Investment Flashcards
(183 cards)
1
Q
Covered call
A
- investor owns underlying stock
- offsets any loss associated with selling call
2
Q
Which of the following option strategies would be considered the most risk?
A.Buying a call. B.Buying a put. C.Selling a covered call. D.Selling a put.
A
D. Selling a put
- most risky as stock could fall to zero
- Buying a put/call option limits investor’s loss to premium paid
- Covered call is where investor owns underlying stock which offsets any loss associated with selling call
3
Q
Bond Swap Types: Tax Swap
A
- replaces bonds with offsetting capital gains and losses
4
Q
Bond Swap Types: Substitution Swap
A
- designed to take advantage of anticipated and potential yield differentials between bonds that are similar with regard to coupons, rating, maturities, and industry
5
Q
Bond Swap Types: Rate Anticipation Swap
A
- utilize forecasts of general interest rate changes
6
Q
Bond Swap Types: Yield Pickup Swap
A
- designed to alter the cash flow of the portfolio by exchanging similar bonds having different coupon rates
7
Q
Put option
A
- leveraged alternative to selling short
- can be purchased on a stock that investor has no interest in
- allows investor to sell shares at fixed price over period of time
- experience gain upon downward movement of stock market
8
Q
Tactical Asset Allocation
A
- active management
- rebalances % of assets in various categories
- take advantage of market pricing anomalies or strong market sectors
9
Q
Strategic Asset Allocation
A
- buy and hold
10
Q
Holding Period Return
A
= (Sold Price - Purchase Price +/- Cash Flow) × (1-TR) / Purchase Price
11
Q
Capital Market Line (CML) uses what risk measurement?
A
- standard deviation of market
12
Q
Securities Investor Protection Act of 1970
A
- is designed to protect individual investors from losses as a result of brokerage house failures
13
Q
The Investment Advisers Act of 1940
A
- requires that person or firms advising others about securities investment must register with the Securities and Exchange Commission
14
Q
Payout Ratio (aka Dividend Payout Ratio)
A
- portion of earnings which a company pays investors
- dividend per share/earnings per share
15
Q
Open-end investment company
A
- both passively and actively managed
- shares are traded with the fund, not on secondary market
16
Q
Treasury Bills
A
- varying maturities
- up to 52 weeks max
17
Q
Treasury Notes
A
- maturity between 2-10years
18
Q
Treasury Bonds maturity
A
- maturity greater than 10 yrs (typically 30 years)
19
Q
Odd Lot Theory
A
- odd lot purchase levels indicate number of small investors in market
- assumes small investors are always wrong
- if purchases falling relative to sales = ‘little guy thinks market will fall’ (aka the opposite: a rally is coming)
20
Q
Dow Theory
A
- market moves in predictable patterns (uptrends, downtrends, sideways)
- use Dow Jones Industrial Avg. (DJIA) and Dow Jones Transportation Avg (DJTA) to find trends
- Averages discount everything
- Trends continue until reversed
- Volume confirms trends
- Multiple avg confirms trends
21
Q
Anchoring
A
- results in buying securities that have fallen in value because it ‘must’ get back to that recent high
22
Q
Hindsight Bias
A
- overconfidence
- investor’s belief they had predicted an event that they actually did not predict
23
Q
Regret Avoidance
A
- aka Disposition Effect
- causes investors to take action/inaction in hopes of minimizing regret
24
Q
Representativeness
A
- belief that a good company is a good investment without regard to analysis in the investment
25
Jensen's Alpha tells you the difference between funds ____
- realized return and risk-adjusted return
26
Cognitive Dissonance
- overconfidence
- minimizing/forgetting past losses and exaggerating past gains
27
Intrinsic Value of Put
Strike - Stock price
- cannot be less than $0
- pay premium to sell stock at a strike price
28
Systematic Risk (non-diversifiable)
PRIME
- Purchasing power
- Reinvestment rate
- Interest rate
- Market risk
- Exchange rate
29
Unsystematic Risk (diversifiable)
ABCDEFG
- Accounting
- Business
- Country
- Default
- Executive
- Financial
- Government (regulation)
30
Standard Deviation measures what kind of risk?
Total risk
- includes systematic and nonsystematic
31
Capital Market Line (CML)
- lined defined by every combination of risk free asset and market portfolio (total risk and return of total portfolio)
- uses standard deviation
- risk premium earn for taking on extra risk
- defined by capital asset pricing model
31
Beta measures what kind of risk?
- systematic risk
- relationship between security's return and market return
- when plotting on graph, beta = slope (rise/run)
32
Security Market Line (SML)
- uses beta (systematic risk)
- derived from CML
- relationship between a security's expected return and its systematic risk
33
Capital Asset Pricing Model (CAPM)
- equation of SML
- investors should be rewarded for level of risk they take on
- investors should earn at least risk free rate of return
- investors should earn return on SML
34
Current Yield formula (income yield)
35
Holding Period Return formula
[(Sell Price - Purchase Price) +/- Cash Flows] / Purchase Price
36
Percentage Price change
(Sell Price - Purchase Price) / Purchase Price
37
Macaulay Duration
- weighted average term to maturity of cash flows from bond
- divide PV of cash flow by price to determine weight
- used in immunization strategy
38
Tax Equivalent Yield
- use the tax rates that you SAVE with tax equivalent security
(tax exempt security) / (1 - investor's marginal tax rate - state tax rate if applicable)
39
Short position means
- you are borrowing item from someone else and selling it
40
Long a position means
- give the right to buy the item from someone else at a pre-determined price
41
When using options as a safeguard: Calls are used when
- one wants to buy in at a specified price
42
When using options as a safeguard: Puts are used when
- one wants to get out of investment at a specified price
43
One buys (longs) a call for a __ market
bull market
- gain is unlimited
- max loss is the premium
44
One sells (shorts) a call for a __ market
bear market
- max loss unlimited
- max gain is premium
45
One buys (longs) a put for a __ market
bear market
- max gain is the strike price - premium
- max loss is the premium
46
One sells (shorts) a put for a __ market
bull market
- max gain is premium
- max loss is strike price - premium
47
Types of options
- puts
- calls
48
Options are considered to be ____ securities
derivative
- derive value from price behavior of an underlying real/financial asset
49
Call option description
- gives the holder of call option the right, but no obligation, to BUY stock at predetermined price (strike/exercise price)
- within predetermined time period
50
Put option description
- gives holder of put option the right, not obligation, to SELL stock at predetermined price (strike/exercise price)
- within predetermined time period
51
Long Call description
- pay premium to BUY option
- betting that underlying stock will rise in price
- max gain = unlimited
- max loss = premium
52
Long call: Stock price > strike price
= stock - strike - premium
53
Long call: Stock price < strike price
- won't exercise option
54
Short Call description
- right to SELL option for specific price
- collects premium
- betting that underlying stock will fall in price
- max gain = premium
- max loss = unlimited
55
Short call: Stock > strike
= strike - stock + premium
56
Short call: Stock < strike
= won't exercise option
- profit is the premium paid
57
Long Put description
- right to SELL for specific price
- only valuable when stock price declines
- max gain = strike price - premium
- max loss = premium
58
Long put: Strike < stock
- no exercise
59
Long put: Strike > stock
= strike - stock - premium
60
Short put: Strike > stock
= stock - strike + premium
61
Short put: Strike < stock
- no exercise
62
Long position in a security means that
- you own the security
- expectation that the stock will rise in value in the future
63
Short position in a security means that
- you sell a stock you do not own.
- believe the price of the stock will decrease in value.
- If the price drops, you can buy the stock at the lower price and make a profit
- If the price of the stock rises and you buy it back later at the higher price, you will incur a loss
- short selling is for the experienced investor
64
Neglected firm effect
- one of the market anomalies
- security in question is allowed greater potential for movement as result of lack of scrutiny by analysts
- stock that has produced superior earnings and rates of return but has gone mostly unnoticed by securities analysts and is often considered underpriced
65
Preferred Stock
- market fluctuations are greater than LT bond market fluctuations
- it is more risky than bonds (bonds are a legal obligation and have a higher priority in bankruptcy proceedings)
66
Red herring
- red lettering notifying prospective investors of its status as a prospectus without prices included
- preliminary prospectus issued by managing house of an offering
67
Callable bond: Issues regarding asset
- uncertainty about amount of payments to be made to bondholders
- reinvestment risk faced by bond investor
68
Covered Call
- generates income
- sell/write call options against shares already owned
69
Best effort agreement
- occurs when an underwriter agrees to sell what he or she can
70
Syndicated offering
- underwriter forms a team of brokerage firms
71
Green shoe agreement
- standby commitment
72
What does bullish mean?
- you believe the stock will increase
73
What does bearish mean?
- you believe the stock will decrease
74
In the money: Call option
Stock > Strike
75
In the money: Put option
Strike > Stock
76
Out of the money: Call option
Stock < Strike
- Intrinsic value = 0
77
Out of the money: Put option
Strike < Stock
- Intrinsic value = 0
78
At the money: Call & Put option
Strike = Stock
- Intrinsic value = 0
79
Time Value of Options formula: Call Option
Premium = Fundamental value + Time Value
Fundamental Value = Stock - Strike
80
Time Value of Options formula: Put Option
Premium = Fundamental value + Time Value
Fundamental Value = Strike - Stock
81
Futures contract: Long position
- BUY
- buyer agrees today to pay for & take delivery of commodity on specific date in future
- agrees on price, quality, quantity and delivery date today
- legally binding obligation
- if contract increases = buyer benefits (locked at lower price)
- if contract decreases = buyer loses
82
Futures contract: Short position
- SELL
- seller agrees to make delivery
- legally binding obligation
- if contract increases = seller loses (agreed to sell at lower price)
- if contract decreases = seller wins
83
All futures contracts are done on a ___ basis
margin
- considerable leverage
84
Futures Market: Hedgers
- producers/processors
- protect their own interests in underlying commodity/financial instrument
- provide actual products sold
85
Futures Market: Speculators
- investors
- trying to earn profit on expected swings in prices of futures contracts
- long positions if $ increases
- short positions if $ decreases
86
Of the following indexes, which is the only one that uses the geometric average to compute its daily value?
A.NASDAQ Index.
B.Wilshire 5000 Index.
C.Value Line Average.
D.Dow Jones Industrial Average.
- Value Line Average
87
Of the following indexes, which is the only one that uses the value weighted average to compute its daily value?
A.NASDAQ Index.
B.Wilshire 5000 Index.
C.Value Line Average.
D.Dow Jones Industrial Average.
- NASDAQ, NYSE Composite, and Wilshire 5000 Index
88
Of the following indexes, which is the only one that uses the simple price weighted average to compute its daily value?
A.NASDAQ Index.
B.Wilshire 5000 Index.
C.Value Line Average.
D.Dow Jones Industrial Average.
- Dow Jones
89
Margin Call formula
Loan / (1-Maintenance Margin)
90
Short
Seller, Writer
91
Long
Buyer, Holder
92
Put Break even
Strike - Premium
93
Call Break Even
Strike + Premium
94
Short Put description
- right to SELL for specific price
- only valuable when stock price rises
- max gain = premium
- max loss = strike price - premium
95
What is the P/E ratio?
- price / earnings
- market's expectation of good pricing relative to forward earnings
96
How to solve for an expected return with the P/E ratio?
(P/E ratio) / (relative P/E to S&P)
97
Short selling
- sell at higher price w/ hopes of purchasing stock back at lower price
- margin account required
- sale proceeds held by broker
- no time limit to hold position
- dividends paid by corp must be covered by short seller
98
Initial Margin
- amount equity an investor must contribute to enter margin transaction
- can vary based on volatility of stock
- Reg. T set at 50% (Fed Reserve)
1 - initial margin = loan
99
Maintenance Margin
- min amount of equity required before margin call
100
Margin Purchase price includes ____ and ____
- loan
- equity
101
Margin Position
- current equity position of investor
= equity / FMV
102
Margin Call Price (minimum price) formula
Loan / (1 - maintenance margin)
103
To receive the dividend, you need to own/purchase prior to ___ date
ex-dividend date
104
Qualified dividends receive ___ treatment
capital gains treatment
105
Qualified Dividend: Stock
- issues more shares and not taxable to shareholder
- exposes more of the gains to be taxed over time
- basis doesn't change but # shares increase (basis/share decreases)
106
Qualified Dividend: Cash
- paid by US company or qualifying foreign company
- not listed as dividend that doesn't qualify by IRS
- held stock > 60 days during 121 day period (begins 60 days before ex dividend date) 60 days before and after
107
Stock Split: 3 for 2 example
(3 / 2) *shares
(2 / 3) * price
108
Date of Record
- 1 day after ex dividend date (T+1)
109
Securities Act of 1933 (Paper Act)
- regulates issuance of new securities
- primary market
110
Securities Act of 1934 (People Act)
- regulates secondary market and trading of securities
- created SEC
110
Investment Company Act of 1940
- authorized SEC to regulate investment companies
- three types : open, closed, unite investment trusts
111
Securities Investors Protection Act of 1970 (SIPC)
- similar to FDIC insurance in banking
- protects investors from losses from broker firm failures
- regardless of citizenship
- no protection from incompetence or bad investment decisions
- losses limited to $500k ($250k cash)
112
Commercial Paper
- ST loans between corporations
- matures 270 days or less
- denominations of $100,000
113
Bankers Acceptance
- facilitates imports/emports
114
Which of the following elements of risk in mortgage-backed securities can be difficult to determine?
I. Actual maturity is not known with certainty.
II. Mortgage rates vary between the different investment pools.
III. Actual cash flows are not known with certainty.
IV. Government guarantees make the determination of an appropriate discount rate for calculating their present value difficult.
I and III only
- Lack of a definite maturity date (you won't know if mortgages are paid off early ahead of time) and uncertain cash flows (due to possible early payoffs) are the elements of risk in mortgage-backed securities
115
Dollar-Weighted Return
- Investor's cashflows
- include dividends and any other purchases
116
Time-Weighted Return
- Investment's cashflows
- without regard to investors
117
If required rate of return decreases, the stock price will ____.
increase
118
If required rate of return increases, the stock price will ____.
decrease
119
If the dividend is expected to decrease, the stock price will ____.
decrease
120
If the dividend is expected to increase, the stock price will ____.
increase
121
Efficient Market Hypothesis overview
- Random Walk (stocks unpredictable but not arbitrary)
- cannot predict with consistency/accuracy what response to given stimuli will be
- prices are best incorporation of all available info & true reflection of value (in equilibrium)
122
Efficient Market Hypothesis: Weak
- reflects past prices & volume
Could help?
- fundamental analysis
- insider info
123
Efficient Market Hypothesis: Semi-Strong
- reflects all public info
Could help?
- insider info
124
Efficient Market Hypothesis: Strong
- reflect all public and private info
Could help?
- Diversify stocks
125
Non-marketable US Treasury: Series E and Series EE Bond
- pay fed income tax, NO state
- sold at FV
- doesn't pay interest periodically (accrues interest)
126
Non-marketable US Treasury: Series H and Series HH Bond
- pays interest semiannually
- matured from Series EE
- no longer being made
127
Non-marketable US Treasury: Series I Bond
- inflation adjusted - coupon rate changes
- pay fed income tax, NO state tax
- fixed + variable rates
- accrues interest
128
Treasury Inflation Protected Securities (TIPS)
- principal adjusts for inflation (apply coupon to new amount)
- inflation & purchase power protection
- coupon RATE doesn't change
129
STRIPS
- separate trading of coupon payments and principal amount
- essentially creates many zero coupon bonds
130
What two have full faith and credit of US government (aka zero default risk)?
- GNMA
- US Treasuries
131
Secured Bond: Mortgage Bonds overview
- backed by pool of mortgages
- payment consists of principal & interest
132
Secured Bond: Collateralized Mortgage Obligations (CMO) overview
- investors divided into 'Tranches' (A-Z)
- investors in short term (A) receive principal before investors in long term (Z)
133
Secured Bond: Mortgage Bonds Biggest Risk
- Default risk
- Prepayment risk
134
Secured Bond: Collateral Trust Bonds overview
- backed by asset that company owns
135
Secured Bond: Collateralized Mortgage Obligations (CMO) means to mitigate ___ risk
- prepayment risk
136
Municipal Bond: General Obligation Bonds overview
- backed by full faith, credit & taxing authority of municipality that issued bond
- interest (aka income) NO fed income tax
137
Municipal Bond: Revenue Bonds overview
- backed by revenue of specific project
- riskier than general obligation bonds
- interest (aka income) NO fed income tax
138
Municipal Bond: Private Activity Bonds overview
- public/private
- used to fund construction of stadiums
- interest (aka income) NO fed income tax
139
What are the two insured municipal bonds?
- American Municipal Bond Assurance Corp (AMBAC)
- Municipal Bond Insurance Association Corp (MBIA)
140
Municipal bonds are/are not taxable at the federal, state and local level if you live in issuing state?
are NOT
141
Bonds issued by territories of the US (Puerto Rico) are/are not subject to taxes at federal, state and local level??
are NOT
142
Yield Summary: Premium (high to low)
Discount (low to high)
Coupon Rate - Current Yield - Yield to Maturity - Yield to Call
(CR - CY - YTM - YTC)
143
Liquidity Preference Theory
- lower yields for ST because investors prefer liquidity
- willing to pay for liquidity in form of lower yield
144
Market Segmentation Theory
- yield curve depends on supply & demand at given maturity
145
Expectations Theory
- inflation expectations
- since investors uncertain/believe inflation will be higher in future, LT yields are higher than ST
146
Preferred Stock description: Equity features
- price of bond may generally move with price of common stock
147
Preferred Stock description: Debt features
- stated par value
- stated dividend rate as % of par (doesn't fluctuate like common stock dividend)
- no maturity date like a bond
148
Preferred Stock Tax Advantage on Dividends received: Corp owns < 20% of other corp
- tax deduction is 50%
149
Preferred Stock Tax Advantage on Dividends received: Corp owns > 20% of other corp
- tax deduction is 65%
150
Closed Mutual Fund description
- fixed initial market capitalization
- shares trade on organized exchange
- may trade at premium or discount to NAV
151
Open Mutual Fund description
- unlimited initial market capitalization
- shares bought and redeemed directly from fund family
- shares trade at NAV
152
Unit Investment Trust description
- passive, self-liquidating
- can be equity or fixed income (typically fixed)
- units, not shares
153
Index Funds description
- track performance of various market indexes
- passive approach
154
Growth Funds description
- invests in equities with high P/E
- generate capital appreciation
155
Growth & Income Funds description
- invests in equities and income producing assets
- create capital appreciation and income
156
Balanced Fund description
- invests more in bonds than typical equity fund
157
Global Fund description
- invests in international and US securities
158
International Fund description
- invests in international securities but NOT US securities
159
May be given client facts and asked to recommend portfolio of mutual funds. Always recommend ____________.
the most diversified portfolio of funds (all else being equal)
160
A shares description
- front end load
- small 12b-1 fee
- no redemption fee
161
B shares description
- redemption fee
- max 12b-1 fee of 1%
- no front end load
- convert to A shares
- many funds no longer offer B shares
162
C shares description
- no front end load
- usually charge small back end load
- max 12b-1 fees of 1%
163
Exchange Traded Funds (ETF) description
- portfolio represents index
- tax efficient
- traded on exchange similar to stocks
- don't have to buy & sell blindly (trade throughout day)
- low cost of ownership
164
Real Estate Investment Trusts (REITs) overview
- low correlation to stock market
- similar to closed end mutual fund
- must distribute 90% of investment income to shareholder to maintain tax exempt status
165
Real Estate Investment Trusts (REITs): Equity REIT description
- invest in real estate for capital appreciation (own the real estate)
- income generated from rental income and appreciation
166
Real Estate Investment Trusts (REITs): Mortgage REIT description
- invest mostly in mortgages and construction loans (own the real estate paper)
- make spread between lending and borrowing rate
167
Real Estate Investment Trusts (REITs): Hybrid REIT description
- combo of both equity and mortgage
168
American Depository Receipts (ADR) overview
- do NOT eliminate exchange rate risk
- represent foreign stock held in domestic bank's foreign branch
- entitled to dividends and capital gains (include currency fluctuations)
- trade on US exchanges
169
Cryptocurrencies overview
- virtual currency
- not associated with any country or bank
- # of 'coins' are limited
- not widely accepted form of payment
- HIGH RISK investment
170
Positive Outcomes for Bullish Scenario (think an asset will increase in value and you want to have a positive outcome) diagram
- arrow points up
- short the put
- long the call/stock/futures
171
Positive Outcomes for Bearish Scenario (think an asset will decrease in value and you want to have a positive outcome) diagram
- arrow points down
- long the put
- short the call/stock/futures
172
Options overview
- derivative security
- option depends on (derived from) value of underlying asset
- contractual agreement between two parties
- two sides to every transaction (buy & seller/writer)
- handled through option clearing house
173
Portfolio Insurance: What option works best?
- own portfolio of stocks, worried that price will decrease (buy put on S&P)
- use put options on index to 'lock in' gains
174
Long Straddle description
- buys put & call option
- expects volatility, just not sure which direction
175
Short Straddle description
- sells put & call option
- doesn't expect volatility, hoping to keep premiums
176
Black/Scholes Pricing Model
- determine value of call option
- InvEst (exercise price has inverse relationship to price of option) aka higher strike price = lower premium
- all other variables have direct relationship to price of option
177
Put/Call Parity
- attempts to value PUT option based on value of call option
178
Binomial Pricing Model
- attempts to value option based on assumption that stock can only move in one of two directions
179
Warrants
- call options issued by corporation
- written by investors
- expiration period much longer than options (5-10 yrs vs 9 months or less)
- terms NOT standardized
180
What is Fundamental Analysis?
- analyzing company's financial statements (filings, website, use other platforms/broker research reports)
- analyzing broader economic indicators to find intrinsic value (market, economic conditions)
- quantify value of company and its shares to see if worth investing in
181
What is Technical Analysis?
- study historical price trends of stock to predict short term trends
