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Details

CFP - Book 2
Investment Planning
47
Finance
Professional
09/24/2011

Additional Finance Flashcards

 


 

Cards

Term

 

Regulation T - Margin Requirement

Definition

 

50%

Term

 

Margin Call Formula and Related Definitions

Definition

 

Loan Amount

1 - Maintenance Margin

 

Maintenance Margin = minimum equity required before margin call

 

Margin call = addition of equity - cash or securities

Term

 

Ex-Dividend Date

Definition

 

2 days prior to Date of Record

 

(To receive dividend, investor must own stock PRIOR to ex-dividend date, i.e. 3 days prior to date of record.)

Term

 

T-Bills - Maturities and Denomination

Definition

 

4 weeks  (one month)

13 weeks  (one quarter)

26 weeks (half-year)

52 weeks (one year)

 

$1,000 denomination for all maturities

Term

 

Commercial Paper - Maturities and Denomination

Definition

 

Maturities - 270 days or less

 

$100,000 denomination (sold at a discount)

Term

 

Bankers Acceptances - Maturities and Denomination

Definition

 

Maturities - 9 months or less

 

Any denomination

Term

 

Eurodollars - Definition

Definition

 

Deposits in foreign banks denominated in US Dollars

Term

 

Investment Policy Statement Elements

Definition

 

RR TTLLU

"RRaTTLLe yoU"

 

Risk/Return/Taxes/Timeline/Liquidity/Legal/Unique issues

Term

 

Standard Deviation Ranges

Definition

 

1 SD = 68% of outcomes (32% above/below mean)

2 SD = 95% of outcomes (47.5% above/below mean)

3 SD = 99% of outcomes (49.5% above/below mean)

Term

 

Coefficient of Variation - Formula & Definition

Definition

 

Stnd Deviation

Average Return

 

Defintion:  Likelihood of achieving actual return close to the average.  Higher CV = Higher Risk

Term

 

Systematic Risks -

 

Definition and Types

Definition

 

Definition: Undiversifiable Risk / Market Risk

 

Types:  P R I M E

 

Purchasing Power (Inflation)

Reinvestment

Interest Rate

Market

Exchange Rate

Term

 

Unsystematic Risks -

 

Definition and Types

Definition

Definition: Diversifiable Risks / Company-specific Risks

 

Types:  A B C D E F G

 

Accounting

Business (Industry)

Country

Default

Executive (Management)

Financial

Government (Regulatory)

Term

 

Most important factors in portfolio design

Definition

 

Risk / Return / Covariance of Asset Classes

Term

 

Measure of Risk for the

Capital Market Line (CML)

Definition

 

Standard Deviation

 

Note:  CML is not used to evaluate

single security performance.

Term

 

Beta -

 

Definitions & Concepts

Definition

 

1)  Measure of volatility for DIVERSIFED portfolios

2)  Beta is a measure of systemic (market) risk

3)  Beta of the market (or market index) is always 1.

4)  Higher beta = higher risk

5)  Beta formula = security return / market return

6)  Beta of 1 should move in 100% correlation with the market (in any direction - up, down, sideways)

7)  Beta of .5 should move half as much as the market (in any direction - up, down, sideways)

Term

 

Sharpe Ratio -

 

Formula, Defintion and Key Concepts

Definition

 

Formula:  return of portfolio - risk free rate

standard deviation of portfolio

 

Measure of return achieved for each unit of risk.

 

Uses Standard Deviation as measure of risk.  Most appropriate for poorly diversified portfolio.  (r2 < .70)

Term

 

Treynor Ratio

 

Formula, Defintion & Key Concepts

Definition

 

Formula:  Portfolio return - Risk-free rate

beta of the portfolio

 

Definition:  Measure of return achieved for each unit of risk

 

Most appropriate for well-diversified portfolios

 

Term

 

Jensen Index (Jensen's Alpha)

 

Defnition and Key Concepts

Definition

 

Definition:  Measure of risk-adjusted absolute performance.  No comparison needed to other benchmarks.  Higher alpha = better performance.

 

Positive Jensen = More return than expected for each unit of risk

 

Negative Jensen = Less return than expected for each unit of risk

 

Zero Jensen = Return AT expected level for each unit of risk

Term

 

Holding Period Return Formula

Definition

 

Selling Price - Purchase Price +/- Cash flows

Purchase Price or Equity Invested

Term

 

Mutual Funds Returns Reporting Method

Definition

 

Time-Weighted Basis

 

 Calculation of IRR.  Assumes buy and hold.

 

(Does NOT consider the INVESTOR'S cash flow;

only the SECURITY'S cash flow, including initial purchase)

Term

 

Arbitrage Pricing Theory (APT)

Definition

 

Mulit-factor model to explain returns

 

Factors include:  Inflation, Risk Premium, Expected Returns and Sensitivity to the Factors.

 

NOTE:  Stnd Deviation and Bet are NOT inputs to APT

Term

 

Dividend Payout Ratio Formula

Definition

 

Dividend per Share

Earnings per Share

Term

 

Return on Equity Formula

Definition

 

Earnings per Share

Shareholders Equity per Share

Term

 

Dividend Yield Formula

Definition

 

Dividend per Share

Stock Price per Share

Term

 

Technical Analysis -

 

Definition and Tools

Definition

 

Technical Analysis = Trend Analysis

 

Uses Charting, Dow Theory, Market Breadth, Odd Lot Trading Stats, etc.

 

Does NOT use financial data analysis.  Supply and demand are stock price drivers.

Term

 

Financial Analysis -

 

Definition and Tools

Definition

 

Fundamental Analysis = Financial Analysis

 

Uses ratio analysis of financial data such as: liqudity, activiety, profitability

 

Stock price is driven by financial performance of the company.

Term

 

Efficient Market Hypothesis -

 

Key Concepts

Definition

 

Above average market returns are unachievable.

 

Supports passive investment strategy, index investing.

 

Supports "random walk" theory - Stock prices are unpredictable, but not arbitrary.

Term

 

Efficient Market Hypothesis -

 

Weak Form

Definition

 

What leads to above average returns:

 

Weak Form -

 

Rejects: Historical data and technical analysis.

 

Supports: Financial Analysis + Inside Info

Term

 

Efficient Market Hypothesis -

 

Semi-Strong

Definition

 

 

What leads to above average returns:

Semi-Strong Form -

Rejects: Technical Analysis and Fundamental Analysis

Supports: Inside Information Only

 

Term

 

Efficient Market Hypothesis -

 

Strong Form

 

Definition

What leads to above average returns:

Strong Form -

Rejects: All Informatiion

Supports: All Information is Reflected in Stock Price

Term

 

Municipal Bonds -

 

Types & Descriptions

Definition

 

General Obligation - Backed by taxing authority of issuer

 

Revenue Bonds - Backed by revenue of specific project (i.e., tolls from roads and bridges)

 

Private Activity Bonds - Used to finance stadium contstruction

Term

 

Tax Exempt Rate / Tax Equivalent Rate

Definition

 

Tax EXempt = Gross Down = Corp. Rate X (1- Marginal Tax Rate)

 

Tax Equiv. Rate = Gross Up = Tax Exempt Rate / (1 -Marginal Tax Rate)

Term

 

Coupon Rate Formula

Definition

 

Coupon Rate =

 

Coupon Payment

Par Value of Bond

 

Par Value is usually $1,000

Coupon Payment amount is always constant

 

 

Term

 

Bonds -

 

Current Yield Formula

Definition

 

Coupon Payment (Annual)

Current Bond Price

Term

 

Bond Yield Grid

Definition

 

Coupon  Current  Maturity  Call

 

Premium       Prem                                Disc

 

Par               Par       Par          Par        Par +

 

Discount        Disc                                Prem

Term

 

Bond Duration -

 

Indicator of:

Definition

1)  Price sensitivity to interest rate changes.  (Longer/higher duration indicates greater price swings relative to interest rate changes.)

 

2)  The moment in time when investor is immunized from interest rate risk and reinvestment rate risk.

 

3)  The weighted average time until investor receives all coupon payments and principal.

 

4)  A bond portfolio that is effectively immunized when duration equals investor's time horizon for the portfolio.

Term

 

Zero Coupon Bond Duration:

Definition

 Is always equal to its maturity

 

So: As coupon rate increases, duration decreases.

As Yield to Maturity increases, duration decreases.

As Yield to Maturity decreases, duration increases.

 

Coupon Rate and YTM (both INterest rates), have INverse relationship.

 

Term of bond and duration have direct relationship.

 

Term
3 Reasons to Invest in Options
Definition

1) Hedging

2) Speculation

3) Income

Term
Options strategy to Maximize gains in a Rising Market:
Definition
Buy a Call
Term
Options Strategy to Maximize Gains in a Falling Market:
Definition
Buy a Put
Term
Options Intrinsic Value Formulae:
Definition

Call = Stock Price - Strike Price

 Put = Strike Price - Stock Price

 

Intrinsic Value cannot be < 0

Term

 

Options Grid for In/Out of the Money

Definition

Remember to Keep the Grid in Alphabetic Order

 

               IN                     At                     OUT

 

Call   Stock > Strike     Stock = Strike     Stock < Strike

 

Put    Stock < Strike     Stock = Strike     Stock > Strike

 

 

Term

 

Black/Scholes Model Variables:

Definition

 

1) Current price of underlying asset

2)  Time until option expiration

3)  Risk-free rate of return

4)  Volatility of the unerlying asset

Term

 

Put/Call Parity Variables:

Definition

 

Attempts to value a PUT based on a Call option.

Term

 

Binomial Pricing Model Variables:

Definition

 

Pricing is based on underlying asset's pricing moving in one of two directions only - Up or Down.

Term

 

LEAPS - Expiration Period Duration

Definition

 

2 years

 

(Traditional Options have expirations of

up to 9 months)

Term

 

Market risk premium increase causes stock price to:

Definition

 

Decrease

 

(Higher return requirement for higher risk acceptance leads to lower stock price.)

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