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CFP - July 2023 Exam > Investment Planning > Flashcards

Investment Planning Flashcards

1
Q

Efficient Market Hypothesis

Weak Form

A
  • Asserts FUNDAMENTAL analysis
  • Historical information will NOT help achieve above-average market returns
  • Advantage through INSIDE Information
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2
Q

Efficient Market Hypothesis

Semi-Strong Form

A
  • Rejects both technical & fundamental analysis
  • INSIDE Information WILL lead to above-average market returns
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3
Q

Efficient Market Hypothesis

Strong Form

A
  • Asserts that stock prices reflect ALL available information
  • No advantage could be gained
  • Even with inside information can one out-perform
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4
Q

Ex-Dividend Date

A
  • One business day before Record Date
  • Sell on Ex-Date, you will receive the dividend
  • Buy on Ex-Date, you will NOT receive the dividend
  • Must buy before Ex-Date to receive dividend
  • BE MINDFUL OF BUSINESS DAYS & WEEKENDS
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5
Q

Securities Act of 1934

A
  • Regulates secondary market
  • Created the SEC
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6
Q

Securities Investors Protection Act of 1970

A
  • Covers losses resulting from brokerage firm failures
  • Protects accounts regardless of the client’s citizenship
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7
Q

Money Market Securities
Treasury Bills

A
  • Varying maturities up to 52 weeks
  • Denominations of $100 increments
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8
Q

Money Market Securities
Commercial Paper

A
  • Maturities of 270 days or less
  • Does NOT have to register with SEC
  • Denominations of $100,000
  • Sold at a discount
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9
Q

Money Market Securities
Bankers Acceptance

A
  • Facilitates Imports & Exports
  • Maturities of 9 months or less
  • Can be traded or held until maturity
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10
Q

Money Market Securities
Eurodollars

A
  • Deposits in foreign banks denominated in US Dollars
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11
Q

Affect Heuristic

A
  • Like or dislike a company based on non-financial issues
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12
Q

Anchoring

A
  • Also known as Conservatism & Belief Perseverance
  • Attaching one’s thoughts even though there may be no logical relevance
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13
Q

Availability Heuristic

A
  • Relies upon information readily available in one’s memory
  • May cause investors to overweight recent events or patterns
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14
Q

Confirmation Bias

A
  • Focus on information supporting their opinions
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15
Q

Cognitive Dissonance

A
  • Tendency to misinterpret information contrary to an existing opinion and support an existing one
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16
Q

Disposition Effect

A
  • AKA Regret Avoidance or Faulty Framing
  • Create mental accounts of their stock purchases
  • And continue even after market prices have changed
17
Q

Familiarity Bias

A
  • Underestimate/overestimate investments which they familiar/unfamiliar with
18
Q

Prospect Theory

A
  • Base their decisions on perceived gains rather than perceived losses
  • May avoid high risk investments even if they offer strong risk-adjusted returns
  • One may over-insure against risks through low deductibles
19
Q

Herd Mentality

A
  • Leads to buying high and selling low
20
Q

Representativeness

A
  • Thinking a good company is a good investment without an analysis
21
Q

Familiarity

A
  • Investing in companies that are familiar, like his or her own emplyer
22
Q

Leptokurtic

A
  • High peak
  • Fat tails
  • HIGHER chance of extreme events
23
Q

Platykurtic

A
  • Low peak
  • Thin tails
  • LOWER chance of extreme events
24
Q

Coefficient of Variation

A
  • Useful in determining which investment has more relative risk when they have different average returns
  • Tells us the probability of actually experiencing a return close to the average return
  • Higher the CV the more risky an investment per unit of return
25
Q

Mean Variance Optimization

A
  • Process of adding risky securities
  • But keeping the expected return the same
  • Finding the balance of asset classes to provide the lowest Std
26
Q

Covariance

A
  • Measures Relative Risk
27
Q

Coefficient of Determination (R-Squared)

A
  • Measures what % of return is due to the market
  • Determines how well-diversified a portfolio is
  • Square the Correlation Coefficient
  • If greater than or equal to 0.70 - use Beta
  • If less than 0.70 - use Std

CFP - July 2023 Exam (4 decks)

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