > Flashcards

Term 1 Flashcards

1
Q

What is the formula for the CAPM?

A

Rf+cov/Var(rm-Rf)

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2
Q

Discuss the CAPM?

A

Represents ROR and Beta
If plotting over = Under priced
Investors are rewarded for taking on systematic risk

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3
Q

What are the assumptions of the CAPM?

A

Investors are efficent and homogenous
Unlimited borrowing and lending, no taxes or transaction costs
Infinitley divisible assets

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4
Q

What is the Roll Critique?

A

As we cannot identify the market, we cannot test the CAPM

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5
Q

Discuss the Zero Beta Model?

A

A model that uses the least risky asset as opposed to a risk free asset
Minimum variance
Steeper than the CAPM

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6
Q

What is the value effect?

What is the size effect

A

The higher P/E the better the performance

The smaller the firm the better the performance

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7
Q

What is the CCAPM?

A

Links asset growth to growth of aggregate consumption
More growth = higher returns
High covariance with consumption = more risk
We can now measure the market portfolio

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8
Q

Discuss risk in the CCAPM?

A

Consumption valued more in hard time

A risky asset thus pays off more in booms

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9
Q

What is the CCAPM equation?

A

E(R)=BicRPc
B= Slope of returns above consumption portfolio
RPc = Risk premium associated with consumption uncertainty

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10
Q

What are the drawbacks of the CAPM?

A

Does not match data
Consumption is hard to measure
Every individual does not invest but does consume

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11
Q

Define the ICAPM?

A

Inter temporal CAPM
Assume the distribution of returns and investor preferences change over time
There is also multiple sources of risk

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12
Q

Define some potential sources of risk in the ICAPM?

A

Consumption, labour income, other investment opps

Each has own beta

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13
Q

Evaluate the ICAPM?

A

Need to use factors that have a theoretical justification

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14
Q

How do you calculate the Beta of a weighted portfolio?

A

Calculate the average of each of the assets Beta

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15
Q

What do we assume about the basic securities?

A

They themselves are well diversified therefore no idiosyncratic risk

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16
Q

What is a factor replicating portfolio?

A

An asset that has one Beta = 1 and the rest zero

This allows an identical portfolio to an asset X - should have same price

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17
Q

What is the notation?

A

X=rf+B1xLamda1+B2xLamda2`

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18
Q

What is the APT?

A

We replicate an asset using factor replicating portfolios, they should have teh same price

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19
Q

What are the limitations of the APT?

A

Doesn’t say what factors to include

Can never disprove the model, only the factors include

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20
Q

What are the assumptions of TA?

A

The market considers all info

Prices move in trends

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21
Q

What are the benefits of TA?

A

Only need to consider previous information

Low information costs

22
Q

What are the drawbacks of TA?

A

Contradicts EMH

Very subjective

23
Q

What is the DOW theory?

A

Three Trends:
Primary
Secondary
Tertiary

24
Q

What proves a primary trend?

A

Each peak and trough should be higher than the last

25
Q

What are the types and time frames of trends?

A

Upwards, Downards, Horizontal

Long = Months
Medium = Weeks
Short = Days
26
Q

Discuss support and resistance?

A

Support is the bottom - buyers overwhelm sellers

Resistance is the top - Sellers overwhelm buyers

Moving beyond indicates a trend

27
Q

Discuss role reversal in supports and resistances?

A

If moves beyond a support, it becomes a resistant

28
Q

What is teh benefits of using moving averages?

A

A short average allows faster reactions but may misfire

29
Q

Discuss some patterns in stoch charts?

A

Head and Shoulders - Indicate Reversal

Double Tops - Indicate Reversal

Cup and Handle - Indicates a buy

30
Q

What are the four types of Gaps?

A

Common
Breakaway - Indicates a new trend
Runaway - Trend accelerating
Exhaustion - Followed by a reversal

31
Q

Discuss triangles?

A

Indicates a breakaway in direction of flat side

32
Q

What is point and figure chatrting?

A

Define a unit, x indicates increase, removes noise

33
Q

Discuss candlestick?

A

Hollow indicates higher than open

34
Q

Discuss oscilators?

A

Records momentum
If < 15 - Buy
If higher than 85 - sell

35
Q

What do we assume for FA?

A

Markets are semi-strong inefficent

36
Q

What variables do we consider for FA?

A

Financial reports
Macro news
Analyst opinions

37
Q

Discuss the top down approach?

A

Start with macro analysis
Then pick strong industries
Then pick firms

38
Q

What are demand shocks in TA?

A

Tax rate changes

Gov spending

39
Q

What are supply shocks in TA?

A

Natural disasters

40
Q

What must be considered at an industry level?

A

Sensitivity to business cycle

41
Q

What is sector rotation?

A

Moving portfolio based on economic situation
Contraction = Utilities
Expansion = Industry

42
Q

Discuss the industry life cycle?

A

Start up - Rapid Growth
Then slows
Does not indicate asset quality - cash cows

43
Q

What are the two main approaches to micro valuation?

A

Discounted Cash flow

Relative Valuation

44
Q

What is the dividend discount model?

A

Dt/(1+k)^t …. (Dt+1)/(K-g)(1+k)^T

45
Q

What is the cash flow valuation method?

A

FCF/(1+WACC)^t … (FCF/WACC-G)(1+K)^t

46
Q

What are the pros and cons of discounted cash flow?

A

Determins the firms absolute value

We have to assume a discount rate and growth

47
Q

What is the issue with relative valuation?

A

If you compare an overvalued industry to a massively overvalued market, you may believe the industry is undervalued

48
Q

What is the P/E ratio?

A

P/E=(D1/E)(K-g)

49
Q

Discuss the PEG ratio?

A

PE/G

If PE

50
Q

What is value investing?

A

Determing a stocks fundemental value and comparing it to the market price

51
Q

Name some types of investors?

A

Passive Screens: Scan whole market
Contrarian Investors: Go against market
Activist: Change company

ISA (2 decks)

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