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CFP - Review Wrong answers > Investments > Flashcards

Investments Flashcards

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1
Q

Discount bond

A

A bond where its par value is in excess of the Bond’s purchase price.

Yield to maturity must exceed current yield because YTM factors the discount into the return.

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2
Q

Risk of Notes and Bonds

A

Reinvestment, Interest rate, Purchasing Power (RIP)

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3
Q

Treasury bonds

A

Interest paid is subject to federal income tax, sold in a YTM basis, can be callable

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4
Q

Treasury Inflation-Protection Securities (TIPS)

A

Issued in minimum denominations of $1,000, interest rate is fixed, interest payments vary as the principal is adjusted for inflation and deflation, obligations of the federal government, increase in principle must be reported (phantom income)

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5
Q

Mortgage-backed certificate

A

Security backed by mortgages, a pass- through security, represents pooled debt obligations repackaged as certificates.

Investors receive payments sources from the interest and principal on the mortgages

Ex. Includes GNMA, Fannie Mae, and Freddie Mac securities.

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6
Q

Bond quality

A

Based on rating agencies, not the indenture agreement.

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7
Q

Bond rating companies

A

Standard & Poors and Moodys

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8
Q

Banker’s acceptance

A

Used to finance import/export transactions.

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9
Q

I Bonds

A

Based on both a fixed rate of return and the semiannual inflation rate. Earn interest for up to 30 years.

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10
Q

How does preferred stock differ from common stock?

A

It pays a fixed dividend rate.

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11
Q

Property Intrinsic Value formula

A

Net Operating Income (NOI) / Capitalization Rate

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12
Q

What does Net Operating Income (NOI) not factor?

A

Debt service

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13
Q

Unit investment trust

A

It will self-liquidate and you can trade it on the secondary market.

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14
Q

ETF

A

May be an open-end or closed-end fund. Traded on a major exchange.

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15
Q

Shares for an open-end fund and a closed-end fund.

A

Closed - Issued with a limited number of shares.
Open - Increase or decrease based on customer deposits and redemptions.

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16
Q

No-load balanced mutual fund

A

Can always be purchased at NAV.

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17
Q

Unit investment trusts

A

Not actively managed. Once created, no new securities are purchased, and portfolio securities are rarely sold.

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18
Q

Similarities between an open-end fund and no-load balanced mutual fund

A

Shares are purchased and redeemed directly with the issuer.

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19
Q

10q & 10k vs. Corporate Annual Report

A

10q and 10k has to be filed with the SEC. Annual report is sent to stockholders.

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20
Q

American Depository Receipt (ADR)

A

A receipt for shares of a foreign-based corporation.

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21
Q

ETF advantages

A

Be bought on margin, be sold short, be bought or sold throughout the trading day, and trading orders can include stop-loss and limit orders.

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22
Q

Put options

A

Right to sell a specific number of shares at a set price. Investors buy puts when they are pessimistic (bearish).

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23
Q

Intrinsic value of a Put

A

Exercise price - Market price

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24
Q

Call options

A

The right to purchase a specific number of shares of common stock at a set price. Investors buy calls when they are optimistic (bullish).

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25
Intrinsic value of a Call
Market price - Exercise price
26
Time Premium formula
Premium - intrinsic value
27
Riskiest option position
Selling a naked call because if the stock rises, the seller of the options has to buy the stock at the higher market price. Can rise without limit.
28
Difference between long position and short position
Long = buy the commodity/financial (bullish) Short = sell the commodity/financial (bearish)
29
Difference between warrants and call options
Warrants are issued by corporations; Calls are created by individuals on exchanges Warrants have maturities last for several years; Calls expire within 9 months Warrant terms are not standardized compared to call options Warrants are issued with no intrinsic value
30
Futures contract
Formal agreement between buyer or seller that operates through a commodity exchange. Not securities and not regulated by the SEC.
31
Option with the highest potential for profit
Buying a call
32
Buying call/selling put vs. Buying put/selling naked call
Profitable strategies in a rising market vs. profitable strategies in a falling market.
33
Option with unlimited loss potential
Seller of a naked call
34
When is put in the money?
When the market price of a stock is lower than the exercise price of the option.
35
Total Risk vs. Systematic Risk
Total is expressed by standard deviation while systematic is expressed by beta.
36
Difference between correlation coefficient and covariance
While they both express which movements of stocks/securities in the same portfolio are similar or not, covariance considers an infinite possibility of outcomes while correlation coefficient falls within a specific range.
37
Standard deviation vs. Beta
Both are used to express the risk of a security. SD measures variability of returns used in a non-diversified portfolio and is a measure of total risk. Beta measures volatility of returns used in a diversified portfolio and is a measure of systematic risk.
38
Applying standard deviation with bell-shaped curve
68% within 1 SD, 95% within 2 SD, and 99% within 3 SD
39
A portfolio with a beta of +1 has what?
Systematic risk
40
Why would a portfolio with a correlation coefficient of zero be good to own?
Standard deviation (risk) would be greatly reduced.
41
What does the risk level of beta express?
Volatility and systematic risk
42
Coefficient of variation formula
Standard deviation / Mean
43
What happens when a correlation coefficient is +1?
Investments are perfectly positively correlated.
44
Negative correlation in correlation coefficient
Reduce the portfolio risk and make the beta negative.
45
Geometric mean
Compound returns over more than one time period (time-weighted return). Evaluates the performance of the portfolio manager.
46
Dollar-weight vs. Time-weight returns
Dollar-weight enables investors to compare absolute dollar amounts with financial goals. Time-weight evaluates manager performance.
47
Holding period return
Total return (income plus price appreciation and dividends less margin interest) over the period from purchase to end of period or sale divided by the price of the investment.
48
What happens when you buy the stock on margin?
The downside risk is greater than the upside gain for the same rate of return.
49
Treasuries and taxes
Only subject to federal tax, not state or city. Formula is % of treasury bonds (1-federal tax percent)
50
Interest-bearing bonds
Pay interest at the end of the period, are issued at par value, and pay semiannual interest.
51
What happens to a bond's duration if it has a high coupon rate?
It is shorter than similar maturity debt with a smaller coupon. High coupon (interest) = low duration (inversely related). Smaller coupon (interest) = higher duration) inversely related)
52
What happens to a bond's duration if it has a long maturity?
Long maturity (time) = long duration (positively or directly related)
53
What does it mean when zero coupon bonds have durations equal to their maturities?
Prices fluctuate more than those of coupon bonds with the same maturities, making it more volatile.
54
UPS
Interest rates UP, Shorten duration.
55
FALLEN
Interest rates FALL, LENgthen duration.
56
not factored in calculating the intrinsic value using the dividend discount model?
Gross earnings of the company
57
Relationship between duration and maturity
Positively correlated
58
Intrinsic value of a stock
P/E ratio x earnings. If stock is more than intrinsic value, it is overvalued.
59
Stock's yield formula
Dividend / Closing price
60
What does a curve look like for someone who is risk averse?
It would be a steep curve, compared to someone who is less risk averse, which would be more flat.
61
Strong form
Insider information will not produce superior results over time. Neither fundamental nor technical analysis will produce superior results.
62
Semi-strong form
Current prices reflect past prices and factor all publicly available information. Inside information can lead to superior results.
63
Portfolio that is above the efficient frontier is what?
Unattainable
64
Which form of EMH reflects all information including insider information?
Strong form
65
Prices of securities in EMH
Fully reflect all available information.
66
Modern portfolio theory expresses a risk-return relationship based on what?
Capital Market Line
67
Random walk hypothesis
The next price change of a stock is unrelated to the last price.
68
What are differences of a bond that wouldn't cause a wash-sale?
Coupon rate or maturity
69
Ex-Dividend Date
The day after the purchase date of a company and the day before the date of record. Does not count weekends or holidays.
70
Sharpe Ratio
Ratio of the excess return of the portfolio to its standard deviation. Compared to the market or other mutual funds.
71
Treynor Ratio
Ratio of the excess return of the portfolio to its beta.
72
Jensen Ratio
Also known as alpha. Measures the contribution of the portfolio manager. Positive number means return exceeded expectations. Negative means poor management.
73
Why must a portfolio be diversified when using Jensen or Treynor?
They both use beta to express risk.
74
R2 (squared)
Correlation coefficient. If greater than 60, look for highest alpha. Next possibility is highest Treynor. If lower than 60, look for highest Sharpe.
75
Why should you focus on standard deviation with a low R2 (squared)?
Because a low R2 means the fund isn't diversified
76
Information Ratio (IR)
Expresses portfolio returns above the returns of a benchmark to the volatility of those returns.
77
Difference between excess return and active return
Excess (Sharpe) denotes return over the risk-free asset Active (Information ratio) denotes the return over the benchmark
78
Probability distribution examples
Normal Triangular Uniform Lognormal
79
What index is DJIA?
Price weighted
80
Dow Theory
Contradicts Modern Portfolio Theory and EMH. Based on trends, not day to day.
81
What does Alpha indicate?
How the portfolio manager performed relative to a benchmark.
82
Difference between Sharpe and Jensen
Sharpe assumes the portfolio is not diversified, while Jensen does and compares the actual return to the expected return and uses Beta coefficient
83
What is not included in a current ratio?
Retirement funds and mortgage
84
How do you immunize a bond portfolio?
Match the average duration of the bond portfolio to the time horizon.
85
How can volatility be controlled?
Buying stocks with low betas or diversifying the portfolio to reduce its weighted beta
86
Under Black/Scholes, what will decrease the value of a call option?
Increase in strike price.
87
Valuation model
Black/Scholes and Binomial. Prices are established through the action of buyers and sellers.
88
Preferred stock and bonds similarities
Both are fixed income securities. Highly correlated since they are price sensitive to interest rate changes.
89
SML vs. CML
SML quantifies the risk/return relationship of a single security. CML specifies the relationship between risk/return on a portfolio.
90
What is Beta a measure of?
A stock's systematic risk
91
What should you do if the R2 is high?
Select the highest Alpha. If not available, then the highest Treynor number.
92
The Markowitz Model
Uses standard deviation as a risk measurement (covariance, correlation coefficient, and return). It does not factor Beta.
93
What do anomalies contradict?
Efficient Market Hypothesis, arguing that unexplained situations can occur.
94
Semi-strong form
In EMH, suggests that investors with inside information can outperform the market.
95
When is a publicly traded corporation most likely to issue new bonds?
When previously issued bonds are selling at a premium, interest rates are expected to rise, and interest rates have fallen.
96
Duration and interest rates relationship
Inverse. If interest rates increased, then duration decreased.
97
Bonds with lower coupons
Experience a greater relative price fluctuation
98
What does it mean when the zero-coupon bond's maturity equals its duration?
It is the most recommended bond to choose.
99
STRIPS
Most often purchased by pension plans because the plan is tax-deferred.
100
PUT feature
Able to redeem bonds back at par even when the market price of the bond has declined.
101
T-Bills vs. Treasury Bonds
T-Bills have short-term maturities, are not callable, sold at a discount. Bonds have longer maturities, are callable, and pay interest semiannually.
102
Corporate long-term bond
Expected to generate the highest total return when interest rates decline.
103
Benefit of buying a PUT
Whatever you paid for is the maximum you could lose.
104
Naked short call
There is no limit to the potential loss.
105
Writing
Selling the option
106
Nonpublic REITs and Real Estate LPs
Not liquid and not marketable for many years.
107
Equity REIT
Could provide leverage and a reasonable hedge against inflation.
108
Stock price, Earnings, and Dividend Yield
When comparing stocks, you multiply stock price and earnings for each stock. Whichever amount is furthest below earnings will pay a dividend.
109
Best way for a US investor to buy a foreign stock.
American Depositary Receipts (ADR)

CFP - Review Wrong answers (7 decks)

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