CFP Investments

Question 1

3 differences btwn Warrants & Call options

Answer 1

1. Warrants created by corps, options created by individuals
2. Warrants typically have maturities of several years
3. Warrant terms aren’t standardized, call options are

Question 2

Reg D: Accredited vs Non-accredited investor

Answer 2

Accredited (unlimited)
• NW over $1mm or
• Individual w/ income of $200k
• Couple w/ income of $300k

Non-accredited
• max of 35 investor
• Must use a purchase representative if not sophisticated

Question 3

Coefficient of Variation (CV) formula

Answer 3

Standard deviation / mean return
CV indicates risk per unit of expected return. Helps ID what investment is riskier

Question 4

What does Beta measure

Answer 4

• systematic risk
• volatility of returns in a diversified portfolio

Question 5

What does Standard Deviation measure

Answer 5

• Total risk
• variability of returns in a nondiversified portfolio

Question 6

If correlation coefficient is negative, will Beta be negative?

Answer 6

Yes

Question 7

Geometric mean is what type of return?
And calculation

Answer 7

Time-weighted
Factors percentages (manager comparisons)
Multiply returns = FV
PV -1; n=years; i = solve

Question 8

IRR and NPV are what type of return

Answer 8

Dollar-weighted
Factors cash flow (absolute dollar amounts)

Question 9

What is the most important consideration relative to the Markowitz Efficient Frontier?

Answer 9

Risk

Question 10

What type of index is the Russell 2000?

Answer 10

Capitalization weighted
• smallest 2000 stocks in the Russell 3000

Question 11

What type of index is the Wilshire 5000?

Answer 11

Value weighted

Question 12

What type of index is the Value Line?

Answer 12

Equally weighted

Question 13

What type of index is the NASDAQ?

Answer 13

Capitalization weighted

Question 14

Margin call formula

Answer 14

(1 - initial margin %) / (1 - maintenance margin %) x Purchase Price of Stock

Question 15

Capitalization of Large Cap Stocks

Answer 15

> $10 billion

Question 16

Capitalization of Mid Cap Stocks

Answer 16

$2 billion - $10 billion

Question 17

Capitalization of Small Cap Stocks

Answer 17

< $2billion

Question 18

Capitalization of Micro Cap Stocks

Answer 18

< $300 million

Question 19

Types of Systematic Risk
(Non-diversifiable)

Answer 19

PRIME
Purchasing power (inflation)
Reinvestment
Interest Rate (change in rates will cause value of fixed income to fall)
Market
Exchange Rate

Question 20

Types of non-systematic risks
(Unsystematic/non-diversifiable)

Answer 20

Financial
Business

Question 21

If the yield curve moved upward, duration has increased or decreased?

Answer 21

Decreased.

Interest rates and duration have an inverse relationship.

Question 22

What is the best way for a US investor to buy a foreign stock?

Answer 22

ADR

Question 23

Call options (9 mos or less) - taxability

Answer 23

• Taxability to writer due to lapse - premium received is STCG
• Taxability to the writer due to exercise (covered call) - premium received is added to sale price
- becomes LTCG if underlying security held for > 1yr
- STCG if held < 1yr

Question 24

Taxability to a call option holder

Answer 24

• if exercised, then option is considered sold (expires), and it is a short term gain/loss
• if not exercised, still short term gain/loss

Question 25

What yield is generally the most important to a bond investor?

Answer 25

YTM

Question 26

What is the intersection of the CML called?

Answer 26

Rf or Risk free (100% T bills)

Question 27

What is point B called on the CML?

Answer 27

The optimal risky portfolio, a proportional percentage of risky assets, or the tangent of the CML and the Markowitz efficient frontier.

Question 28

What happens if the portfolio moved from point of tangency to Rf on the CML?

Answer 28

The investor sells risky assets and buys T bills

Question 29

Are REITS redeemable?

Answer 29

No, they are negotiable and trade on exchanges

Question 30

Is Modern Portfolio Theory active or passive?

Answer 30

Active It is the selection of an optimal combo of assets so the investor secured the highest return for a given level of risk

Question 31

2:1 or 2 for 1 stock split

Answer 31

You get 2 shares for 1, thus reducing the par value of the stock

Question 32

Duration correlation w/ interest rates, coupon rate, and maturity

Answer 32

• interest rates = inversely correlated • coupon rate = inversely correlated • maturity = positively correlated

Question 33

Using duration to manage bond portfolios • if interest rates are expected to rise • if interest rates are expected to fall

Answer 33

• interest rates rise = buy high coupons w/ short maturities to shorten duration (UPS: interest rates UP, Shorten duration) • interest rates fall = buy low coupons w/ long maturities to lengthen duration (Fallen: interest rates FALL, LENgthen duration)