Overall CFP Flashcards by Amy Spalding

PRIME

Systematic risks (non diversifiable):
Purchasing power risk
Reinvestment rate risk
Interest rate risk
Market risk
Exchange rate risk

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Behavorial finance terms

Page 12 of Dalton investments book

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Price weighted average index

Dow Jones Industrial Average

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Value weighted indices

S&P 500
Russell 2000
Wilshire 5000
EAFE

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What is the difference between price and value weighted indices?

Price weighted indices are simply an average of the prices of the holdings. They do not take into account the percent allocation of the position within the index- or market capitalization.

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Unsystematic risks

A acctg risk
B business risk
C country risk
D default risk
E executive risk
F financial risk
G government/ regulation risk

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What measure of risk does the Capital Market Line (CML) use?

Standard deviation

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When is P/E ratio used?

To value a stock that does not pay dividends

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P/E ratio

Price per share
/
EPS
-or- 
Price per share= P/E x EPS

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PEG ratio

Stocks P/E ratio
/
3-5 year growth rate in earnings

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What does PEG ratio tell us?

Used to determine if the stock’s P/E ratio is keeping pace with the firm’s growth rate in earnings.

A PEG rate equal to 1 suggests that the stock is fairly valued bc P/E ratio is in line with earnings growth rate.

A PEG ratio greater than 1 suggests the stock is fully valued (or over valued) bc an expanding P/E ratio is contributing to the stock price appreciating more than the growth rate.

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Dividend Payout ratio (not on formula sheet)

Common stock dividend
/
Earnings per share

The relationship btwn the amt of earnings paid to shareholders in form of a dividend, relative to EPS.

Usu the higher the dividend payout ratio, the more mature the company.

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ROE

EPS
/
Stockholders equity per share

Measures overall profitability of a company

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Dividend Yield

Dividend
/
Stock Price

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What are tools used by technical analysts?

Charting, Dow Theory, Market Breadth, Market Volume, Short Interest, Odd Lot Trading

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What do Fundamental Analysts look at?

Financial statements, ratio analysis, calculating liquidity & profitability, economic data (inflation, interest rates, GDP & unemployment).

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Weak form of EMH

Prices reflect historical price data.
Refutes technical analysis-
Only advantage through fundamental analysis & insider info

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Semi-Strong Form of EMH

Price reflects public information.

Only advantage through insider information.

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Strong form of EMH

Price reflects all information.

No advantage- even from insider info.

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Market anomalies

January effect
Small firm effect
Value Line effect
P/E effect

Market anomalies do not support the EMH in any of the three forms.

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Are agency bonds backed by the full faith of the US government?

No- with one exception: GNMA- Ginnie Mae bonds (Government National Mortgage Association), division of Dept of Housing & Urban Development

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3 types of muni bonds

1) General Obligation bonds- backed by full faith of issuing entity
2) Revenue bonds- backed by project revenue
3) Private Activity Bonds- used to finance construction of stadiums

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Companies that insure muni bonds

American Municipal bond assurance corp (AMBAC)
-and-
Municipal Bond Insurance assoc corp (MBIA)

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Corporate bond risks

Default risk
Reinvestment rate risk
Interest rate risk
Purchasing power risk

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US Gvt bond risk

Reinvestment rate risk Interest rate risk Purchasing power risk (Difference btwn corporate bonds is corp bonds also have default risk)

TEY

r / (1-t) ``` r= tax exempt yield t= marginal tax rate ``` Gives how much yield a corporate bond much would need to pay to be equivalent to a tax exempt muni

Tax Exempt Yield

Corporate rate x (1-marginal tax rate)

Bond duration

Duration is the wtd avg maturity of all cash flows. The bigger the duration, the more price sensitive or volatile the bond is to interest rate changes. Modified duration is a bond's price sensitivity to changes in interest rates. A bond portfolio should have a duration equal to the investor's time horizon to be effectively immunized.

As coupon rate increases, what does duration do?

Decrease

True or False: There is a direct relationship between duration and the term of the bond?

True. As term increases, duration will increase.

True or false: there is an INverse relationship btwn CR/ YTM and duration?

True. Remember that CR and YTM are INterest rates and there is an INverse relationship.

What type of investor benefits most from the tax advantages of preferred stocks?

Corporate

NAV

Assets- Liabilities / Shares outstanding

UIT's

Passively managed | Self liquidating

True or False: | ADR's eliminate exchange rate risk

False

What option will provide the maximum gains if a stock price appreciates?

Buying a call

What option maximizes gains if a stock price falls?

Buying a put

Option premium consists of what 2 things?

Intrinsic value and time value Intrinsic value: Call option: stock price-strike price Put option: strike price- stock price Time value = premium - intrinsic value

When trying to protect profits or lock in gains, what option should you do?

Buy a put

Call option vs Put option

Call is right to buy | Put is right to sell

Long straddle

Investor buys a put and a call option on same stock.

Short straddle

Investor sells a put and call option on same stock.

Zero cost collar

Investor owns underlying stock but wants to protect downside risk without paying the entire cost of the put option. Investor sells a call option at a strike price that is slightly higher than the current stock price. This creates premium received. Investor then buys a put option that is below the current stock price. The premium dollars received by selling the call are used to buy the put options.

Black Scholes model

Used to determine the value of a call option. Considers: - price of underlying asset - time until expiration - risk free rate of return - volatility of underlying asset All variables have a direct relationship on price of the option, except strike price. As strike price increases, the option decreases in value.

Put/call partity

Attempts to value a put option based on the value of the corresponding call option.

Binomial pricing model

Explains prices based on underlying asset moving into 2 directions.

Taxability of options

Call option: If contract expires, premium paid is a ST loss and premium rec'd is a ST gain. If contract is exercised, premium is added to stock price to increase the basis. If held > a year, LT gain or loss. If held < a year, ST gain or loss. For put option, if contract expires w/out being exercised, the premium paid is a ST loss and premium rec'd is a ST gain.

Call option intrinsic value

Stock - Strike price

What options strategy can cause the greatest loss for the investor?

Selling a naked call.

Long position benefits when price goes _______?

Short position benefits when price goes _____?

Down

Who does not need to register with the SEC?

Publisher was Broke (broker- dealers) because he was LATE to US Bank (bankers) L lawyers A accountants T teachers Engineers

What does Series 6 allow you to sell?

Mutual funds, UIT's and variables (life and annuities) Also need a state license to sell variable life insurance or variable annuities

What does Series 7 allow you to sell?

Everything except commodities and futures

3 main goals of Federal Reserve

Maintain long term economic growth Maintain price levels supported by the economy Maintain full employment

BEST

Buy securities- increase money supply- decrease interest rates = Expand Sell securities- decrease money supply- increase interest rates = Tighten

Current Ratio

Current assets / Current liabilities Shows clients ability to meet ST obligations

Housing ratio

< 28% Monthly housing costs (PITI) / Monthly GROSS income

Students are considered independent if they are:

Over age 23 Have legal dependents other than a spouse Are married

If req'd rate of return decreases, stock price will increase. If dividend is expected to increase, stock price will increase. If the req'd rate of return increases, the stock price will decrease. If the dividend is expected to decrease, the stock price will decrease.