Equity Investments

Question 1

Financial Assets

Answer 1

Securities (stocks and bonds), derivative contracts, currencies

Question 2

Real assets

Answer 2

Real estate, equipment, commodities and other physical assets

Question 3

Derivative contracts

Answer 3

Values derived from other assets

If pysical derviative contracts, dervides from oil, gold, wheat

Question 4

Financial derviative contracts

Answer 4

Based on equities, equity indexes, debt, debt indexes, or other financial contracts

Question 5

Spot markets

Answer 5

markets for immidiate delivery

Question 6

Primary/secondary markets

Answer 6

Newly issued securities/sebsequent sales of securities

Question 7

Money markets/Capital markets

Answer 7

Debt securities with maturity of < 1 year/ Longer-term debt security markets

Question 8

Warrants

Answer 8

similar to options in that they give the holder the right to buy a firm’s equity shares at a fixed exercise price prior to the warrant’s expiration.

Question 9

Financial contracts

Answer 9

based on securities, currencies, commodities, or security indexes (portfolios). They include futures, forwards, options, swaps, and insurance contracts.

Question 10

Forward contracts

Answer 10

agreements to buy or sell an asset in the future at a price specified in the contract at its inception and are not typically traded on exchanges or in dealer markets.

Question 11

Futures contracts

Answer 11

similar to forward contracts except that they are standardized as to amount, asset characteristics, and delivery time, and are traded on an exchange.

Question 12

Insurance contract

Answer 12

Pays cash amount if a future event occurs

Question 13

Brokers

Answer 13

Connect buyers and sellers of same security at same location and time

Question 14

Dealers

Answer 14

Match buyers and sellers of same security at different points in time. Dealer will hold an inventory

Question 15

Arbitageurs

Answer 15

Transact with buyers and sellers of same security at same time, but in different markets

Question 16

Securitizers, depositary institutions

Answer 16

Sell interest in a diversified pool of assets - pool assets together and sell the interest to investors

Question 17

Short position

Answer 17

Gains when asset value decreases - selling short means borrowing asset and selling it in the market, buy back at lower price and pocket difference

Question 18

Maintanance margin (margin call)

Answer 18

If margin percentage falls below minimum, more cash or securities must be deposited in order to maintain the position

Question 19

Rate of return on margin transaction

Answer 19

Gain or loss on security position / margin deposit

Question 20

Trigger price (for margin call)

Answer 20

Po x {(1- initial margin) / (1 - maintanance margin)}

Question 21

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bid price

Answer 21

Best price at which a dealer will buy a security

Question 22

Ask/offer price is the price at which a dealer will sell a security

Answer 22

Ask/offer price is the price at which a dealer will sell a security

Question 23

Market order

Answer 23

Instructs broker to execute the trade immidiately at the best available price

Question 24

Limit order

Answer 24

Places a minimum execution price on sell orders and a max execution price at buy orders

Question 25

Day order

Answer 25

expire if unfilled buy the end of the trading day

Question 26

Immidiate or cancel orders

Answer 26

Canceled unless they can be filled immidiately

Question 27

Stop (stop loss) orders

Answer 27

A trade at the stop (trigger) price activates a market order

Question 28

Good-on-close orders

Answer 28

are only filled at the end of the trading day (if the are market orders, they are referred to as market-on-close orders)

Question 29

Quote-driven markets

Answer 29

Investors trade with dealers (inventory) - less liquid markets

Question 30

Order-driven markets

Answer 30

There are rules in place which are used to match buyers and sellers (more liquid markets)

Question 31

Brokered markets

Answer 31

Brokers find counterparty for a trade

Question 32

A market is said to be complete if: (4 things)

Answer 32

Investors can save for the future at fair rates of return.
Creditworthy borrowers can obtain funds.
Hedgers can manage their risks.
Traders can obtain the currencies, commodities, and other assets they need.

Question 33

Security market index

Answer 33

is used to represent the performance of an asset class, security market, or segment of a market.

Question 34

Price return

Answer 34

Looks at movement in price. (ending price/ beginning price) - 1

Question 35

Total return

Answer 35

Includes cash flow from the securities in the index. {(ending value + CF) / beginning value} - 1

Question 36

Price-weighted index

Answer 36

sum of stock prices / #stocks in index, adjusted for splits

Higher priced stock have more weight than lower priced stock

Question 37

Market-Cap Weighted Index

Answer 37

returns are weights based on the market capitalization of each index stock (current stock price times the number of shares outstanding) as a proportion of the total market capitalization of all the stocks in the index.

Question 38

Float-adjusted market capitalization-weighted index

Answer 38

Index with investable shares

Question 39

Fundamental index weights

Answer 39

Weights are based on proportion of total value of fundamental factor (e.g. revenue, earnings, book value, cash flow)

Question 40

Equal-weighted index returns

Answer 40

To calculate the performance of an equal-weighted index, you take the arithmetic average of the returns of all the stocks in the index

Question 41

Index Rebalancing

Answer 41

Refers to periodically adjusting the weights of securities in an index or portfolio to their target weights

Question 42

Index reconstitution

Answer 42

occurs when the securities that make up an index are changed. Securities are deleted if they no longer meet the index criteria and are replaced by securities that do.

Question 43

Types of equity indexes

Answer 43

• Broad market
• Multi-market market cap
• Multi-market with fundamental weighting
• Sector
• Style

Question 44

Fixed income indexes

Answer 44

• Broad universe, high turnover (bonds mature)
• Lack of price data
• Illiquidity

Question 45

Informational efficiency

Answer 45

Security prices quickly and fully reflect available info

Question 46

Weak-form market efficiency

Answer 46

Reflect currently available security market data. If it holds, purely technical analysis has no value

Question 47

Semistrong form market efficiency

Answer 47

weak-form + incorporate public info. If stock prices are semistrong form efficient, neither technical nor fundamental analysis has any value in stock selection.

Question 48

Market anomaly

Answer 48

A market anomaly is something that would lead us to reject the hypothesis of market efficiency.

Question 49

Behavioral finance

Answer 49

Examines investor behavior, its effect on financial markets, how cognitive biases may result in anomalies, and whether investors are rational.

Question 50

Depository receipts (DRs)

Answer 50

Shares are deposited in a bank. Claims to deposited shares (receipts) trade like local stock in local currency.