CFP - Investment planning

Question 1

Best Efforts

Answer 1

Underwriter agrees to sell as much of the offering as possible
Risk resides with firm

Question 2

Firm Commitment

Answer 2

Underwriter agrees to buy entire issuance from company
Risk resides with underwriter

Question 3

Red herring

Answer 3

Preliminary prospectus issued before SEC approval

Question 4

10k and 10Q

Answer 4

10K is annual report of financial statements filed with SEC - audited
10Q is a quarterly report - not audited

Question 5

Limit Order

Answer 5

Price more important than timing
Best for volition sticks

Question 6

Stop Order

Answer 6

Price hits a certain level and turns to market order
Once a stop sell order price is reached it turns to market order, stock sold at that price or less since it’s market order
Risk that investor could get less if market is moving quickly

Question 7

Stop limit or stop loss limit

Answer 7

Investor sets 2 prices
First is stop loss price, once reached order turns to limit
Second price is limit price- investor will not sell below price
Risk if market moves quickly order may not fill and investor left with lower price
Best for investors with significant gain

Question 8

Margin

Answer 8

Assume 50 % requirement

Question 9

Maintenance Margin

Answer 9

Minimum amount of equity required before a margin call

Question 10

Margin call

Answer 10

Loan / 1- maintenance margin

Question 11

Value Line

Answer 11

Ranks Stocks
Rank of 1 represents highest rating ( signal to buy)
Rank of 5 is lowest rating ( signal to sell)

Question 12

Morningstar

Answer 12

Ranks mutual funds, stocks and bonds
1 star is lowest and 5 stars is highest

Question 13

To receive a dividend

Answer 13

Investor must purchase prior to stock prior to ex- dividend date or 2 business days before the date of record

Question 14

Cash Dividends tax treatment

Answer 14

Qualified dividends receive cap gains treatments
Cash dividends are taxed upon receipt

Question 15

Stock dividends

Answer 15

Not taxable to shareholder until the stock is sold

Question 16

Securities Act of 1933

Answer 16

Regulates new issues
Requires prospectus

Question 17

Securities Act of 1934

Answer 17

Regulates secondary market and trading of securities
Created the SEC to enforce compiance

Question 18

Investment company Act of 1940

Answer 18

Authorized SEC to regulate investment companies
Open, closed and UIT

Question 19

Investment advisors act of 1940

Answer 19

Requires investment advisors to register with SEC

Question 20

Securities Investors Protection Act of 1970

Answer 20

Established SIPC to protect investors for losses resulting from brokerage firm failures

Question 21

Insider Trading and Securities Fraud Enforcement Act

Answer 21

Defines and insider as anyone with information that is not available to the public

Question 22

Treasury Bills

Answer 22

Issued in varying multiples up to 52 weeks
Denominations in $100 increments through treasury Direct up to 5 million per auction
Larger amounts available through Bid

Question 23

Commercial Paper

Answer 23

Short term loans between corporations
Maturities of 270 days or less
Denominations of $100 sold at discount

Question 24

Bankers Acceptance

Answer 24

Facilitates imports/ exports
Maturities of 9 months or less
Held until maturity or traded

Question 25

Eurodollars

Answer 25

Deposits in Foreign Banks that are denominated in US dollars

Question 26

Investment policy statement establishes

Answer 26

RR TTLLU Risk, Return, Taxes, Time-line, Liquidity, Legal and Unique circumstances

Question 27

Dow Jones Industrial Average

Answer 27

Simple price adjusted average Does not incorporate market cap

Question 28

S&P 500

Answer 28

Value weighted index - incorporates market cap of individual stocks into average

Question 29

Russell 200”

Answer 29

Value weighted index of smaller market cap stocks in the Russell 3000

Question 30

Wiltshire 5000

Answer 30

Broadest index that measures performances of over 3000 stocks Haven’t contained 5000 stocks since 12/2005

Question 31

EAFE

Answer 31

A value weighted index that tracks stock in Europe, Australia, Asia and FAr East

Question 32

Affect Heuristic

Answer 32

Judging something - based on non financial issues

Question 33

Anchoring

Answer 33

Anchoring to a reference point

Question 34

Availability Heuristic

Answer 34

Relies on knowledge that is readily available in memory

Question 35

Bounded Rationality

Answer 35

Rationality is limited by available information

Question 36

Confirmation Bias

Answer 36

People focus on info that supports decisions

Question 37

Cognitive Dissonance

Answer 37

Misinterpret info that is contrary to an existing opinion

Question 38

Disposition effect

Answer 38

Investors create mental accounts when they purchase stocks and continue to mark value to purchase prices

Question 39

Prospect theory

Answer 39

People value gains and losses differently

Question 40

Similarity Heiristic

Answer 40

Used when a similar situation occurs even though situations have different outcomes

Question 41

Standard deviation can be used to measure

Answer 41

Total risk of an undiversified portfolio

Question 42

Standard Deviation Example

Answer 42

Question 43

Coefficient of variation

Answer 43

Standard deviation divided by average return

Question 44

Standard Deviation Example

Answer 44

Question 45

Positive Skewness

Answer 45

Question 46

Negative skewness

Answer 46

Question 47

Kurtosis

Answer 47

Question 48

Lepotokurtic

Answer 48

High peak and fat tails ( LIPO) Higher chance of extreme events

Question 49

Platykurtic

Answer 49

Low peak and thin tails( lower chance of extreme events) PLatonic

Question 50

Covariance

Answer 50

Measure of 2 securities combined and their interactive risk Measure of relative risk

Question 51

Beta

Answer 51

Beta coefficient is a measure of an individual security’s volatility relative to that of the market Used to measure volatility of a diversified portfolio

Question 52

Beta of Market is 1

Answer 52

Stock with beta of 1 is expected to mirror the market Stock higher than 1 means the stock fluctuates more than market Stock less than 1 indicates less fluctuations relative to market

Question 53

Systematic Risk

Answer 53

Nondiversifiable Market risk Economy basked risk

Question 54

Unsystematic Risk

Answer 54

Diversifiable Unique risk Company - specific Risk

Question 55

PRIME Systemic Risk

Answer 55

Purchasing Power Reinvestment Interest rate Market risk Exchange rate

Question 56

Unsystematic Risk ABCDEFG

Answer 56

Accounting risk Business Risk Country Risk Default Risk Executive Risk Financial risk Government/ regulation risk

Question 57

Treynor Index

Answer 57

Realized return on portfolio minus risk free rate of return divided by the beta of the portfolio

Question 58

Treynor Index Facts

Answer 58

One Treynor must be compared to another The higher the ratio the better Measures reward relative to risk

Question 59

Sample Portfolio Theory Question

Answer 59

Question 60

Sharpe Index

Answer 60

Realized return of portfolio minus risk free rate of return divided by standard deviation

Question 61

Sharpe Ratio Facts

Answer 61

Sharpe needs to be compared to another sharpe The higher the ratio the better

Question 62

Sample portfolio theory question

Answer 62

Question 63

Jensen Model

Answer 63

Absolute performance measure Positive alpha = find manager provided more return then was expected negative = less return Zero = return equal to what was expected

Question 64

Sharpe, Treynor and Alpha Application

Answer 64

Question 65

Summary of performance measures

Answer 65