Investments Flashcards
(29 cards)
Margin
Initial Margin:
o Regulation T sets 50% and was established by the Federal Reserve
o Amounts of equity an investor must contribute
Maintenance Margin
o Minimum amount of equity required before a margin call
Margin Position
o Current equity position
Research Reports
Value Line vs. Morningstar
Value Line
o Ranks stocks from 1 (highest rating) to 5
Morningstar
o Ranks mutual funds, stocks and bonds from 1 star to 5 stars (highest ranking)
Dividend Dates
o Ex-Dividend Date (1 biz day prior to Date of Record)
o Date of Record
To receive the dividend, an investor must purchase the stock prior to the ex-dividend date or 2 biz days before the date of record
Security Regulations
Securities Act of 1933
o primary market; requires prospectus with new issuance
Securities Act of 1934
o Regulates secondary market and trading of securities
o Created SEC to enforce compliance
Investment Company Act of 1940
o Authorized SEC tp regulate investment companies: open, closed and UIT
Investment Advisers Act of 1940
o Required investment advisers to register with SEC or state
Securities Investors Protection Act of 1970 (SIPA)
o protect investors for losses resulting from brokerage firm failures
Insider Trading and Securities Fraud Enforcement Act of 1988
o Defines insider as anyone with info that is not available to the public
Money Market Securities
Treasury Bills
- maturities up to 52 weeks （1 year)
- Denominations in $100 increments through Treasury Direct up to $5 million per auction
Commercial Paper
- ST loans between corporations
- maturities up to 270 day; no need to register with SEC
- Denominations of $100,000; sold at a discount
Bankers Acceptance
- Facilitates imports/exports
- Maturities of 9 mo or less
- Can be held until maturity or traded
Eurodollars
- Deposits in foreign banks that are denominated in US dollars
Market Averages and Indices
ONLY DJIA is price-weighted
Dow Jones Industrial Average S&P 500 (value) Russell 2000 (value) o smallest market cap stocks Wilshire 5000 (value) o broadest index of 3,000+ stocks EAFE (value) o tracks stocks in Europe, Australia, Asia and Far East
Select Behavioral Finance Terms
o Naïve diversification - investing in every option available to the investor; common with 401k or other retirement plans
o Representativeness - thinking a good company is a good investment w/o analysis
o Familiarity - investing in companies that are familiar, such as an employer
o Loss Aversion - prefer avoiding loss more than experiencing gains
Cash dividend vs. Stock Dividend
o Cash dividend: qualified dividend taxed at CG tax rate; taxed upon receipt
o Stock dividend: no taxable until stock is sold
o Dilute the value of existing shares, but does not increase the market value
o Similar to Stock split in this regard
Coefficient of Variation
Useful in determining which investment has more relative risk when investments have different average returns
CV = Standard Deviation / Average Return
Standard Deviation vs. Beta vs. R-Squared
SD: measures the total risk of an undiversified portfolio
Beta: measures the volatility of a diversified portfolio
R-Squared: measures how much return is due to the market
R-Squared = Correlation Coefficient ^2
If R-Squared > = 0.7, beta is an appropriate measure of total risk
If R-Squared < 0.7, SD should be used to measure total risk
Systematic Risk (PRIME)
Also known as
- Non-diversifiable risk
- Market Risk
- Economy based risk
(P) Purchasing Power Risk - impacts both equities and bonds
(R) Reinvestment Risk - mostly bonds
(I) Interest Rate Risk - impacts both equities and bonds
(M) Market Risk - impacts all securities
(E) Exchange Risk - impacts international securities
Unsystematic Risk (ABCDEFG)
Also known as
- Diversifiable risk
- Unique Risk
- Company-specific Risk
(A) Accounting Risk (B) Business Risk (C) Country Risk (D) Default Risk (E) Executive Risk (F) Financial Risk (G) Government / Regulation Risk
Optimal Portfolio
The point at which an investor’s Indifference Curve is tangent to the Efficient Frontier
Holding Period Return
HPR = [Selling Price - Purchase Price +/- Cashflows] / Purchase Price or Equity Invested
Consider ALL shares; No considerations on the time when invested
Dollar Weighted Return vs. Time-Weighted Return
Dollar-Weighted
- Calculate IRR using the investor’s cash flows
Time-Weighted
- Calculate IRR using the security’s cash flow (w/o regards to investor’s cash flow)
!!! Mutual funds report on a time-weighted return basis !!!
Arbitrage Pricing Theory
- Asserts that pricing imbalances cannot exist for any significant period of time, otherwise investors will exploit the imbalances until equilibrium
- Multi-factor model that explains return based on factors
- Inputs are factors such as inflation, risk premium and expected returns
- Sensitivity to those factors
- Standard deviation and beta ARE NOT inputs variable to the APT
Fundamental Analysis
o Financial Statement Analysis and Ratio Analysis
o Economic Date: inflation, interest rates, GDP and unemployment
Technical Analysis
o Charting: plotting of historical prices. 50-, 100-, or 200-day moving average
o Market volume: investor sentiment
o Short interest: # of shares sold short gives insight into the future demand of a stock. A high short interest indicates “pent-up” demand
o Odd Lot Trading: trades less than 100 shares; most done by small investors; asserts that small investors are most likely wrong
o The Dow Theory: signals an end to a bull or bear market
o Breadth of the market: measures the # of stocks that increase in value vs. the # of stocks that decreases in value
o Advance Decline Line: difference between # of stocks that closed up vs. # of stocks that decreased in value
Portfolio Immunization
Attempts to balance the Price Risk & Reinvestment Risk
–> Offers protection against interest rate risk
Forms of Efficient Market Hypothesis
Strong Form
o Rejects all public info, insider info, financial or technical analysis
Semi-Strong Form
o Rejects historical or public info, financial or technical analysis;
o BUT inside info will lead to above-average market returns
Weak Form (DIRECT CONTRADICTION w/t technical analysis)
o Rejects technical analysis
o BUT historical info and financial analysis help to achieve above-average market returns
Market Anomalies
DO NOT SUPPORT THE EMH in any of the 3 forms
- January Effect: jan tends to be a better month because of tax loss harvesting in Nov and Dec; Investors get back to the market in Jan
- Small Firm Effect: small caps tend to outperform large caps
- Value Line Effect: stocks that receive VL’s highest ranking outperform the lowest ranking ones
- P/E Effect: stocks with low p/e tend to outperform stocks with a high p/e
Market Cap
Small Cap: $300M ~ $2B
Mid Cap: $2B ~ $10B
Large Cap: $10B ~ $200B
Micro Cap: under $300M
Investment Strategies
- Active investment strategy: active investing & market timing
- Passive Investment strategy: buy and hold such as laddered bonds, ETFs, barbell bond strategy, UTIs and index investing
Tactical vs. Strategic Asset Allocation
- Tactical: active allocation strategy; performed frequently; rebalancing the portfolio to take advantage of expected returns
- Strategic: active allocation strategy; done every few years
US Treasury Securities
- All treasury securities are not subject to state and local taxes
o Non-Marketable US Treasury Issues
o Series EE/E bonds (Interest is NOT subject to federal taxes until redeemed)
- non transferrable
- $25 minimum
o Series HH/H bonds (stopped issuance since Aug 2004)
o Series I Bonds (fixed % return + inflation adjustment every 6 mo)
o Marketable US Treasury Issues (all sold in denominations of $100)
o US Treasury Bills
- sold at discount; do not pay interest, matures at par value; maturities are less than 1 year
o US Treasury Notes
- interest paid semi-annually; maturities are between 2-10 years
o US Treasury Bonds
- interest paid semi-annually; maturities are greater than 10 years
