finance ll Flashcards by Michelle A

Money market

Short term money

Deposit
- T-bills
- CD
Federal funds

Debt
- T-bills
-Commercial paper
-Repo

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Skewness

The normality of a distribution by measuring if it is symmetric.

Negative Skewness: Standard deviation underestimates the risk.

Positive skewness: Standard deviation overestimates the risk.

skewness of zero: The distribution is normal the standard deviation is an appropriate measure of risk.

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Hedge fund

More active & Less regulated.

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REIT

Real estate investment trust: Help investors gain easy access to real estate which is often highly leveraged.

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RePo

Repurchase agreement “I promise to repurchase these securities tomorrow at a slightly higher price”.

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conventional financial theory

Individuals tänker rationellt och är consictent med EMH

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puttable Bond

can be sold back to the issuer before the bond matures.

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Conservatism

means that investors are too slow in updating their beliefs in response to evidence

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Forecasting error

A person gives too much weight to recent information compared to prior beliefs.

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APT

Recognizes multiple systematic risk factors. Identifies factors that affect expected return and find arbitrage opportunities.

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Put-Call parity

Risk free position.

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Tests for market efficiency Anomalies

I EMH gör man tester i marknaden för att hitta avvikelser. ??

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HPR

Bonds: Fixed income → Promiest future return → Därav kan vi räkna ut det via HPR.

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E(r)

Stocks: No promises for future returns → therefore we calculate the expected return.

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Capital allocation

Capital allocation: Decisions between risky and non-risky assets

Asset allocation: Within Risky Asset o Decision between various risky asset classes.

Security selecon: Decision on instrument level.

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Benchmarking

Market index is an important benchmarking tool. → Information ratio.

CAPM can be used for diversification & Benchmarking.

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Geometric average

is a better indicator of actual past performance.

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EAR

Returns with different holding periods are best compared with EAR.
Compounding matters i EAR!

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If everyone is a rational mean-variance maximizer

than just one factor, the market portfolio is enough.

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Derivatives

are leveraged positions

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biased led behavior

Lazy, Afraid, Shortsited.

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Inverted Yield curve:

Market is getting ready for a crash. (yield curve is determend form bond prices.

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Increase in bonds yield =

Smaller price change than : when the yield decreases.

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International diversification

Home bias

exchange risk
political risk
Correlations between countries suggest international diversification is beneficial.
It is possible to expand the efficient frontier some.

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Treasury

T-bills har en kort löptid, vanligtvis mindre än ett år T-notes har vanligtvis en löptid på 2 till 10 år T-bonds har en lång löptid, vanligtvis från 10 till 30 år

Myopic behavior

shortsighted: They plan for one identical holding period.

Credit spred

default premium

Mutual fund

Can only be bought/sold in the end of the day when NAV is calculated.

Diffrent types of investments

Direct investment: Directly owning an asset Indirect investment: closed end / open end fund EFT

secundary market

Direct search Brokerd market Dealers market Auction market

Underlying assets

Commodites Metals / energy Foreign corrency Financial asset

Forward contract

higher risk specified unregulated buy sell att maturity

Future contract

ingen risk standardized regulated buy/sell anytime

Open intrest

Number of contracts outstanding

marking to market

gains/losses are settle daily on margin account

Protective put

when puts are beeing used as a insuarence aginst stock price decline

Coverd call

purchas stock and write call agiainst it

Straddle

Buying calll & put

Spread diagram

tow or more calls/put limit gains and losses

Higher duration

more sencetive to changes in the yield

Limited attention

Choose good enough

Framing

Chooice depends on how alternatives are framed

Prospect teory

risk aversion changes with losses risk seeker

Bonds rating

investment grade or non-investment grade & high yield

agency problem

diffrent intrests between the owners & management

strategic asset allocation

mix of assets classes

tactical assets allocation

securities in the chosen class

CertaintyEquivalen

The certainty equivalent is a guaranteed return that someone would accept now, rather than taking a chance on a higher, but uncertain, return in the future

SingleIndex model

many assumptions but fewer estimates

Markowitz model

few assumptions but many estemates

Fama and French Three Factor Model

multi model This model considers the fact that value and small-cap stocks outperform markets on a regular basis the model adjusts for this outperforming tendency,

Sortino ratio

standardavvikelsen för nedåtrisken

Sterling ratio

measuring the risk attached to a hedge fund average drawdown of a fund rather than the just the maximum drawdown

reguration

more & better regulations, financial education transparency from compaies

VWAP

Volym weighted average price

6. Studies of Siamese twins companies find ...Which … the efficient market hypothesis (EMH).

Incorrect relative pricing ; Does not support.

1. Price, yield and risk are all related. Which of the following statements is true?

Decreasing prices in fixed incomes is an indicator that the risk is increasing.

3. A market decline of 23% on a day when there is no significant macroeconomic event … consistent with the EMH because …

Would not be; it was not a clear response to macroeconomic news.

4. Six investors who take long positions in futures agree to … of the commodity on the delivery date, and those who take the short positions agree to … of the commodity.

Take delivery; make delivery. The trader in the long position is said to“buy” the contract; the trader in the short position is said to “sell” the contract.However, no money changes hands at this time.

A fair game is

A risky investment with a risk premium of zero.

The means by which individuals hold their claims on real assets in a well-developed economy are

Financial assets

With regard to a futures contract, the long position is held by

the trader who commits to purchasing the commodity on the delivery date.

The material wealth of a society is a function of

All real assets.

The… refers to the potential conflict between management and shareholder.

Agency problem

Which statement is true concerning the Repo-rate?

A repo is a repurchase agreement where one financial institution sells a high quality financial security to another financial institution with the promise of buying it back in the near future(usually the next day) at slightly higher price

A zero investment portfolio with guaranteed return arises when

A risk free arbitrage opportunity arises.

Hedge funds are… transparent than mutual funds because of… stricts SEC regulation on hedge funds.

Less, less

Analyst may use regression analyses to estimate the index model for a stock. When doing so, the slope of the regression line is an estimate of:

Beta

According to the so called Regret Avoidance theory, individuals who make decisions that turn out badly have more regret when the investment was:

Unconventional

A diversification increases, the unsystematic risk of a portfolio approches:

The means by which individuals hold their claims on real assets in a well-developed economy are

financial assets.

The material wealth of a society is a function of

All real assets.

6. Futures , forwards and options can be useful instruments in offsetting risk.Which of the following statements is true?

If you are short of a european calloption, you need to sell a certain security or commodity at a predetermined price at apredetermined date if the holder of the call option wants to exercise the option

In this course we emphasize two basic ways to finance a company, offeringownership or issuing debt. Which of the following statements is true?

Owning Equity in a company is the same as owning a portion of that company

Which of the following statements is true concerning stocks?

A stock is a perpetual security

finance ll Flashcards

(76 cards)