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Investments Flashcards

(66 cards)

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1
Q

How is total risk/portfolio risk defined and expressed?

A

Combination of systematic and unsystematic risk in a portfolio
Expressed by standard deviation (TWO WORDS)

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2
Q

Risks associated with brokered CDs

A

Interest rate risk (extra word so extra risk)

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3
Q

STRIPs

A
  • Direct guarantee by US government
  • Zero coupon bonds
  • Discount is treated as taxable income (phantom income)
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4
Q

TIPs

A
  • Subject to federal tax only
  • Interest income is taxable when received
  • Inflation adjustment received as principal must be reported as income (phantom income) in the year the adjustment was made and also increases the basis
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5
Q

EE bonds

A

 Interest is subject to federal tax only
 Owner has option of being taxed each year or deferring until maturity
 Nonmarketable, nontransferable, nonnegotiable, and cannot be pledged as collateral
 Directly guaranteed by US government
 Issued at face value
 Fixed interest rate
 Guaranteed to reach face value in 20 years but can earn interest up to 30 years
 If owned by child, no education status and taxed as ordinary income upon redemption
 If owned by parent, interest redeemed for education expenses is tax exempt

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6
Q

GNMA

A
  • Direct guarantee of the US government (no default risk)
  • Interest is taxable at federal and state level given it’s not issued by the Treasury
  • Interest rate risk (prices fall when interest rates rise)
  • Reinvestment risk (homeowners repay mortgage loans prematurely when interest rates fall)
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7
Q

Z tranche of a CMO

A

Highest risk, highest return, and highest duration
No coupon

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8
Q

Bond conversion value formula

A

= par value / conversion price x current market price of the stock

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9
Q

UITs

A
  • Investment company with no day to day management (passive investment)
  • Self-liquidating (funds are received and then distributed to unit holders NOT SHAREHOLDERS)
  • Secondary market exists for selling units
  • Units are redeemed at NAV
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10
Q

Open end investment companies

A
  • Continue to sell shares to investors after the initial offering
  • NAV = total value divided by number of fund shares outstanding
  • Redemptions are at NAV (NOT SALES)
  • Could impose sales charge or operate as no load
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11
Q

Closed end investment companies

A
  • No new shares are issued
  • Shares trade on an exchange and are valued like any other tradable security
  • May hold illiquid securities
  • Cannot redeem shares (sold in the market at prevailing price)
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12
Q

NOI calculation

A

= gross rental receipts + non-rental income - vacancy losses - operating expenses (DOESN’T INCLUDE INTEREST AND DEPRECIATION)

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13
Q

Cash flow calculation from NOI

A

= NOI - debt service

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14
Q

Intrinsic value formula from NOI

A

= NOI/capitalization rate

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15
Q

Equity REITs

A

Invest mainly in income producing properties (office buildings, hotels, shopping centers) and then lease properties to others

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16
Q

Mortgage REITs

A

o Make loans to develop property or finance construction
o Vulnerable to purchasing power risk (INFLATION IS BAD FOR THESE)

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17
Q

Tax rules regarding REITs

A

o At least 75% of income must come from real estate
o If REIT distributes a minimum of 90% of net investment income, it only pays tax on undistributed portion
o If REIT doesn’t distribute at least 90% of net investment income, then all net investment income it taxable

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18
Q

Time value

A

= premium - intrinsic value

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19
Q

Direct/indirect relationships for variables of the Black Scholes option model for a call option

A

All are direct except for the exercise price

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20
Q

Protective put

A

Buying a stock and a put on that stock

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21
Q

Long term equity anticipation securities (LEAPs)

A

o Longer term options (9 months to 3 years)
o Once the LEAP is exercised, the investor must hold the shares for more than 12 months in order to pay long term capital gains

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22
Q

Warrants

A

o Issued by corporations
o Maturities last several years
o Terms are not standardized
o Issued with no intrinsic value
o When exercised, a new stock is issued

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23
Q

Short selling

A
  • Must be made in a margin account
  • Net proceeds from the sale are held by the broker
  • No funds are immediately available by the short seller
  • No time limit
  • Dividends declared on any stock sold short must be covered by the short seller
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24
Q

When to take a futures long position

A

Concerned about price rising

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25
When to take a futures short position
Concerned about pricing falling
26
Private placement (Regulation D)
* Not a public offering so exempt from registration * Can be sold to a maximum of 35 nonaccredited investors but nonaccredited investors must be sophisticated and must sign an investment letter  Can be sold to an unlimited number of accredited investors
27
Accredited investor
1,2,3 Needs to meet at least one of the following: o Net worth of $1 million excluding primary residence o Individual with annual income of $200,000 o Couple with joint income of $300,000
28
Qualified purchaser
At least $5 million in investments
29
Correlation coefficient (R or rho)
o Perfectly positively correlated (1) – stocks move exactly together, no reduction in portfolio risk o 0 means no relationship between the price changes among the securities o -1 means the securities move opposite one another, risk is completely eliminated o Unless securities are all perfectly correlated, the standard deviation of the portfolio must be less than the weighted average standard deviation of the individual securities
30
Coefficient of variation
= standard deviation / average return Stock with the larger value is riskier
31
Definition of standard deviation
variability of returns in a non-diversified portfolio, measure of total risk
32
Definition of beta
volatility of a particular security’s rate of return relative to the market’s return
33
Risk tolerance
amount of risk that an individual investor is comfortable to assume
34
Risk capacity
amount of risk an individual investor must take to reach their goals
35
Simple return/compound return/effective rate of return
Arithmetic mean, doesn't show investor's results
36
Time weighted return
Geometric mean, way to evaluate manager's performance (G-T)  Calculation * PV = -1 * FV = (1+ first return) x (1+ second return) x (1 + next return) etc. * N = number of returns * Solve for I
37
Dollar weighted return
IRR or NPV calculation  Means of comparing actual dollar amounts to financial goals  Assumes reinvestment rate is constant  When IRR is greater than the required return, the investment is acceptable
38
Definition of duration
Weighted average maturity of bond's cash value on a present value basis
39
When interest rates increase, what happens to duration?
Duration decreases (IN/IN)
40
When coupon payments increase, what happens to duration?
Duration decreases
41
When maturity increases, what happens to duration?
Duration increases
42
Y from formula sheet
Yield on comparable bonds
43
C from formula sheet
Annual coupon
44
T from formula sheet
Years until maturity
45
How to offset interest rate and reinvestment rate risk with bonds
Immunize the portfolio (average duration should equal time horizon)
46
Current yield formula
= annual interest/current price
47
TEY formula
=muni bond rate/(1 - rate you don't pay)
48
ROE formula
= EPS/net worth or book value
49
Dividend payout ratio
= dividends paid/EPS
50
Stock yield formula
= dividend per share/stock price per share
51
Efficient frontier
Provides an investor with the highest return for any given level of risk or the lowest risk for any given level of return o Any point on the frontier is efficient and attainable o Any point below the curve is inefficient but attainable o Any point outside the curve is unattainable
52
Optimal portfolio on efficient frontier
point where indifference curve is tangent to the efficient frontier  If investor is risk adverse, curve is steep (large amount of additional return needed to take on additional risk)  If investor is riskier, curve is flat (small amount of additional return needed to take on additional risk)
53
Capital market line and points A, B, and C
specifies the relationship between risk and return on a PORTFOLIO (not just one investment) o Point A – investor who puts less than 100% in the market portfolio is lending money to the government (buys T-bills) o Point B – an investor who puts 100% of his assets in the portfolio will have same expected return and risk as the market portfolio (proportional percentage of all risky assets, not just stocks and bonds) o Point C – an investor who borrows at the risk free rate and invests 100% in the market portfolio should have a higher expected return and higher expected risk
54
Security market line/CAPM and security lying above, on, or below line
represents the client’s required rate of return, risk/return relationship for an INDIVIDUAL SECURITY o If security lies on SML, expected return equals required rate of return o If security lies below SML, the security is overvalued because the expected return is less than what’s required o If security lies above SML, the security is undervalued because the expected return is greater than what’s required
55
Market risk premium
Second term of CAPM without beta (since the beta of the market is 1)
56
Stock risk premium
Second term of CAPM with beta
57
Strong form of the EMH
No one can beat the market
58
Semi strong from of the EMH
Inside information can beat the market
59
Weak form of the EMH
Fundamental analysis can beat the market
60
Anomalies and their relationship with EMH
They operate in contrast
61
Resistance level
price ceiling at which position is sold, bullish to break through
62
Support level
price floor at which position is bought, bearish to break through
63
Coefficient of determination (R squared)
percentage of fund movements explained by movements in the S&P 500 o R squared greater than 60 = diversified  Look for highest alpha  If alpha isn’t present, look for highest Treynor o R squared less than 60 = non-diversified  Look for highest Sharpe ratio o R squared less than 60 and greater than 60, look for highest Sharpe ratio
64
Dollar amount of maintenance call problems
Maint. call amount = equity required - equity you have Equity required = maint. call % * total value of shares owned Equity you have = total value of shares owned - amount on margin
65
Strategic asset allocation
Passive strategy, determining a long term strategic asset mix after running simulations
66
Tactical asset allocation
Active strategy, short term changes in asset mix driven by changes in predictions regarding returns going forward (market timing)

CFP Personal Flashcards (6 decks)

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