WEEK 4: Trading Securities, Risk, and Return Flashcards

memorize terms

1
Q

Trading long vs short

A

Long: own the security positive outlook
Short: sell security without owning it, negative outlook

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2
Q

covered vs uncovered sales

A

Covered sale: sell a security you already own, write a call option
Uncovered sale (naked): sell the security without owning it first - very risky

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3
Q

types of trading

A

Day trading: intraday trading (few minutes, hours, or day), profit from short-term price fluctuations
Intermediate training (swing trading): days to months, actively trading
Long-term trading (position trading): several months or years, stay here for a while, infrequent

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4
Q

Bid-Ask

A

Bid - highest current price someone is willing to buy the security
Ask - lowest current price someone is willing to sell the security
Last - most recent transaction
Spread = difference between bid and ask price
Change = last price quote compared to previous day close
As you get more liquid securities thousands of people want to buy/sell, spread gets closer
Smaller the spread, the more liquid the security, can quickly buy/sell

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5
Q

quote levels

A

Level 1 - shows best bid best offer
Level 2 - shows depth of best bids/offers, usually 5-10 orders
Level 3 - shows up to 20 bids and offers

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6
Q

Order types

A

market order (immediate fill), limit order (fills if execution meets price condition), stop order (price triggers the trade order)

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7
Q

market order

A

fill order immediately at the next available price, go buy it at the market, used during market hours in liquid markets

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8
Q

limit orders

A

no guarantee of a fill, order fills only if security can be bought or sold at the specified price or better, small stocks

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9
Q

stop orders

A

allow investor to place a buy or sell order ahead of time, with price being the order’s trigger
Stop orders: order to buy or sell a stock once the market price reaches that level, when triggered the stop order becomes a market order
Going on vacation and cannot watch your shares
Stop limit orders: once market price triggers the stop, the order becomes a limit order (filling at the limit price or better)

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10
Q

trade time limitations and conditions

A

Day order: active until end of trading day
Good-till-canceled: active until completely filled or canceled by the trader
All or none: trade executive 100% (no partial buys or sell); the order is in effect until canceled
Fill or kill: entire trade 100% filled, otherwise canceled immediately
Immediate or cancel: any portion of trade filled, the canceled immediately

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11
Q

trade settlements

A

Stocks, bonds and mutual funds: Required to settle two business days after the trade
On settlement day, certificate and money exchange hands
Government securities and options: Settlement is one business day after trade

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12
Q

physical certificate vs book entry

A

Physical certificate: issuer records investor as owner, hard-copy
book entry: street name registration, broker-dealer registered as owner on issuer’s book, investor is the beneficial owner

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13
Q

types of accounts

A

cash account: 100% settlement made in cash
margin: allows investor to use leverage in purchasing security
option: options must be traded in an options account

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14
Q

margin accounts

A

margin offers investors trading leverage. cash + margin = security settlement. investor pays interest on margin loan

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15
Q

margin rules

A

minimum account balance, $2000 or 100% of purchase price, Federal reserve Board sets initial margin %, broker-dealer establishes maintenance margin. if account falls below maintenance margin, investor will get a margin call and must add cash or sell

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16
Q

order authority

A

discretionary/solicited: broker-dealer or advisor has the authority to decide what to buy and how to purchase
non-discretionary/unsolicited: investor makes the buy/sell decisions

17
Q

expected risk vs expected return

A

cash equivalents, short-term, intermediate, long term-bonds, large-cap, mid-cap, small-cap equities, alternative investments

18
Q

unsystematic risk

A

factors that are unique to the individual firm (micro)

19
Q

systematic risk

A

factors that influence the entire market (macro)

20
Q

types of unsystematic risk

A

business, financial, credit (default), liquidity, marketability, industry, prepayment, call risk

21
Q

types of systematic risk

A

business cycle, interest rate, inflation, reinvestment, country, political, regulatory, currency risk

22
Q

risk reduction by diversification

A

holding 15-30 diversified assets effectively eliminates unsystematic risk

market/systematic risk cannot be diversified away

23
Q

equity risk premium

A

long-term equity returns are greater than bonds because you are rewarded for holding systematic risk. you are not rewarded for unsystematic risk because you can diversify it away

24
Q

concentrated positions

A

review allocation and holistic asset holdings and rebalance as appropriate, tax-efficient selling, apply option strategies to spread income tax allocation over several tax periods.

25
simple vs compound interest
simple: interest applied to only the beginning contribution compounding: interest and dividends applied to beginning contribution plus annual additions
26
time-weighted return
not affected by the timing of the portfolio cash flows. simply measures portfolio return during period - total return - annualized return over holding period - arithmetic/geometric average return
27
dollar-weighted return
accounts for the timing and amount of the portfolio cash flows - internal rate of return (IRR)
28
total return (HPR)
includes all returns on investments including capital gains and distributions (interest/dividends) (endPrice + cash distribution - beginPrice)/(beginPrice)
29
annualized HPR
Given quarterly returns: (1 + HPR1 ) x (1 + HPR2 ) x (1 + HRP 3 ) x (1 + HPR n )] -1 Given 3-year HPR: (1 + HPR1 )(1/N) -1
30
arithmetic returns
sum of the series of returns and divide by number of returns - best used when forecasting a future return because offers estimate of return in that next period - used for portfolio optimization data inputs
31
geometric returns
average compounded growth rate of the investment portfolio, calculated by taking the nth root of the product of the returns - useful in explaining how much a portfolio would have grown over a period
32
internal rate of return (IRR)
measures investment performance considering all beginning, intermediate, and ending cash flows, the return is the rate that makes NPV = 0, often used as part of a portfolio manager performance assessment
33
after-tax return
as an investor, you are concerned about the return you get to keep after taxes = investment return * (1 - marginal tax rate)
34
tax-equivalent yield
tax-free yield: taxable yield * (1 - marginal tax rate) tax-equivalent yield: tax-free yield/(1-marginal tax rate)
35
nominal yield
coupon rate
36
current yield
total annual cash flows/current price
37
yield to maturity (YTM)
internal rate of return on all cash flows - assumes bond is held to maturity - discount rate % that equates the PV of all interest and return of principal payment to price of bond
38
yield to call (for callable bonds)
IRR on all cash flows up to the first date the bond could be called
39
real rate of return
quantified the actual return of an investment after adjusting for impact of inflation real rate = [(1+nominal rate)/(1+inflation rate)]-1