Unit 20 Flashcards by Evan Hoehne

Discount factor

(1 + r)n

How well did you know this?

Not at all

Perfectly

Rule of 72 equation

72 ÷ rate (whole number) = # of years

How well did you know this?

Not at all

Perfectly

Definition of IRR

Method of computing long-term returns that takes into consideration time value of money

How well did you know this?

Not at all

Perfectly

What yield is used in IRR

Yield to maturity

How well did you know this?

Not at all

Perfectly

Is IRR or NPV generally considered more importnat

NPV

How well did you know this?

Not at all

Perfectly

What IRR is always expressed as

A percentage

How well did you know this?

Not at all

Perfectly

What NPV is expressed as

Dollar amount

How well did you know this?

Not at all

Perfectly

What term duration is used for

Measuring the sensitivity of a debt security when faced with changes in interest rates

How well did you know this?

Not at all

Perfectly

The lower the coupon rate, what is bond’s duration

Longer

How well did you know this?

Not at all

Perfectly

The longer a bond’s maturity, what is bond’s duration

Longer

How well did you know this?

Not at all

Perfectly

If we find two bonds with the same duration, which one offers greater interest rate risk protection

The one with higher convexity

How well did you know this?

Not at all

Perfectly

What is the most useful in determining the price volatility of a bond to a significant change in interest rates?

Convexity

How well did you know this?

Not at all

Perfectly

What factors are needed to compute future cash flow (3)

Principal amount
Coupon rate
Number of interest payments

How well did you know this?

Not at all

Perfectly

What an analyst would use the discounted cash flow method for

Finding fair value of a security

How well did you know this?

Not at all

Perfectly

When comparing the arithmetic mean to the geometric mean, which will always be higher

Arithmetic mean

How well did you know this?

Not at all

Perfectly

Mid-range calculation

Lowest number + highest number / 2

How well did you know this?

Not at all

Perfectly

What measure shows which investments significantly outperformed the average of the other investments

Mean

How well did you know this?

Not at all

Perfectly

Alpha computation

(Actual portfolio return – risk-free rate) – (portfolio beta × [market return – risk-free rate])

How well did you know this?

Not at all

Perfectly

What to do if risk-free rate is not given on exam

Leave it out of calculation

How well did you know this?

Not at all

Perfectly

Difference between beta and standard deviation

Beta only measures systematic (market) risk, standard deviation measures both systematic and unsystematic

How well did you know this?

Not at all

Perfectly

Formula for working capital

Current assets – current liabilities

How well did you know this?

Not at all

Perfectly

What working capital is

Amount of capital or cash a company has available

How well did you know this?

Not at all

Perfectly

Current ratio calculation

Current liabilities / Current assets

How well did you know this?

Not at all

Perfectly

Formula for book value per share

Tangible assets – liabilities – par value of preferred /
Shares of common stock outstanding

How well did you know this?

Not at all

Perfectly

Earnings available to common

Remaining earnings after the preferred dividend has been paid

EPS formula

Earning available to common / # of shares outstanding

Current yield formula

Common dividends / share value

Dividend payout ratio

Annual common dividends / EPS

What ratio do some fundamental analysts believe is more important than P/E

Sales to earnings ratio

What does bond's YTM reflect

IRR

What relationship within bonds is linear

Duration and time to maturity

What happens to bonds with higher coupons when market rates rise

Decline less than those with lower coupons

Goal of a constant dollar plan

Maintain a constant dollar amount in stocks, moving money in and out of a money market fund when necessary

Goal of a constant ratio plan

Keeping asset allocations the same throughout rebalancing

What Dividend Discount Model states

Fair current market value of a stock should be equal to the present value of all future dividends

Are preferred stock dividends fixed?

Yes

What growth style of portfolio management focuses on

Stocks of companies whose earnings are growing faster than most other stocks and are expected to continue to do so

What growth managers are looking for

Earnings momentum

What value style of portfolio management focuses on

Undervalued or out-of-favor securities whose price is low relative to the company's earnings or book value

What a contrarian is

Investment manager who takes positions opposite of that of other managers or in opposition to general market belie

Micro-cap market capitalization

Less than $300 million

Small cap market capitalization

Between $300 million and $2 billion

Mid cap market capitalization

$2 billion to $10 billion

Large cap market capitalization

More than $10 billion

3 bond strategies

Barbell, bullet, laddering

Ladder strategy

Bonds are bought at the same time with different maturity dates

Capital market assumptions (7)

1. Money is always borrowed at the risk-free rate of return 2. All investors are rationale 3. Time horizon is equal for all investors 4. No personal income taxes 5. No inflation 6. Assets can be infinitely divisible 7. No mispricing within capital markets

How to calculate return using security market line (CAPM)

([Return of the market - risk-free rate] × beta) + RF rate

What CML measures risk through

Standard deviation

What SML measures risk through

Beta

What weak form market efficiency says

Current stock prices have already incorporated all historical market data and trends (Only fundamental analysis will produce returns)

What semi-strong form market efficiency says

Current stock prices not only reflect all historical price data but also reflect data from analyzing financial statements, industry, or current economic outlook (only insider trading will produce returns)

What strong form market efficiency says

Security prices fully reflect all information from both public and private sources

What efficient market hypothesis is also called

Random walk theory

Purpose of dollar cost averaging

Reduce the investor's average cost to acquire a security over the buying period relative to its average price

Do passive or active portfolio managers use rebalancing

Passive

What CAPM assumes

The optimal portfolio should be the one with the highest Sharpe ratio of all possible portfolios

What selling a futures contract also means

Taking a short position

What growth investors look for in a P/E rati

20:1 or higher

Best strategy for hedging a short position

Buying calls

What "lower limit" is called in technical analysis

Support level

What "upper limit" is called in technical analysis

Resistance level

What determines "risk-free" rate of return

91-day Treasury bill

An efficient portfolio is one that offers...

1. The most return for a given amount of risk 2. The least risk for a given amount of return

What takes short-term market fluctuations and smooths them out

Charting moving averages

Technical theory that assumes small investors are usually wrong

Odd lot

When the customer elects to receive distributions in cash, what happens

His proportional interest in the fund will decline

Which of bond strategy is the least active?

Bullet

What is considered an asset class in and of itself

REIT

Unit 20 Flashcards

Analytical Methods (69 cards)