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Series 7- Random Fact Bag > Unit 13- Portfolio Or Account Analysis > Flashcards

Unit 13- Portfolio Or Account Analysis Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Difference between strategic and tactical asset allocation?

A

Strategic = Arranging asset classes proportionately, and rebalancing them periodically. Is a long-term, passive approach.

Tactical = Making portfolio changes based on market conditions (buys/sells). Is an active, often short term approach.

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2
Q

What is Modern Portfolio Theory?

A

Invented by Harry M, it seeks to combine volatile and price stable investments in the same portfolio.

MPT looks to use investments that have a negative coronation.

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3
Q

Analysis tools used in MPT?

A

Capital Asset Pricing Model (CAPM)

  • A calculation used to project the rate of return based on an investments risk profile.

Beta Coefficient

  • Is a measure of a stocks volatility, compared to the overall market.

Alpha

  • The extent to which an investments return exceeds or falls short of its expected return.
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4
Q

What is fundamental analysis, and what does it include?

A

Fundamental Analysis = an examination of the business prospects of a company

Tools used include:

  • Financial Statements.
  • Balance sheet
  • Income statement
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5
Q

What are the three types of business assets?

A

Current Assets = Cash or items that can be turned into cash within the next 12 months

  • Cash and cash equivalents
  • Accounts receivables
  • Inventory
    -Prepaid expenses

Fixed Assets = Assets not easily converted to cash. Can be depreciated over time.

  • Property
  • Equipment

Other Assets = Intangible assets, like brand value, etc.

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6
Q

What are the two types of liabilities?

A

Current Liabilities = Corporate debt payments due within 12 months

  • Accounts payable
  • Accrued wages payable
  • Current long term debt
  • Notes payable
  • Accrued taxes

Long-Term Liabilities = all debt due longer than 12 months

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7
Q

What are the three key parts of an income statement (aka: P& L)?

A
  • Revenues = Total sales
  • Cost of Goods Sold = The total cost to make a finished goods
  • Pretax Income = Operating income - interest payments
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8
Q

How are fixed assets depreciated?

A

Depreciation is calculated annually, over the useful life of the asset.

It is often seen as an expense on the income sheet, and included in the COGS.

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9
Q

What is shareholder equity, and what are the three types?

A

Shareholder Equity = total assets - total liabilities (also called net worth)

There are three types:

  • Capital stock at par = Preferred stock + common stock, at par value
  • Capital in excess of par = The amount of money over par that a company received through an IPO.

Retained Earnings = Profits that have not been paid out as dividends.

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10
Q

What is a companies capital structure?

A

A companies capital structure or capitalization is comprised on four things:

  • Long term debt
  • Capital stock
  • Capital in excess of par
  • Retained earnings
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11
Q

Define: working capital

A

Working capital = current assets - current liabilities

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12
Q

Define: Current Ratio

A

Current ratio = current assets / current liabilities

Note: this is that same thing as working capital, simply expressed as a ratio

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13
Q

Define: Quick asset ratio (aka: acid test ratio)

A

“Quick assets” = current assets - inventory. It is essentially a companies currents assets, if they could not make anymore sales.

QAR (aka: acid test ratio) = quick assets / current liabilities

Note: this is simply a more stringent version of the current ratio

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14
Q

Define: debt to equity ratio

A

Debt to equity = total capitalization / total debt

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15
Q

Define: book value per share

A

Book value per share = NAV per share of a single company (very similar to a mutual fund)

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16
Q

Define: Footnoots

A

Found at the bottom of a financial statement, they document significant financial or managerial events that might affect the overall performance of a company.

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17
Q

Define: Earnings per share

A

Only apply to common stock. Is the company earnings per share of common stock outstanding.

Note: earnings are calculated after dividends to perfected share holders have been paid.

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18
Q

Define: dividend yield (aka: current yield)

A

Applies to common stock only. Just like a bond, this is the annual dividend divided by current market rate.

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19
Q

Define: dividend payout ratio

A

The proportions of a companies earnings that are paid to shareholders.

20
Q

Define: PE Ratio

A

P/E ratio = market price of a common share / earnings per share

21
Q

What does fundamental analysis focus on?

A

-Broad economic trends

  • Current conditions within an industry
  • Quality of a specific business
22
Q

What does technical analysis focus on?

A

Attempts to predict the direction of prices based on historical prices/volume patterns when laid out graphically.

23
Q

Three types of trend lines used in technical analysis?

A

Consolidations
- When a stocks price stays in a narrow range.

Reversals
- Indicates an upward or downward trend has dropped
- example: head and shoulders top pattern
- example: head and shoulders bottom pattern

Overbought/Oversold
- When an index is going a direction, but the underlying stocks are reversing direction (example: a declining index where more stocks are beginning to advance than decline)

24
Q

Three types of technical market theory?

A

DOW Theory
- Used to confirm the end of a major market trend.
- Three types of market trends: primary (one year or more), secondary (3-12 weeks), and short-term (hours or days).
- Shall changes are ignored, unless the overall DOW average is moved.

Odd Lot Theory
- Believes that small investors invest in odd lots, and are usually wrong.
- Decisions are made opposite to what the odd lot investors are doing

Short Interest Theory
- Looks are the number of short positions for a given stock.
- Because short positions must be re-purchased, this is seen as mandatory demand.
- A lot of short positions is seen as a bullish thing, and provides strong pricing support for a stock.

25
Q

What is The Bond Buyer and what’s included in it?

A
  • Daily publication.
  • Publishes the volume of municipal issues expected to hit the market in the next 30 days.
  • Publishes the “placement” or “success ratio” of the sale of new issues.
  • Publishes the 40 Bond Index (daily index, 40 GO issues, avg maturity 20 yrs)
  • Publishes the 20 Bond Index (weekly index, 20 GO issues, 20 yr maturity)
  • Publishes 11 Bond Index (weekly index, 11 of the bonds from the 20 Bond Index)
  • Publishes the Revdex 25 (weekly index, 25 revenue bonds, 30 yr maturity)
26
Q

What is Thompson Muni Market?

A

Is a wire service that provides information about municipal bonds current trading in the secondary market.

Key point: While The Bond Buyer focuses on new issues, Thompsons focuses on the secondary market.

27
Q

Define: Mortality and Expense Charge

A

This is a charge tied to either an annuity of a life insurance product that, that protects the insurance company in the event you live longer than expected (annuity) or die sooner than expected (life insurance).

28
Q

Define: Death Benefit Fee

A

Most annuities have the option to add a death benefit rider. In the event the person died before the annuity takes affect, the beneficiary will receive the great of either the principal or account value.

There is also cost to add this rider, called a “death benefit fee”.

29
Q

Define: 5% Markup Policy

A

Is a guideline (not solid rule) for fair rates for brokerage services in the OTC and exchange markets.

Applies to all transactions of nonexempt listed or unlisted securities, for both agency and principal transactions.

NOTE: Does not apply to securities sold by prospectus (new issues, mutual funds, annuities), and municipal securities.

Note: the price a firm paid for a security can not be factors into the price it is sold for. The sale price must be reasonable to the overall market.

30
Q

Define: Risk-less and Simultaneous Transactions

A

When a broker buys/sells a security to an investor that, that was not in their inventory. Can execute this as either an agent or principal transaction.

Note: if executed as principal, markups/markdowns must be disclosed.

31
Q

Define: Proceeds Transacrion

A

When a customer sells a security and uses the proceeds to purchase another security, the broker can not double dip on the commission/sales charge. It is viewed as one transaction.

32
Q

Define: “Net Transaction”

A

When a broker dealer sells a security to an investor and charges no commission.

This happens when a security comes from the brokers inventory, as a principal transaction.

Sometimes called “hidden fees”, FINRA wants to make sure these types of transactions and portraits the broker making no money.

33
Q

Define: Wash Sale

A

Taking an intentional loss in the sale of a security, and then repurchasing that security either 30 days before/after the sale. (Note: the trade day is included, so the total period is 61 days)

34
Q

Define: Tax Swapping

A

It’s common the sell a bond and purchase another simultaneously, to control tax liability.

This is allowed and not subject to wash sale rules, if done correctly.

The IRS looks at three things to determine if it is a wash sale: maturity, coupon, issuer.

35
Q

Three ways investors can sell shares they own?

A
  • FIFO = oldest share sold first, usually results in higher tax paid
  • Share Identification = shares sold are selected by investor, to minimize tax
  • Average Cost Basis (mutual funds only) = investor can average the cost basis of all shares, and calculate taxes accordingly.
36
Q

How is cost basis calculated when a securities inherited or gifted?

A
  • Inheritance = cost basis is adjusted up/down to fair market value. Shares are always considered to be in a long-term status for tax purposes
  • Gifting = the beneficiary takes over the donor’s cost basis.

Note: Basis is NOT adjusted for an inherited annuity.

37
Q

Estate taxation things to know…

A
  • When a person dies, tax on the estate is paid by the estate, not the heirs.
  • When a gift is given, tax is due on the gift.
    Note: spouses are 100% exempt, and there is a $16,000/year exemption for other individuals. Gifts for health issues and educations expenses are also 100% exempt.
  • Gift taxes are due when annual income taxes are filed.
  • Estate and gift tax are unified, meaning the lifetime estate tax exemption is reduced by the amount of gift tax exemption used.
38
Q

If a wash sale violation occurs, what happens to the realized loss?

A

It gets added to the cost basis of the repurchased security.

Example: if a security is purchased for $38, sold at $35 ($3 loss), and then repurchased at $44, the cost basis of the repurchase is increased to $47 ($44 + $3).

39
Q

Define: paid-in surplus (capital surplus)

A

The amount over par an investor pays for a new issue of a common stock.

40
Q

What date is used when calculating cost basis of an inherited security?

A

The date of death (not the date inheritance is received).

41
Q

Define: Dividend Retention Ratio

A

The % of earnings per share that were retained, rather than paid as a dividend.

42
Q

What date is used when calculating gift tax?

A

The donors basis is used, on the day the gift is given.

43
Q

Define: Position Trading

A

A “position trading” firm is simply one that is acting as principal or dealer (aka: trading from its own account)

44
Q

Define: advance/decline line

A

Measures the number is stocks advancing vs declining. It an indication of the overall market movement.

45
Q

How far back is retained earnings calculated?

A

Since the inception of the company. It represents the accumulation of all earnings that have been retained by the company.

Series 7- Random Fact Bag (16 decks)

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