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Investment Planning Flashcards

(70 cards)

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1
Q

Initial Margin

A

50% - set by Federal Reserve

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2
Q

Maintenance margin

A

Minimum amount of equity required before a margin call
- will be given by the example

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3
Q

Ex-Div date

A

One business day before Date of Record

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4
Q

Date of Record

A

Date on which you’ll get a dividend: One business day after Ex-Div Date

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5
Q

To get a dividend, when do you have to Buy a stock?

A

Two business days prior to Record Date

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6
Q

Characteristics of the Securities Act of 1933

A

Regulates the issuance of new securities (Primary Market).
Requires new issues are accompanied with a prospectus before being offered

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7
Q

Characteristics of the Securities Act of 1934

A

Regulates the secondary market and trading of securities.
Created the SEC to enforce compliance with security regulations and laws.

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8
Q

Characteristics of the Investment Company Act of 1940

A

Authorized the SEC to regulate investment companies.
Three types of investment companies: Open, Closed and Unit Investment Trusts.

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9
Q

Characteristics of the Investment Advisers Act of 1940

A

This act required investment advisors to register with the SEC or state.
To register with the SEC, an advisor must file form ADV.
Less than $100 million in assets, register with the state.
Greater than $110 million, register with the SEC.
Between 100M and 110M AUM has the choice to register with the state or SEC.

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10
Q

Characteristics of the Securities Investors Protection Act of 1970

A

Established the SIPC to protect investors for losses resulting from brokerage firm failures.
This act does not protect investors from incompetence or bad investment decisions.

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11
Q

Characteristics of the Insider Trading and Securities Fraud Enforcement Act of 1988

A

Defines an insider as anyone with information that is not available to the public.
Insiders cannot trade on that information.

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12
Q

Characteristics of TBills

A

Maturities up to 52 weeks
$100 increments
Up to $5m per auction available through competitive bid

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13
Q

Characteristics of Commercial Paper

A

Short loans between corporations
Maturities <270 days
Not registered with SEC
Denominations of $100,000
Sold at a discount

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14
Q

Bankers Acceptance

A

Facilitates Imports/Exports
Maturies < 9 months
Can be held until Maturity or Traded

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15
Q

Eurodollars

A

Deposits in foreign banks denominated in US Dollars

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16
Q

Coefficient of Variation

A

Probability of actually experiencing a return close to the average return
Higher is more risky

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17
Q

Kurtosis

A

Variation of returns.

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18
Q

Positive kurtosis

A

High peak with little variation of returns

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19
Q

Negative kurtosis

A

Low peak and widely dispersed returns

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20
Q

Leptokurtosis

A

high peak with fat tails
higher chance of extreme events

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21
Q

Platykurtosis

A

low peak and thin tails
lower chance of extreme events

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22
Q

Lognormal distribution

A

not normal
seeking a trendline or ending dollar amount

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23
Q

Skewness

A

a normal distribution shifted to the left (positive) or right (negative) of mean return
Commodity returns

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24
Q

Coefficient of Determination

A

r-squared
How much of return is due to market
How well diversified the portfolio is
higher r2 means more systematic risk

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25
When is beta an appropriate measure of risk?
if r2 is >= 0.7
26
When is standard deviation a good measure of total risk?
if r2 < 0.70
27
Modern Portfolio Theory
acceptance by an investor of a given level of risk while maximizing expected return objectives
28
Efficient frontier
Curve illustrating best possible returns from all possible portfolios
29
Indifference curves
highest level of returns given an acceptable level of risk
30
Efficient portfolio
when an investors indifference curve is tangent to the efficient frontier
31
Optimal portfolio
the one selected from all efficient portfolios
32
If r decreases, the stock price...
Increases
33
If dividend expected to increase then stock price...
Increases
34
If r increases, the stock price...
Decreases
35
If dividend expected to decrease then stock price...
Decreases
36
Technical Analysis believes:
Supply and Demand drives a stock price
37
Dow Theory
Industrials & Transportation: signals an end to a bull or bear market. Not when, but just that its over.
38
Random Walk Theory
Prices are unpredictable but not arbitrary Impossible to consistently achieve above-average returns Prices are in equilibrium
39
Weak Form of EMH
Asserts - historical will not help an investor achieve above average market returns. Rejects - technical analysis
40
Semi-strong Form of EMH
Asserts - both historical and public information will not help investors achieve above average market returns. Rejects - both technical and fundamental analysis.
41
Strong Form of EMH
Asserts - historical, public and private information will not help investors achieve above average market returns. Suggests - stock prices reflect all available information and react immediately to any new information.
42
Bond Nominal Yield
Coupon / Par
43
Bond Current Yield
Coupon / Market Price
44
What compounding is used for bonds on the exam?
Semi-annual unless told otherwise
45
Problematic assumption with YTM
All coupon payments can be reinvested at YTM
46
Problematic assumption with YTM
All coupon payments can be reinvested at YTM
47
Accrued Interest
Buyer pays the seller accrued interest
48
Unbiased Expectations Theory
Related to term structure of interest rates: todays longer term rate have expectations about future short-term interest rates.
49
Assumption of Bond Duration and problem with it
Linear relationship between changes in rates and bond price, but the relationship is actually curvilinear
50
When does duration work well?
Small changes in interest rates
51
When doesn't duration work well?
Larger changes in interest rates
52
Which way does duration not work when rates increase?
Overstates the price decline
53
Which way does duration not work when rates decrease?
Understates the price gain
54
Convertible Stock formula
Par ÷ Conversion Price * Price of common
55
Capitalization Rate
NOI ÷ Capitalized Value
56
UIT
Unit Investment Trust: passively managed and self-liquidating
57
A Shares: two traits and good for whom?
Front-end load Low 12b-1 fee For long-term investors
58
B Shares: two traits and good for whom?
Back-end load High 12b-1 (max 1%) Can convert to A shares but pretty rare now
59
C Shares: two traits and good for whom?
Small back end load High 12b-1 (max 1%) For short-term investors
60
REITs
Good for diversification Must distribute 90% of investment income
61
ADRs & interest rate risk
Not eliminated
62
Calc gain/loss on Options
Stock gain or loss + Option gain or loss + Premium paid or received + Shares controlled or owned
63
Married put
Portfolio Insurance Own the stock and buy a Put
64
Long Straddle
Buy Put & Call - volatility one way or the other
65
Short Straddle
Sell Put & Call - hope for low volatility & collect the premiums
66
Black Scholes Model
Considers the following variables: Current price of the underlying asset. Time until expiration. The risk-free rate of return. Volatility of the underlying asset.
67
Put/Call Parity
Attempts to value a PUT option based upon a call option.
68
Binomial Pricing Model
Explains prices based upon the underlying asset price moving in two directions.
69
Tax consequences of Call option
If expired: Premium paid or earned is short-term If exercised: premium added to stock to increase basis; regular short and long-term gain/loss
70
Difference between Options & Futures
Options right, Futures obligation

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