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CFP > Investments > Flashcards

Investments Flashcards

1
Q

What is short selling?

A

Selling the stock at a higher price in the hopes of you buying it at a lower price

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2
Q

What are some of the characteristics of a short sell?

A

Investor must have margin account, Broker holds the sales proceeds, short seller covers the dividends that are usally paid by corporation, there is no time limit

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3
Q

What is the initial margin?

A

it’s the amount of equity (Money of their own) they must contribute to have a margin transaction (Usually 50%)

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4
Q

What is the maintenance margin?

A

This is the minimum amount of equity required before a margin call comes

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5
Q

“Margin Call Price” Formula (Not on Formula sheet)

A

(Loan / 1 - Maintenance Margin)

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6
Q

MF and Stock ratings: Value Line & MorningStar

A

Both have a scale from 1-5: Valueline - 1 is best // Morningstar - 5 is best

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7
Q

What is the ex-dividend date?

A

the day that you WONT get the dividend

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8
Q

At what date would you get the dividend?

A

1 day before Ex-dividend // 2 days before Date of record

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9
Q

Which is taxed: Qualified dividends / stock dividends?

A

Qualified dividends get capital gains treatment

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10
Q

What is a qualified dividend? Characteristics

A

1) Paid by American company or qualifying foreign company 2)Qualifies with IRS 3)Held on for a minimum amount of time (60 days during 120 day period)

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11
Q

Securities act of 1933

A

Regulates issuance of new securities (Primary Market)

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12
Q

Securities act of 1934

A

Regulates issuance of secondary market and trading of securities // Created SEC

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13
Q

investment company act f 1940

A

Regulates investment companies (Open, Closed, Unit Investment trusts)

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14
Q

Securities investors protection of 1970

A

Protects investors from broker firm failures that creates losses

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15
Q

Money Market Securities - Certificates of Deposit

A

Set interest rate and maturity date - deposit to bank

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16
Q

Money Market Securities - Tbills

A

Less than 1 yr // direct obligation of the government //denominations f $100

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17
Q

Money Market Securities - Commercial paper

A

Short term loans between corporations // Maturites are 270 days or less // denominations of $100,000

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18
Q

Money Market Securities - Bankers Acceptance

A

Facilitates imports/exports // Maturities of 9 months or less

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19
Q

Money Market Securities - Eurodollars

A

Foreign banks that are denominated with US dollars

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20
Q

What does the investment policy establish? What does it measure?

A

Client’s objectives (Not investment selection) & put Limitations on investment manager // Mesures the performance of manager

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21
Q

What are the objectives and constraints on the IPS? (RR TTLLU)

A

Objectives: Return requirements/Risk Tolerance /// Constraints: Time horizon/Liquidity/taxes/laws & regs/unique circumstances

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22
Q

(IPS Objectives) - Return requirements

A

Specific to a goal such as education or retirement

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23
Q

(IPS Objectives) - Risk tolerance

A

Defining this before making any recommendations

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24
Q

(IPS Constraints) - Time horizon

A

When the clients needs the money

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25
Q

(IPS Constraints) - liquidity

A

Tied to the time horizon // liquidity should be appropiate for when they need the money

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26
Q

(IPS Constraints) - Taxes

A

whether the account is taxable or non taxable

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27
Q

(IPS Constraints) - Laws & Regs

A

assets could be help in trust and terms of the trust

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28
Q

Difference between price weighted and value weighted averages

A

Price weighted - the higher the stock price –> the more weight // Value weighted - the bigger market cap –> the more weight

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29
Q

Dow Jones industrial average

A

30 stocks, price wieghted average

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30
Q

S&P 500, S&P 400, Russel 2000

A

All are value weighted indexed // 500(large cap), 400(mid cap), 2000(small cap)

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31
Q

What does standard deviation cover?

A

total risk

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32
Q

The bigger standard deviation is, the more ______

A

Risky

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33
Q

How do you calculate Standard deviation on calculator? Year 2) 8%, Year 2) 10%, Year 3) 12%

A

You hit 8Σ+, 10Σ+, 12Σ+ then ORANGE Sx,Sy

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34
Q

What are the percentages for +/- 1 Standard deviation, +/- 2 Standard deviation, +/- 3 Standard deviation

A

1) 68% 2) 95% 3) 99%

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35
Q

Coefficient of Variation formula (not on the CFP Sheet)

A

CV=Standard deviation/average return (you are using this when comparing assets)

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36
Q

The higher the coeffiecient of variation, the more _____

A

risky

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37
Q

The asset with a lower coefficient of variation, has a higher _____

A

risk adjusted return(Return/Risk)

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38
Q

Correlation / Correlation coefficient - What does this measure?

A

Measures movement of one security to another. (Ranges from 1+ to -1) 1 being perfectly aligned with one another

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39
Q

For correlation, when do diversification benefits begin?

A

0.99

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40
Q

What does covariance measure?

A

Relative risk that measures two securities combined risk

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41
Q

Beta - what does it measure? What type of portfolio is it good for?

A

systematic/market risk // good for a well diversified portfolio

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42
Q

The higher the beta, the more _____

A

Fluctuation! If the S&P 500 is 1, and DIS is 2 - DIS is more volatile (risky)

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43
Q

What does the Coefficient of determination (r-squared) measure?

A

Measures how much of the return is do to the market (Systematic Risk) and how much is due to unsystematic risk?

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44
Q

When do we use beta and standard deviation for the Coefficient of determination (r-squared) number?

A

if r2≥.70 - Use beta // if r2<.70 -use standard deviation

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45
Q

When you are looking to find the most appropriate benchmark - what should he look for? (they will give you different options)

A

Look for the highest r2

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46
Q

Definition of systematic risk

A

you cannot diversify against this - everything has this risk

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47
Q

Definition of unsystematic risk

A

the risk that is specific to each company (you can diversify away this risk)

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48
Q

What are the different types of systematic risk? PRIME

A

Purchasing power, Reinvestment, Interest, Market, Exchange rate

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49
Q

What are the different types of unsystematic risk? ABCDEFG

A

Accounting, Business, Country, Default, Executive, Financial, Governmental/Regulation

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50
Q

What is Modern portfolio theory?

A

Acceptance of given risk for the maximising expected return

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51
Q

What do indiffernce curves say about an investor (indifference curves located on Modern portfolio theory?

A

Sharp curve - Risk averse // Wide curve - Less risk averse

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52
Q

What is an efficient portfolio? What does it mean if the point is below or above the curve?

A

When it is on the curve - efficient // When above the curve - unattainable // below the curve - inefficient

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53
Q

What risk measure does the CAPITAL MARKET LINE use?

A

Standard deviation

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54
Q

What is the Capital pricing model formula? (CAPM)

A

Required rate of return = Risk free rate (return of market - risk free rate)*Beta

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55
Q

What does the CAPM Formula calculate?

A

required rate of return for the level of risk it takes

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56
Q

What risk measure does the SECURITY MARKET LINE use?

A

Beta

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57
Q

What is the intersetion on the y axis of the Capital market line / security market line?

A

Risk free rate of return

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58
Q

How to find the portfolio risk? There is short cut instead of the formula? (securities with Return/deviation/weight)

A

You will all the deviations together and then divide by two (If there are two stocks) Then it will be a little less than the actual number // Be aware of the weightings 50%/50%

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59
Q

What is the information ratio about?

A

RELATIVE (compared to one another) // Measures the excess return/consistency of fund manager (Higher the better)

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60
Q

What is the information ratio formula? (On formula sheet)

A

(portfolio actual return - return of benchmark) / Tracking error of active return

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61
Q

Treynor Index - What risk measure does this use? (Formula is on formula sheet)

A

Beta

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62
Q

Treynor Index - What itype of measure is it?

A

Relative (Compared to one another) // Measures the reward achived by systmatic risk (Beta) // // the higher the better

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63
Q

Sharpe Index - What risk measure does this use? (Formula is on formula sheet)

A

Standard deviation

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64
Q

Sharpe Index - What itype of measure is it?

A

Relative (Compared to one another) // Measures the reward achived total risk (Standard deviation) // the higher the better

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65
Q

Jensen’s alpha - what is the formula?

A

.=Actual return - Expected return (CAPM)

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66
Q

Jensen’s alpha - What itype of measure is it?

A

Absolute performance // positive alpha (good), Negative alpha (Bad) // Managers performance

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67
Q

Which are relative measures and which are absolute?

A

Relative - Sharpe/treynor // Absolute - Jensen’s alpha

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68
Q

What perfomance measure do you take if they do not give you r-Squared?

A

Sharpe performance meaure

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69
Q

Arbitrage pricing theory - What is this?

A

Multifactor model and is sensitive to those factors (NOT STD DEV / BETA) // When attempting to take advantage of pricing imbalances

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70
Q

Arbitrage pricing theory - What are some inputs in the model? Which are not?

A

Which ARNT: Standard deviation & Beta // Which are: inflation, expected returns

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71
Q

What is the holding period return formula - for cash flows (Not on formula sheet)

A

(Selling price - Purchase price +/- Cash Flows) / (Initial Equity)

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72
Q

What is the holding period return formula - Periodic returns (ON formula sheet)

A

HPR = [(1+rate1) * (1+rate2) * (1+rateN) -1

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73
Q

What is the effective annual rate formula? (One formula sheet)

A

EAR = (1 + interest rated / Number of period) ^number of periods -1

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74
Q

Geometric average - how to find this?

A

N=Amount of returns // I = Solving for // PV = -1 ALWAYS // FV = 1.12 * 1.15 * 98 (Returns plus one times each other)

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75
Q

Net present value - When would you accept or reject it?

A

Positive NPV = yes // Negative NPV = No

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76
Q

NPV - How do you solve it? Explain what you would do on a calculator.

A

CF - initial would be negative // following would be cashflows // Last you would add in the sell // plug in discount rate // Find NPV

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77
Q

When the NPV is 0, what is the IRR?

A

IRR would be the same as the discount rate

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78
Q

IRR - How do you solve it? Explain what you would do on a calculator.

A

CF - initial would be negative // following would be cashflows // Last you would add in the sell // Find IRR

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79
Q

What is dollar weighted return? How to find it.

A

(the return of the INVESTOR) You are finding IRR by using the cash flow method (CF)

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80
Q

What is Time weighted return? How to find it.

A

(the return of the SECURITY) You are finding IRR by using the cash flow method (CF)

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81
Q

What type of weighted return do mutual funds report on?

A

Time weighted basis

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82
Q

Dividend Discount Model (Intrinsic Model) Formula (On formula sheet)

A

Value = DividendYear1 / Rate - growth

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83
Q

How to find Dividend (Year 1)

A

D1 = D0 (1 + growth)

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84
Q

If the required rate of return decreases, the stock price will _______

A

Increase

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85
Q

If the dividend is expected to increase, the stock price will ________

A

Increase

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86
Q

If the required rate of return increase, the stock price will _______

A

decrease

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87
Q

If the dividend is expected to decrease, the stock price will ________

A

decrease

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88
Q

Expected rate of return formula (On formula sheet)

A

Expected return = (DividendYear1 / Price) + Growth

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89
Q

Behavioral finanance terms - Affect Heuristic

A

Dealing with judging something based on non-financial issues

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90
Q

Behavioral finanance terms - Anchoring

A

Attaching to one reference point and staying with it with no logic

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91
Q

Behavioral finanance terms - Availability Heuristic

A

Relying upon knowledge that is readily available in their memory - maybe causing overweight to recent events and paying little attention to longer term trends

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92
Q

Behavioral finanance terms - Bounded rationality

A

knowledge Limits on what the investor can use. Investors often times make sure they can satisfy something in their portfolio instead of making the absolute best option.

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93
Q

Behavioral finanance terms - Confirmation bias

A

People tend to filter info that supports their opinions

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94
Q

Behavioral finanance terms - Cognitive dissonance

A

The tendency to misinterpret information that is different from their, hence they only pay attention to their own viewpoints

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95
Q

Behavioral finanance terms - Dispoistion effect (regret avoidance)

A

Investors making mental accounts on when they bought a stock and only view it as the original purchase price - even though the market has changed

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96
Q

Behavioral finanance terms - Familiarity Bias

A

Investors tend to overestimate/underestimate the risk of investments which they are unfamiliar/familiar with

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97
Q

Behavioral finanance terms - Gambler’s Fallacy

A

Having incorrect understandings which can lead to bad predictions

98
Q

Behavioral finanance terms - Herding

A

Following the masses

99
Q

Behavioral finanance terms - Hindsight bias

A

Looking back after the fact is known and thinking that they could have predicted it

100
Q

Behavioral finanance terms - illusion of control bias

A

Investors tend to overestimate their ability to control events

101
Q

Behavioral finanance terms - Overconfidence bias

A

Listens to themselves too much and too heavily rely on their skills and capilbilities - end up going too risky

102
Q

Behavioral finanance terms - Overreation

A

Emotions at the recipt of news or information

103
Q

Behavioral finanance terms - Prospect theory (Loss Aversion)

A

People treat gains and losses differently. Gains are not worth as much as losses // (Investors feel more pain from losses than enjoyment of gains)

104
Q

Behavioral finanance terms - Recency

A

Giving too much weight to recent events

105
Q

Behavioral finanance terms - Similarity Heuristic

A

Using the same decision on an event that appears to be a similar situation but the outcome is entirely different

106
Q

Behavioral finanance terms - Representativeness

A

thinking that a good company is a good investment without regard to an analysis

107
Q

Behavioral finanance terms - Familiarity (Not Familiarity Bias)

A

Investment in companies that you know of, like your employer

108
Q

What is it asking you to calculate when “Which investment is most risky?”

A

Standard deviation

109
Q

Kurtosis graph - What is a Leptokurtic and Platykurtic look like?

A

Lep - High peak and fat tails (Higher chance of extreme events) // Platy - low peak and thin tails (Lower chance of extreme events)

110
Q

P/E ratios are a useful took used to value a stock if the firm ______

A

Does not pay any dividends

111
Q

P/E Earnings Ratio Formula (There are 2 ways to answer this)

A

PE = Stock price / EPS

112
Q

Dividend Payout ratio formula (Not on formula sheet)

A

Dividend Payout Ratio = Common Stock Dividend / EPS

113
Q

What type of company would have a high dividend payout ratio?

A

More established company (If you have a higher ratio, bigger possiblility that the dividend will be reduced)

114
Q

What does the Divident payout ratio tell you?

A

How much of the earnings of a stock are paid in the form of a dividend

115
Q

Return on Equity Formula (Not on formula sheet)

A

ROE = EPS / Stockholders Equity per Share

116
Q

What doe the return on equity tell you?

A

Measures the overall profitability of a company

117
Q

Dividend Yield Formula (Not on formula sheet)

A

Dividend Yield = Dividend Per Share / Stock Price

118
Q

Dollar cost averaging - How do you find this?

A

of shares you bought / Total amount of money you spent

119
Q

Efficient Market hypothesis (Random Walk theory) - What does it state?

A

Behavior of stocks are in a random walk and unpredicatable // State that you cannot predict with consistency or accuracy // Prices fully incorporate all available info // Prices are in equilibrium

120
Q

Efficient Market hypothesis (Weak) - What does it reject and accept?

A

REJECTS: (1) Technical Analysis (Based on Historical info) // ACCEPTS: (2) Fundamental analysis (Based on public info) AND (3) Private insider trading

121
Q

Efficient Market hypothesis (Semi-Strong) - What does it reject and accept?

A

REJECTS: (1) Technical Analysis (Based on Historical info) AND (2) Fundamental analysis (Based on public info) // ACCEPTS: (3)Private insider trading

122
Q

Efficient Market hypothesis (Strong) - What does it reject and accept?

A

REJECTS: (1) Technical Analysis (Based on Historical info) AND (2) Fundamental analysis (Based on public info) AND (3) Private insider trading

123
Q

If EMH is correct, why do we see anomalies in the marketplace?

A

Market anomalies do not support EMH or any of the three forms

124
Q

Investment Strategies - Active = What do they belive in?

A

Inefficient Markets and can achive above average market returns

125
Q

Investment Strategies - Passive = What do they belive in?

A

Efficient Markets and will do the buy and hold strategy

126
Q

(Nonmarketable Treasury Issues) Series E & EE Bonds - When do they pay interest?

A

Do not pay interest periodically

127
Q

(Nonmarketable Treasury Issues) Series H & HH Bonds - When do they pay interest?

A

Pays interest semiannually (Different than EE Bonds)

128
Q

(Nonmarketable Treasury Issues) Series I Bonds - How does it have inflation protection?

A

Fixed Rate (4%) + Variable rate (Depends)

129
Q

(Nonmarketable Treasury Issues) Series I Bonds - When do they pay interest?

A

Do not pay interest periodically

130
Q

US Treasury Bills (Maturity length)

A

Maturities <1

131
Q

US Treasury Notes (Maturity length)

A

2-10 Years

132
Q

US Treasury Bonds (Maturity length)

A

Greater than 10 years

133
Q

What are US treasuries taxable at? And non taxable at?

A

Taxable at the federal level BUT not taxable at the state and Local

134
Q

Treasury inflation protected securities - How does it have inflation protection?

A

Principal adjusts for inflation and the existing coupon rate will apply to the new principal amount

135
Q

STRIPS - What is this?

A

Separate trading of the coupon payments and the prinicipal // This makes a lot of zero coupon bonds

136
Q

What federal agency security is backed by full faith and credit of US government?

A

GNMA - Ginnie Mae

137
Q

(Secured Bond) Mortgage Bonds - What is this?

A

pool of mortgages which are backed by home // Payment consists of both principal and interest

138
Q

What are the biggest risks of Mortgage bonds?

A

Default risk - 2008 crisis // Prepayment Risk - Interest rates lower and people pay their mortgages off quicker

139
Q

(Secured Bond) Collateral trust bonds - What is this?

A

Backed by an asset that the company owns

140
Q

(Secured Bond) Collateralized Mortgage Obligations - What is this?

A

Investors divided into different “tranches” (A-Z) - Short term tranch (A) received prinicipal before long term tranch (Z) (this gets rid of prepayment risk)

141
Q

Unsecured bond - how should the return differ from a secured bond?

A

Should be higher because of the more risk (Unsecured is not backed by anything)

142
Q

(Unsecured bonds) Debenture vs Subordinated Debentures

A

Both are unsecured but Debenture in higher in line to receive their money back

143
Q

(Unsecured bonds) Income bonds

A

This is based off of the revenues of the revenues tied to a project

144
Q

(Municipal bonds) General obligation bonds - What is important about these?

A

Safest - Backed by full faith, creditand taxing authority of the municpality that issued the bond

145
Q

(Municipal bonds) Revenue Bonds - What is important about these?

A

think TOLL ROAD (Specific project) // Not backed by full faith and credit of taxing authority

146
Q

(Municipal bonds) Insured Municipal Bonds - which companies insure?

A

American Municipal Bond Assurance, Municipal Bond Insurance Assoc. Corp

147
Q

(Municipal bonds) Private activity bonds - what are these used for?

A

Construction of Stadiums

148
Q

Municipal bonds - when are you elligble for the triple tax exemption?

A

Non taxable at federal, state and local level if you live in the issuring state

149
Q

TEY (Tax equivalent yield) Formula (On Formula Sheet)

A

TEY = Tax Exempt Yield / (1-Marginal Tax Rate)

150
Q

Coupon Rate - What is this?

A

Stated rate - Annual payment in dollars divided by par value

151
Q

Current Yield - What is this?

A

Rate that changes based on the price of the bonds // Annual payment amount divided by current price

152
Q

How to find the price of the bond using the current yield formula?

A

Price = Coupon Payment / Current Yield (Ex. 900=90/.10) COMES FROM CY=C/P

153
Q

(Yield Summary) Premium (High to Low)

A

CR-CY-YTM-YTC

154
Q

(Yield Summary) Discount (High to Low)

A

YTC-YTM-CY-CR

155
Q

Yield Ladder - When you go shopping, if you see a discount “Call Mom’s Cell Now!”

A

Highest to lowest - Call, YTM, CY, NY

156
Q

Accrued Interest - What is this?

A

Buyer of the bond pays the seller of the bond the interest that the seller accrued since the last coupon payment

157
Q

What is the buyer of the bond entitled to for paying accrued interest to the seller?

A

Deduction for the accrued interest paid

158
Q

How to find the accrued interest?

A

(Coupon interest * (# of bonds bought * $1,000) * Months that Seller had it for since last coupon payment)

159
Q

Original Issue Discount (OID) - What is this?

A

Zero Coupon bonds (Buys bond at $600 and grows to Par) and pays interest on phantom income each year

160
Q

Liquidity Preference theory - What is this?

A

Yield curve displays People prefer liquidity - so if I am going to give you $1 for 10 years vs $1 for 100 years - I am going to demand more return for the 100 year bond

161
Q

Market segmentation theory - What is this?

A

Yield curve displays Supply and demand for each maturity (ST/MT/LT)

162
Q

Expectations theory - What is this?

A

Yield curve displays investors have inflation expectations - most people think inflation is going to grow over the long term, hence that they will want higher yields for longer amount of time

163
Q

Unbiased Expectation Theory (UET) - How to solve this? (Cheat calculator way)

A

N=Amount of returns (Years) // I = Solving for // PV = -1 ALWAYS // FV = (1.04)*(1.045) (Returns plus one times each other)

164
Q

What does duration indicate?

A

The price sensitivity for a bond when the interest rate changes (The higher the duration, the more volitile the interest rate changes

165
Q

What does it meant to have an immunized bond portfolio?

A

The duration is equal to the investors time horizon to be effectively immunized

166
Q

The ______ the duration, the more volatile the bonds price

A

Higher

167
Q

The ______ the duration, the higher the duration

A

Longer

168
Q

The ______ the duration, the shorter the duration

A

Higher

169
Q

The higher the YTM, the _______ the duration

A

Shorter

170
Q

What is the relationship between coupon/YTM and duration is…..

A

Inverse (INterest rates)

171
Q

Duration direct/inverse relationships -

A

Direct - Term of bond // Inverse - Interest rates

172
Q

A zero coupon’s duration is

A

Equal to its maturity

173
Q

Which has higher duration - 30 Year 5% coupon or 30 Year 10% coupon?

A

30 Year 5% coupon (REMEMBER - YTM/Coupon inverse with duration)

174
Q

Duration formula - what inputs do you need?

A

Yield to maturity, coupon rate, # number of periods to maturity

175
Q

% Change in price of bond Formula (On Formula Sheet)

A

(% Change of Price in Bond / Price of bond) = - Duration * (-OR+ interest rate change / 1 + Yield to Maturity)

176
Q

If interest rates were going to increase, (High/Low) duration is best

A

LOW

177
Q

What is the dividend difference between Preferred stock and common stk?

A

Dividends for preferred stock do not fluctuate (Slated % of par) // Common stock do

178
Q

Difference between preferred stock and bond?

A

No maturity date AND Preferred stock has an equity component

179
Q

What tax advantage do preferred stock get?

A

Deductions for dividends

180
Q

Convertible Bond Formula (Not on formula sheet)

A

Convertible Value = (Par - $1,000 / Conversion Price) * Market Price of Common Stock

181
Q

Property Valuation Formula (Finding Value)

A

Value = Net Operating Income (NOI)

182
Q

Net Operating Income Formula

A

Gross Income (Make sure to reduce gross income by Vacany rate) MINUS Operating Expenses (DO NOT ADD Depreciation or Interest Expense)

183
Q

Investment Companies - Closed - Key Traits?

A

Fixed Initial Market cap // Shares trade on exchange // May trade at a premium or discount to NAV

184
Q

Investment Companies - Open - Key Traits?

A

Unlimited initial Market cap // Shares are bought from fund family // Shares trade at NAV

185
Q

Investment Companies - Unit Investment Trust - Key Traits?

A

Passive Management // Self liquidating // UNITS, not shares // Can be equity or fixed income unit investment trust

186
Q

Mutual Funds - Index Funds

A

Tracks performance of various market indexes, passive approach

187
Q

Mutual Funds - Growth Funds

A

Equities with usually a high PE and objective for high capital appreciation

188
Q

Mutual Funds - Growth and index Funds

A

Invests in equities and income producing assets // Primary objective is to create balance of capital appreciation and income

189
Q

Mutual Funds - Balanced Funds

A

Invests in more bonds than typical equity fund

190
Q

Mutual Funds - Global Funds

A

International and US securities

191
Q

Mutual Funds - International Funds

A

International WITHOUT US SECURITIES

192
Q

You should always recommend the most _____ portfolio of mutual funds

A

most diversified

193
Q

What is the most tax efficient mutual fund?

A

Stock index fund

194
Q

A Shares

A

Front end load, small 12b-1 fee, no redemption fee

195
Q

C Shares

A

No Front end load, Usually small back end load, max 12b-1 fee of 1%

196
Q

Exchange Traded funds

A

Tax efficient // Low cost of ownership // traded on exchnage similar to stocks // When you trade it, you don’t have to trade it blindly, unlike mutual funds

197
Q

REITS - why is this attractive to investors?

A

Low correlation with the stock market

198
Q

REITS - What % must it distibute of investment income to share holders to maintain tax exempt status?

A

90%

199
Q

REITS - Equity reits - What is this?

A

Invests in real estate with the objective for capital appreciation (Income comes from rental income and appreciation)

200
Q

REITS - Mortgage reits - What is this?

A

Invest mostly in mortgages and construction loans

201
Q

REITS - Hybrid reits - What is this?

A

Combo of both equity and mortgage reits

202
Q

ADR (American Depository Receipts) - what is this?

A

Foreign stock held in domestic bank’s foreign branch that is traded on the US exchanges and denominated in US Dollars

203
Q

ADR - Which risk does ADR NOT eliminate? *Key risk to this term

A

Exchange rate risk

204
Q

Crytocurriencies - what is this?

A

Virtual currency not associated with any country or central bank (High risk)

205
Q

Options Trading - where are all of the options transactions handled through?

A

Option clearing house

206
Q

What are the two types of options?

A

Call and put options

207
Q

What are the two sides of options trading?

A

Seller and buyer

208
Q

If you think the stock is going to rise, you would want to ________

A

Buy Call

209
Q

If you think the stock is going to fall or stay the same, you would want to ________

A

Sell Call

210
Q

If you think the stock is going to Fall, you would want to ________

A

Buy Put

211
Q

If you think the stock is going to rise or stay the same, you would want to ________

A

Sell Put

212
Q

For purchasing options, you have the obligation or right?

A

Right

213
Q

Intrinsic value formula (Call option)

A

Call Option = Stock price - strike price

214
Q

Intrinsic value formula (Put option)

A

Put Option = Strike price - Stock price

215
Q

What is the lowest the intrinsic value can be?

A

0

216
Q

Time Value formula (Both call and put option)

A

Time Value = Premium - Intrinsic value

217
Q

Portfolio insurance - what is this?

A

Buying put options on an index to lock in portfolio gains (For a well diversified portfolio, this would mean that you would buy S&P puts)

218
Q

Long straddle - what does the instructor do?

A

Buys a put and call option - expects that there is going to be volatility but not sure which direction

219
Q

Short straddle - what does the instructor do?

A

Sells a put and call option - does not expect volatility, just in hopes to get the income from premiums

220
Q

Black/Scholes Pricing Model - what is this used for?

A

To find out the value of the call option

221
Q

Black/Scholes Pricing Model- what variables are inversely and directly related to this? *IMPORTANT

A

INVERSE - Strike price // DIRECT - Current price of asset, time until expiration, risk free rate of return, volatility of asset

222
Q

Put/Call Parity Pricing Model- what does this calculate the value of?

A

Puts the value of a PUT Option based on the value of a CALL option

223
Q

Binomial Pricing Model

A

Attempts to value an option based on the idea that a stock can only move two directions (up or down)

224
Q

Warrants - what is this?

A

Call options that are issued by the corporation

225
Q

Warrants - what is the time period?

A

5-10 years

226
Q

Warrants and options - what are 3 differences?

A

1) Warrants are not standardized (Options are), 2) Warrants are usually 5-10 years (Options are 9mo), 3) Warrants are issued by corporations (Options - individuals)

227
Q

Which option has the maximum loss potential?

A

Naked Call options

228
Q

Futures contracts - what are examples of commodities contracts?

A

Copper, wheat, pork bellies, oil

229
Q

Futures contracts - what are examples of Financial contracts?

A

Currency, interest rates and stock indexes

230
Q

What are differences between futures and options contracts? *Important

A

1) options give you the right to do something vs futures - obligation 2) futures contacts do not state the per unit price of the underlying asset

231
Q

If you are an orange grower, you will ______ the _________

A

Long the commodity, short the contract (Because they have the orange, long what you have!)

232
Q

If you are a manufacturer of orange juice , you will ______ the _________

A

Short the commodity, long the contract (because they don’t have the commodity they will short it)

233
Q

Tools of technicians - Charting

A

Looking at historical prices and checking out the moving average

234
Q

Tools of technicians - Market Volume

A

About investor sentiment - If market goes up and volume is high - sentiment is high

235
Q

Tools of technicians - Odd lot trading

A

Trading less than 100 shares

236
Q

Tools of technicians - Dow theory

A

signals an end or a bull or bear market

237
Q

Tools of technicians - Breadth of the market

A

Shows the number of stocks that increase in value vs the ones that decline in value

238
Q

What does fundamental analysis consider? (2 things)

A

Financial statement analysis and economic data

239
Q

Primary difference between Corporate Bond risk and US Gov Risk

A

US gov bonds are not subject to default risk

240
Q

When there is a question about “protectin profits” or “locking in gains” - you should

A

always buy a put

CFP (7 decks)

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