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Flashcards in Investments Deck (269)
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1

Investment Policy Statement

RR TLLU

 

Objectives:

  • Return requirements
  • Risk tolerance

Constraints:

  • Time Horizon
  • Laws and Regs
  • Liquidity needs
  • Unique circumstances
  •  
  • Permitted investments
  • Prohibited investments
  • Tax constraints
  • No investment selection

2

Primary Market

Market in which new issues of securities are sold to the public.

  • public offering
  • rights offering (give existing shareholders the rights to buy new issues)
  • private placement (not open market)

3

Secondary Market

  • provides investors way of buying and selling securities that were issued in primary market
  • NYSE, NASDAQ, OTC, AMEX
  • Provides liquidity to shareholders

4

IPO Process

  • Investment banking firm or syndicate underwrites the IPO
    • Buys the stock from firm
    • Advises firm
  • Selling group: join and accept responsibility for selling shares

5

Accredited investor

  • $200K/year income or
  • 1M of net worth excluding personal residence or
  • Trusts > 5M

6

Underwriting types (3)

Underwriting takes 3 forms:

  • firm commitment - underwriter buys all the stock and takes risk it won't sell
  • best efforts approach - any stock not sold is returned to the company
  • private placement
    • sold to no more than 35 unaccredited investors
    • avoids SEC registrations

7

American Depository Receipts

  • A US Bank's foreign branch holds stock of a foreign company
  • Bought and sold on US market
  • Prices quoted in US dollors
  • Exchange rate risk
  • Represent shares held in foreign foreign branch

8

Yankee Bonds

  • No exchange rate risk
  • US$ denominated bonds sold by a foreign entity in the US
  • Because they are US denominated, there is no exchange rate risk.
  • Registered with SEC

9

Securities Act of 1933

  • Regulates primary market
  • Deals with new security issues
  • Paper act
  • Prospectuses

10

Securities Act of 1934

  • Regulates secondary market
  • Gives SEC power to regulate markets, disclosure requirements of new and current securities

11

The Investment Advisors Act of 1940

  • Investment Advisors must disclose all relevant info about
    • Advice (investment advice)
    • Background
    • Conflicts of interest
  • If under 100M AUM register with the state
  • Greater than 100M AUM register with SEC

12

Insider Trading and Fraud Act of 1988

  • Defines insiders as:
    • Directors, officers, shareholders, anyone who obtains nonpublic information.
  • Established penalties

13

Sarbanes-Oxley Act of 2002

  • Protects against corporate fraud
  • requires instant disclosure of stock sales
  • tightened audit regulations
  • established conflict of interest guidelines.

14

SEC Fair Disclosure (FD)

  • requires distribution of market-moving information
  • prohibits "pre-release" of information to market professionals.

15

US Patriot Act

Requires broker-dealers:

  • to have anti-money laundering policies
  • to have anti-money laundering officer
  • gather information on clients
  • source large deposits and transfers

16

initial margin

  • amount of equity that must be put up
  • Fed minimum margin amt is 50%

17

maintenance margin

the amount of equity that must maintained

18

Debit balance

  • amount borrowed to purchase security

19

Margin position equation

Margin position = (Value of sec. - Debit balance)/Value of securties

Margin call stock price = Debit balance/ (1 - Maintenance Margin)

20

Market Cap of Indexes

S & P: Large cap

Wilshire 5000: Broad index  - all caps

Russell 2000: small cap

21

Stop-limit order

Turns a stop-loss order into a limit order at a certain price

Prevents selling at a too-low price if the price declines rapidly.

Might not result in sale

22

Stop-loss order

Executes a market order once the stock drops to a certain price (can sell for much lower if rapidly decline)

23

Required Rate of Return

Required Rate of Return = Real rate + expected inflation premium + risk premium

24

Time-weighted return

The return of one security during the time period.

Investment's cash flows

(InvestmenT, Time)

25

Dollar-weighted return

Return on the number of stocks that a specific investor transacts

Investor's cash flows

(dollaR, investoR)

26

Systematic Risk

market-driven risk; Non-diversifiable risk

  • Purchasing power (inflation - cash, bonds)
  • Reinvestment Rate (risk that interest rates go down)
  • Interest rates
  • Market risk (general market movements, business cycle)
  • Exchange Rate

Measured by beta

 

27

Unsystematic risk

  • diversifiable risk
    • business risk
      • accounting/audit risk

      • executive risk

    • country risk
    • default risk
    • financial risk

28

Total Risk

  • Systematic risk + unsystematic risk
  • measured by Standard Deviation

29

Beta

  • Sensitivity of a security to market movement
  • indication of a security's volatility relative to the market.
  • Only measures systematic, undiversifiable (market) risk.
  • Derived by plotting a security's return vs. market return; slope = beta
  • Security return = Beta * Market change

30

Standard Deviation

  • Absolute measure of risk.
  • Measure of total risk (systematic + unsystematic)
  • Based on an individual security's historical return
  • Higher standard deviation = more risk
  • σ
  • Measures variation of return around an average
  • +1/-1 SD : 68% probability
  • +2/-2 SD: 95% probability
  • +3/-3 SD: 98% probability