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CFP extras > Investment Planning > Flashcards

Investment Planning Flashcards

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
Q

When is beta an appropriate measure of risk?

A

if r2 is >= 0.7

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26
Q

When is standard deviation a good measure of total risk?

A

if r2 < 0.70

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27
Q

Modern Portfolio Theory

A

acceptance by an investor of a given level of risk while maximizing expected return objectives

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28
Q

Efficient frontier

A

Curve illustrating best possible returns from all possible portfolios

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29
Q

Indifference curves

A

highest level of returns given an acceptable level of risk

30
Q

Efficient portfolio

A

when an investors indifference curve is tangent to the efficient frontier

31
Q

Optimal portfolio

A

the one selected from all efficient portfolios

32
Q

If r decreases, the stock price…

A

Increases

33
Q

If dividend expected to increase then stock price…

A

Increases

34
Q

If r increases, the stock price…

A

Decreases

35
Q

If dividend expected to decrease then stock price…

A

Decreases

36
Q

Technical Analysis believes:

A

Supply and Demand drives a stock price

37
Q

Dow Theory

A

Industrials & Transportation: signals an end to a bull or bear market. Not when, but just that its over.

38
Q

Random Walk Theory

A

Prices are unpredictable but not arbitrary
Impossible to consistently achieve above-average returns
Prices are in equilibrium

39
Q

Weak Form of EMH

A

Asserts - historical will not help an investor achieve above average market returns.
Rejects - technical analysis

40
Q

Semi-strong Form of EMH

A

Asserts - both historical and public information will not help investors achieve above average market returns.
Rejects - both technical and fundamental analysis.

41
Q

Strong Form of EMH

A

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
Q

Bond Nominal Yield

A

Coupon / Par

43
Q

Bond Current Yield

A

Coupon / Market Price

44
Q

What compounding is used for bonds on the exam?

A

Semi-annual unless told otherwise

45
Q

Problematic assumption with YTM

A

All coupon payments can be reinvested at YTM

46
Q

Problematic assumption with YTM

A

All coupon payments can be reinvested at YTM

47
Q

Accrued Interest

A

Buyer pays the seller accrued interest

48
Q

Unbiased Expectations Theory

A

Related to term structure of interest rates: todays longer term rate have expectations about future short-term interest rates.

49
Q

Assumption of Bond Duration and problem with it

A

Linear relationship between changes in rates and bond price, but the relationship is actually curvilinear

50
Q

When does duration work well?

A

Small changes in interest rates

51
Q

When doesn’t duration work well?

A

Larger changes in interest rates

52
Q

Which way does duration not work when rates increase?

A

Overstates the price decline

53
Q

Which way does duration not work when rates decrease?

A

Understates the price gain

54
Q

Convertible Stock formula

A

Par ÷ Conversion Price * Price of common

55
Q

Capitalization Rate

A

NOI ÷ Capitalized Value

56
Q

UIT

A

Unit Investment Trust: passively managed and self-liquidating

57
Q

A Shares: two traits and good for whom?

A

Front-end load
Low 12b-1 fee
For long-term investors

58
Q

B Shares: two traits and good for whom?

A

Back-end load
High 12b-1 (max 1%)
Can convert to A shares but pretty rare now

59
Q

C Shares: two traits and good for whom?

A

Small back end load
High 12b-1 (max 1%)
For short-term investors

60
Q

REITs

A

Good for diversification
Must distribute 90% of investment income

61
Q

ADRs & interest rate risk

A

Not eliminated

62
Q

Calc gain/loss on Options

A

Stock gain or loss +
Option gain or loss +
Premium paid or received +
Shares controlled or owned

63
Q

Married put

A

Portfolio Insurance
Own the stock and buy a Put

64
Q

Long Straddle

A

Buy Put & Call - volatility one way or the other

65
Q

Short Straddle

A

Sell Put & Call - hope for low volatility & collect the premiums

66
Q

Black Scholes Model

A

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
Q

Put/Call Parity

A

Attempts to value a PUT option based upon a call option.

68
Q

Binomial Pricing Model

A

Explains prices based upon the underlying asset price moving in two directions.

69
Q

Tax consequences of Call option

A

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
Q

Difference between Options & Futures

A

Options right, Futures obligation

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