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2012 CFP > Investments > Flashcards

Investments Flashcards

1
Q

What risks are undiversifiable?

A

PRIME

Purchasing power
Reinvestment risk
Interest rate risk
Market risk
Exchange rate risk
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2
Q

What is endogenous risk?

A

Risk generated with in the system due to participants being human

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3
Q

How many stocks does it take to remove unsystematic risk?

A

10 to 15

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4
Q

What are the risks with bonds?

A

DRIP

Default
Reinvestment
Interest rate
Purchasing power

Gov’t bonds don’t have default risk

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5
Q

R-squared gives…

A

Amount of systematic risk…the balance (to 1) is unsystematic

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6
Q

Growth rate equation

A

g = roe * rr

roe is return on equity
rr is retention rate

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7
Q

Semi - variance

A

Alternative risk measure that includes only returns below expectation

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8
Q

Coefficient of variation

A

Communicates the variability of an investment per unit of return (stdev/xbar)

Lower the CV, greater reliability

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9
Q

R or rho

A

Correlation coefficient (ranges:-1 to 1)

Think “Credence Clearwater Revival” - CC=R

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10
Q

R-squared

A

Coefficient of determination

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11
Q

Contrarian opinion rules (6)

A

BIOMOP

Barron's confidence index
Investment advisory opinion
Odd lot sales
Mfd cash
OTC vs NYSE volume
Put/call ratio
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12
Q

Follow-the-smart money rules (2)

A

Confidence index

Short sales by specialists

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13
Q

Basic assumption of tech analysis

A

Irrational investors are an important element in stock prices

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14
Q

Return on equity

A

ROE = net_income/common_equity

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15
Q

Difference between quick ratio and current ratio

A

Current ratio is current_assets/current_liabilities

Quick ratio subtracts inventory from assets before dividing

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16
Q

Intrinsic value of a stock according to fundamental analysis

A

The discounted value of future dividends

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17
Q

Quick market price calc

A

Outstanding shares

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18
Q

Hierarchy of comparison testing

A

BATS

Beta
Alpha
Treynor
Sharpe

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19
Q

Black Scholes model of CALL option pricing relies on 5 variables

A

1) mkt price (incr)
2) time (incr)
3) stdev (incr)
4) risk-free rate (incr)
5) ex price (decr)

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20
Q

Venture capital stages (8)

A

1) seed
2) start-up
3) 1st stage
4) 2nd stage
5) mezzanine
6) bridge
7) acquisition
8) leveraged buy out LBO

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21
Q

Seed capital

A

Vc for product development & mkt research

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22
Q

Start up capital

A

VC for initial marketing but NO SALES

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23
Q

First stage financing

A

VC for manufacturing & sales

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24
Q

Second stage financing

A

VC for working capital

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25
Q

Mezzanine financing

A

VC for expansion or new products

26
Q

Bridge financing

A

VC for expected IPO

27
Q

Acquisition financing

A

VC for acquisition of other companies

28
Q

LBO financing

A

VC for management to buy pastorally of a business

29
Q

Margin call price

A

(Purchase price)(1-initial margin)/(1-maint. Margin)

30
Q

Valuation of preferred stocks

A

V= Do/r

Constant dividend divided by current interest rate

31
Q

Difference between T-bills, notes, & bonds

A

Maturity

Bill: 4, 13, 26, 52 weeks
Note: >1y to 10y
Bond: >10y

32
Q

Eurodollars

A

Bonds issued by US companies oversees

33
Q

Yankee bonds

A

Bonds issued in US by foreign companies

34
Q

Key feature of a debenture

A

It is unsecured

35
Q

Expectation theory of rates

A

Lt rates are the current st rate plus the expected future st rate

36
Q

Liquidity preference of rates

A

Investors like liquidity so must be compensated with higher rates for lt bonds

37
Q

Segmentation rate theory

A

Supply and demand with in ST and LT segments because investors like to stay within their segments

38
Q

Efficient market assumptions

A
  • Investors always act rationally and in their own best interests
  • Investors cannot outperform the market as they don’t have better data
  • info is rapid and available to all
  • investors react quickly to news
  • prices adjust immediately
  • prices are not predictable (random walk)
39
Q

Difference between CAPM & APT

A

CAPM is single factor model (beta), APT is multi-factor

40
Q

4 factors that affectation stock in APT

A

Inflation
Industrial production and the GDP
Risk premium changes
Interest rate changes

41
Q

Overconfidence bias

A

Believing you are smarter or have better information than others

42
Q

Representativeness bias

A

Applying past experiences to current

43
Q

Anchoring & Judgement bias

A

Using the initial value of all decisions and never adjusting it

44
Q

Cognitive dissonance bias

A

Investors will only believe data that supports their desire

45
Q

Self-attribution bias

A

Good decisions are the investor’s, bad ideas are the fault of others

46
Q

Illusion of control bias

A

Belief that you can influence an outcome

47
Q

Conservatism bias

A

Investor clings to prior views at the expense of new data

48
Q

Ambiguity aversion bias

A

Investors dislike uncertainty more than risk

49
Q

Endowment bias

A

Valuing an owned stock more than others

50
Q

Self-control bias

A

Consume today rather than save for tomorrow

51
Q

Mental accounting bias

A

Treating portfolio as different parts such as inheritance vs earned

52
Q

Confirmation bias

A

Whatever an investor wants is believed to be correct…sometimes seems as “it has always been this way in the past.”

53
Q

Hindsight bias

A

After something happens to believe that you saw it coming

54
Q

Lass aversion bias

A

Cause investor to hang onto bad investments thereby avoiding loss

55
Q

Recency bias

A

Current events/information is emphasized which creates ST thinking

56
Q

Regret aversion bias

A

The fear that a decision will be the wrong one

57
Q

Framing bias

A

To focus so much on one factor as to ignore other crucial factors

58
Q

Status quo bias

A

Choosing the course that will keep things as they are

59
Q

GDP

A

C + I + G + NE

Consumption, investment, govt spending, & net exports

60
Q

NOI

A

Net Operating Income

Gross receipts
+ non-rental income (laundry)
=potential gross income

  • vacancy & collection loses
    = effective gross income
  • operating expenses
61
Q

Value of RE based on cap rate

A

NOI / cap_rate

62
Q

Gross Income multiplier calc

A

Sales_price/gross_income

2012 CFP (7 decks)

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