202 Flashcards
(94 cards)
1
Q
Stocks are
A
Securitized ownership
2
Q
Bonds are
A
securitized loans
3
Q
Ownership vs loan
A
Ownership could get 100% or nothing back where as loan you could get intertest and prinicipal
4
Q
Measurement of equity
A
Price of a stock
5
Q
What is the point in buying a stock and never selling?
A
to collect dividends
6
Q
What does the Gordon Growth Model assume
A
constant g growth rate
7
Q
What is the GGM?
A
P=D/r-g
8
Q
Why is the GGM helpful/what can it be used for?
A
To calculate the r, as you may not be sure what the equity investors r is, you can then use that for NPV calculation
9
Q
Money in business
A
Book Equity per share
10
Q
Profit %
A
ROE %
11
Q
Profit
A
EPS
12
Q
Give away %
A
DR
13
Q
Give away $
A
Dividend
14
Q
If paid out entirely to shareholders DR=
A
100%
15
Q
Another note if DR=100%
A
g=0 as g=ROEx(1-DR)
16
Q
Shares mean you have
A
small portion of ownership of the company
17
Q
Is more EPS/r or more PVGO
A
value stock, growth stock
18
Q
PVGO
A
PV of growth opportunities
19
Q
What is PVGO?
A
how much in a share you are paying for the fact that the price/div will grow
20
Q
log return and log of return
A
NOT the same thing
21
Q
weights rule
A
add up to equal 1
22
Q
The return of a portfolio only depends on 2 things
A
stock weights and returns
23
Q
Why can’t you just P1+P2/N to measure the performance of the whole stock market? (2)
A
1) companies sometimes have much bigger
2) stock splits
24
Q
Weight is also known as
A
market capitilisation
25
Why is the market index helpful?
It means you can find the change over longer periods of time rather than from one day to the nxt
26
Std of a stock is the
risk
27
Correlation rule
-1 <= p <= 1
28
Risk of a stock is the
std
29
Higher std means
more risky, more spread of returns
30
diversification ___ apart from __
lowers std/risk
p=1
31
p=-1 you could obtain
std=0
32
when does it mean there is a higher chance of a loss?
std=4mean
33
S v S given r* and std*
one r* point
one, two, none std* point
34
weights rule
w1+w2=1
35
Short Selling
borrow shares to sell, hoping price will fall, so that they can buy them back cheaper
36
Short-selling does though...
extends possibilities on a risk return graph
37
S v Bank
model bank as stock with std=0 as 0 risk you are guaranteed to get the money back
38
S v Bank with one negative weight?
you can't short sell a bank but you could borrow money, leveraging
39
S v Bank risk return graph is ..
linear
40
Leveraging does what to the possibilities between S v B
extends
41
B v B is
Arbitrage
both have std=0
42
Arbitrage is only legal..
only legal in the US
43
If you are treating portfolios like stocks you use what maths technique...
vectors
44
S v S, S v B, B v B summaries
S v S
- without selling can only get pts on curve (stocks lie on curve)
- given r* 1 pt
-given sigma* 1, 2 or none
- short seling extends curve
- curved line
S v B
- banks risk/sigma=0 it has guaranteed return
- bank is like a risk free asset
- straight line
- short selling (borrowing) extends line
- S/sell is borrowing to invest in stock (leverage)
B v B
- impossible
-maths is all good, not financially feasible
45
With 3 or N socks what is the curve called on returns/sigma graph?
minimum variance set
46
What is the upper half of MVS?
efficient frontier
47
What is possible on or in MVS?
everything inside
48
Do stocks lie on MVS?
not necessarily like the 2 stocks do
49
given an r* on a N stocks graph
infinite possibilities for portfolios
50
MVS gives portfolio with lowest
risk
51
N stock optimization uses what maths?
Lagrangian
52
The two fund theorem means that P1, P2 are any Ps that lie on ___ and if they are optimal that means
MVS
every other optimal P comes from distributing money between P1, P2
53
How to find if P(x,y,z) lie on MVS?
3 equations for a
if all of the a's are equal
54
How to find if stock 1 on MVS?
sub P(1,0,0) into P
55
If you have N stocks and 1 bank the efficient frontier is called
capital market line
56
Risk free portfolio
P(1,0,0)
57
Tangent portfolio
Pt(0,w1,w2)
58
what is CAPM?
is a financial model that calculates the expected rate of return for an asset or investment
59
2 assumptions of CAPM
every investor has same values for r*, std *, p* for all stocks
everybody does mean variance optimizationC
60
CAPM means that what are equal
Pm=Pt
61
Why can't you just do rt/stda for sharpe ratio?
as banks std is 0 so would go to inf
62
CAPM tell us that
you can't beat the sharpe ratio for Pm as it has the highest sr
63
for CAPM everything on off frontier has same SR
as PM
64
Find P on eff frontier with return x%
sub in return risk free then calculate return t then solve for a
65
if financed by the bank the discount rate comes from
banks IR
66
if financed by shareholders comes from
CAPM (re)
67
risk and return key message
for correlation (-) increased risk does not mean increased return
68
2 takeaways of finance
p too high diversification does not help
p(-) increased risk does not mean increase return
69
IRR is r* that bank offers to be
exactly the same as business
70
For continuous compounding what is the formula for PV?
FV/e^rt
71
A bond contract always has the following 4
face value
maturity
coupon rate
coupon schedule
72
Coupon payments end when the bond
matures
73
on the maturity date for a bond, what is the payment you receive?
C+fV
74
bond price is not a part of the contract but defined
by the market
75
how could you compare if putting money in a bank is better or worse than purchasing a bond?
compare int payments and coupon payments
76
When using y as int rate gives you an NPV of ____ or a ____ of
0
bond price
77
yield price relationship
yield increases, price decreases
yield decreases, price increases
78
YTM is essentially the ___ of a bond
IRR
79
What is the price of a bond if yield=0?
Price= (Cxt) + fV
80
If CR=y then
P=fV
81
An example of bond default risk
if you buy a gov bond and they go bust
82
Prob of annual default risk
P=y*-y
y* being the yield of the 'shady' company
y is the yield of a 'safe' company
83
where does the compensation for bond default risk come from?
yield
84
if you were to default in year 1 what is the prob of default year 2
0
85
2 steps for prob of default
P(survive each year)=1-apd
P(survive N years) Psey^N
P(default within N years= 1-PsNy
86
compare bond and bank
consider IRR, bank should at least offer that if not more
87
priced at par
Cr= yeild, P=fV
88
ZCb duration, Cr
duration=maturity
CR=0
89
what is appropriate discount rate in bond replication?
yield of ZCM of that maturity
90
OCR
official cash rate
rate at which govt lends to banks (minimum lending rate, cheapest money bank can get)
govt changes
changes in OCR has changes on other interest rates
91
Duration is like
centre of gravity
92
higher coupons means what for duration
lower
93
duration should never
be higher than maturity
94
sensitivity analysis formula means __ and only works for
if y changes by a small amount price changes by that amount but only works for small changes in y
