Wrong Answer investments Flashcards
Coefficient of Variation
A measure of variability used to compare investments with varying rates of return and standard deviation.
Cv is the standard deviation divided by the average mean or average return.
The higher the result the greater the relative risk.
Market Premium
Return of market - risk free rate
(Rm - rf)
Stock Premium
(Rm - rf) x beta
Convertible Bond Formula
Conversion Value = Par/Conversion Price x Current Price of the Underlying Stock
Property’s Intrisic Value
NOI / Cap Rate
Exchange Rate Question Steps
- Get it into the exchange currency
- Increase value based on gain in question
- Convert it back by dividing
Euro Dollars
A denomination in any foreign bank that is denominated in dollars.
Yankee Bonds
A bond issued by a foreign entirety that is issued/traded in the US and denominated in US dollars.
Taxation of TIPs
It principle increases, so does basis.
GIC
A contract between an insurance company and a guaranteeing a specified interest rate. Not subject to interest rate risk for that reason
REIT Keys
-at least 75% of the REIT income must come from real estate investments
-no more than 15% can come from securities like GNMA
-mortgage reits income comes from the spread between the lending rate and the borrowing rate
Futures Contract Daily Limit
The maximum number of permissible price increase or decrease relative to the settlement price of the previous day
Tax Exempt Yield
Taxable yield * (1-marginal tax rate) … also known as after Tax yield
Current Duration in a portfolio %
Add durations together and divide by total number of stocks. Then plug individual durations into percentages given in to see which comes closest to average
PE Ratio Method to Value Stocks
Current Market Price = Earnings x PE Ratio
Dividend Discount Model Shortcuts
-If the first growth rate is lower than the second, choose the next lowest number in the answer after doing the DDM formula using the higher rate,
-if the first growth rate is higher than the second growth rate, choose the next highest number using the same approach.
If a client is being difficult about investment strategies, what is the proper step?
Educate the client, terminating the client relationship usually isn’t the appropriate step unless the client is doing something illegal.
When a husband wants to do something without the wife in a JTROS account, what do you do?
Choose the option that consults both of them, if they are in a JTWROS account they are both your clients
When a husband wants to do something without the wife in a JTROS account, what do you do?
Choose the option that consults both of them, if they are in a JTWROS account they are both your clients
What do if commissions are added to a problem in a taxable sense?
Add to basis
Equity REITs
Invest in income producing properties. Use a modest amount of leverage to finance the property purchases. To much leverage can affect the REITs cash flow resulting in decreased divided payments.
Mortgage REITs
Make loans to develope property or finance construction. They can earn high interest rates but are subject to default risk if the developer is not able to sell the property or lease it after completion. Mortgage REITs are particularly vulnerable to purchasing power risk.
REIT keys
-75% of income can come from real estate investments
-15% can come from securities like GNMAs
-If a REIT fails to distribute 90% then all the net investment income in a REIT is subject to tax.
-Shareholders may deduct 20% of pass through income from a REIT
-REITs are actively traded on an exchange
UITs
An investment company with no day to day management. A UIT is typically an unmanaged security profile created by a sponsor.
-no new securities purchased or sold, the assets are frozen
-the sponsor makes a market for investors selling units and buyers of used units. They are generally redeemed at NAV
