Cfa Portfolio Management, Equity, Fixed Income

Front 1

Holding period return

Back 1

The return earned from holding an asset for a single, specified period of time.

Front 2

Arithmetic Return

Back 2

The average of all returns over a period of time.

Front 3

Geometric Mean Return

Back 3

The return required to yield a result using compounding.

Front 4

IRR

Back 4

The discount rate at which the sums of the present values of these cash flows will equal zero. Otherwise known as the money weighted rate of return.

Front 5

Variance

Back 5

A measure of the volatility or the dispersion of returns. Variance is the average squared deviation from the mean.

Front 6

Standard deviation

Back 6

The square root of variance.

Front 7

Capital allocation line

Back 7

A line indicating the return from a combination of the risk free and risky asset.

Front 8

Capital market line

Back 8

A capital allocation line where the market portfolio is the risky portfolio (as per finance theory)

Front 9

Systematic risk

Back 9

Risk that cannot be avoided and is inherent in the overall market. Non-diversifiable. Inflation, economic cycles, political uncertainty, etc.

Front 10

Nonsystematic risk

Back 10

Risk that is local or limited to a particular asset or industry.

Front 11

Return generating model

Back 11

A model that can provide an estimate of the expected return of a security given certain parameters. Multi-factor models use more than one variable.

Front 12

Fama French

Back 12

A multi-factor return generating model using company size and price/book ratio in addition to beta.

Front 13

Beta

Back 13

Beta is:

Covariance between an asset's return and the market
/
Standard deviation of the market return

Can also be written as:

B = correlation * i std dev
/
market std dev

Front 14

CAPM

Back 14

E(R) = Rf + B(Rm-Rf)

Front 15

CAPM Assumptions (6)

Back 15

1) Investors are risk averse, utility maximizing, rational individuals.
2) Markets are frictionless, without taxes or transaction costs.
3) Investors plan for the same holding period
4) Investors have homogenous expectations and beliefs
5) All investments are infinitely divisable.
6) Investors are price takers.

Front 16

Security market line

Back 16

Beta on the X axis and expected return on the Y axis

Front 17

Sharpe Ratio

Back 17

Rp - Rf
/
Std dev(p)

Front 18

Treynor ratio

Back 18

Rp - Rf
/
B(p)

Front 19

M squared

Back 19

(Rp - Rf) * std dev (m)/std dev(p)

-

(Rm-Rf)

Rankings are the same as Sharpe, but easier to interpret because results are in percentage terms

Front 20

Security Characteristic Line

Back 20

A plot on the excess return of the security on the excess return of the market. Alpha is the intercept, beta is the slope

Front 21

CAPM and "True market portfolio"

Back 21

True market portfolio includes nonfinancial assets. Its basically unobservable.

Front 22

Accelerated book build

Back 22

An offering of securities by an investment bank acting as principal that is accomplished in only one or two days.

Front 23

Acid-test ratio

Back 23

A stringent measure of liquidity that indicated a company's ability to satisfy current liabilities with its most liquid assets. Cash, short term marketable investments and receivables.

Front 24

Primary vs. Secondary Markets

Back 24

Sales by issuers are primary market sales. Securities trade in secondary markets.

Front 25

Forward contracts

Back 25

Arrange for future sales at predetermined prices. Futures are forward contracts guaranteed by clearinghouses.

Front 26

Futures contracts

Back 26

Are a version of forwards guaranteed by a clearinghouse.

Front 27

Information motivated Traders

Back 27

Short sell when they expect prices to fall.

Front 28

Price return vs. total return

Back 28

Price return=> only the prices of the constituent securities.

Total return=> Also includes reinvestment of all income received (ie dividends).

Front 29

Security market index

Back 29

represents a given security market, market segment or asset class. Usually constructed as a portfolio of marketable securities.

Front 30

Float adjusted market cap weighting

Back 30

Companies are weighted base on the market capitalization of the market float.

Front 31

Fundamental weighting

Back 31

Use measures of a company's size besides market cap. Dividends, revenue, etc.

Front 32

Rebalancing

Back 32

Adjusting the weights of the constituent securities in an index.

Front 33

Reconstitution

Back 33

Changing the constituent securities in an index

Front 34

Callable common shares

Back 34

Give the issuer the right to buy back the shares from shareholders at a set price.

Front 35

Putable common shares

Back 35

Give the shareholders the right to sell the shares back to the issuer at a price specified when the shares are originally issued.

Front 36

Preference shares

Back 36

are a form of equity in which payments are made to preference shareholders with precedence over payments to common stockholders.

Front 37

Cumulative preference shares

Back 37

Are preference shares on which dividend payments are accrued so that any payments omitted by the company must be paid before another dividend can be paid to common shareholders.

Front 38

Participating preference shares

Back 38

Allow investors to receive that standard preferred dividend plus the opportunity to receive a share of corporate profits above a pre-specified amount.

Front 39

Private equity securities

Back 39

Are issued primarily to institutional investors and don't trade. Three types of private equity investments:
1) VC 2) LBOs 3) private investments in public equity

Front 40

Depository receipts

Back 40

Securities that trade like ordinary shares on a local exchange, which represent an economic interest in a foreign company.

Front 41

Approaches for classifying companies (3)

Back 41

1) By product/service supplied
2) By business-cycle sensitivity
3) Statistical similarities

Front 42

Porter's Five Forces

Back 42

1) Threat of new entrants
2) Threat of substitute products
3) Bargaining power of customers
4) Bargaining power of suppliers
5) Intensity of rivalry

Front 43

Five stages of industry development

Back 43

1) Embryonic
2) Growth
3) Shakeout
4) Mature
5) Decline

Front 44

Two chief competitive strategies

Back 44

1) Low-cost

2) Product differentiation

Front 45

Three major equity valuation model categories

Back 45

1) Present Value
2) Multiplier
3) Asset Based

Front 46

Present Value Models

Back 46

Present value of future cash flows/benefits

Front 47

Multiplier Model

Back 47

Value as a multiple of some fundamental variable

Front 48

Asset-Based Valuation

Back 48

Based on the estimated vales of assets and liabilities

Front 49

Three bond elements an investor needs to know

Back 49

1) Bond's feature
2) Legal, regulatory and tax considerations that apply to the contract
3) The contingency provisions that may affect the scheduled cash flows

Front 50

Basic features of a bond (5)

Back 50

1) The issuer
2) The maturity
3) The par value
4) The coupon rate/frequency
5) The currency

Front 51

Yield to maturity

Back 51

The discount rate that equates the present value of the bond's future cash flows until maturity to its price.

Front 52

Credit enhancement

Back 52

Can be internal or external. Internal includes subordination, overcollateralization and excess spread. External is typically a guarantee or letter of credit.

Front 53

Amortizing bond

Back 53

A bond whose payment schedule requires periodic payment of interest AND repayment of principal.

Front 54

Bullet bond

Back 54

Entire principal repayment occurs at maturity.

Front 55

Sinking fund agreements

Back 55

An amount of the bond's principal outstanding is repaid each year.

Front 56

Floating rate note

Back 56

Has a coupon based on some external rate.

Front 57

Callable bonds

Back 57

The issuer has the right to buy the bonds back prior to maturity

Front 58

Putable bonds

Back 58

The bondholder has the right to sell the bonds back to the issuer prior to maturity.

Front 59

Convertible bonds

Back 59

Give the bondholder the right to convert the bond into equity. This favors the bondholder and thus lowers the yield.

Front 60

Tenor (bonds)

Back 60

The amount of time left for the repayment of a loan or the initial term length of a loan.

Front 61

Three major bond market sectors

Back 61

Government, corporate, and structured finance

Front 62

Underwriting bond issues

Back 62

When an investment bank underwrites a bond issue, it buys the entire issue and takes the risk of reselling it to investors or dealers.

Front 63

Best efforts offering (bonds)

Back 63

An investment bank serves only as a broker and sells the bond issue only if it is able to do so.

Front 64

Shelf registration

Back 64

A method for issuing securities in which the issuer files a single document with regulators that describes a range of future issuances.

Front 65

Domestic, foreign and Eurobond markets (geographical classification)

Back 65

Domestic- Bonds issued in a specific county, denominated in the currency of that county and sold in that country by an issuer domiciled in that country.

Foreign bonds- Issued in a country in its currency by a foreign company.

Eurobond- Issued internationally, outside the jurisdiction of the country in whose currency it is denominated.

Front 66

Bond coupons and price volatility

Back 66

The lower the coupon, the higher the volatility

Front 67

Flat prices (bonds)

Back 67

Sold without accrued interest. "Dirty bonds" mean the interested accrued is included in the bond price.

Front 68

Current yield

Back 68

Annual coupon payment divided by the flat price

Front 69

Simple yield

Back 69

The current yield including the straight line amortization of the discount or premium

Front 70

Yield-to-worst

Back 70

The lowest of the "yield to call" values on bonds based on the potential call prices.

Front 71

Option-adjusted yield

Back 71

The YTM after adding the theoretical value of the call option to the price.

Front 72

FRN

Back 72

Is priced more stably than a fixed rate note because payments vary with prevailing interest rates.

Front 73

Money market discount rates and return

Back 73

Discount rates understate the rate of return because interest income is divided by the face value or the total amount redeemed at maturity.

Front 74

Horizon yield

Back 74

The internal rate of return between the total return and the purchase price of the bond. The horizon yield on a bond is the annualized holding-period rate of return.

Front 75

Carrying value of a bond

Back 75

The purchase price plus the amortized amount of the discount is the bond is purchased below fair value.

Front 76

Duration of a bond

Back 76

The duration of a bond measures the sensitivity of a bond's full price to changes in its YTM.

Front 77

Yield duration

Back 77

Sensitivity of the bond price to the bond's own YTM.

Front 78

Curve duration

Back 78

The sensitivity of the bond price to a benchmark yield curve.

Front 79

Macaulay duration

Back 79

Weighted average of the time to receipt of the bond's payments, where the weights are the share of the bond's full price that correspond with each payment.

Front 80

Modified duration

Back 80

Macaulary duration divided by 1+r

Front 81

Modified duration and PV

Back 81

Change in present value

= -AnnModDur * Change in yield

Front 82

Derivative

Back 82

A financial instrument that derives its performance from the performance of an underlying asset

Front 83

Exchange traded derivatives

Back 83

Standardized, highly regulated, transparent transactions guaranteed by clearinghouses.

Front 84

OTC derivatives

Back 84

Customized, flexible, less regulated

Front 85

Swap

Back 85

An OTC derivative contract where two parties agree to exchange series of cash flows

Front 86

CDS

Back 86

The buyer makes a series of payments to the seller and receives a promise of compensation for credit losses resulting from the default of a third party

Front 87

Long and short and forward contracts

Back 87

The long holder takes delivery of the underlying asset and pays the forward price at expiration.

Front 88

Eurodollar deposits

Back 88

Are dollar loans made by one bank to another. Interest accrues by adding to the principal.

Front 89

FRA

Back 89

A forward contract in which one party agrees to pay a fixed interest payment at a future date and receive an interest payment at a rate to be determined at expiration.

Front 90

Scalpers vs. Position traders

Back 90

Scalpers: trade futures intraday

Position traders: trade future overnight and longer

Front 91

T-Bill Future

Back 91

The underlying is $1 million of a U.S. Treasury Bill.

Front 92

Delta (options pricing)

Back 92

The sensitivity of the option price to a change in the price of an underlying.

Front 93

Gamma

Back 93

A measure of how well the delta sensitivity measure will approximate the option price's response to a change in the underlying.

Front 94

Rho

Back 94

Sensitivity of an option price to the risk free rate.

Front 95

Theta

Back 95

The rate at which the time value decays as the option approaches expiration.

Front 96

Vega

Back 96

Sensitivity of the option price to volatility.

Front 97

Put-call parity

Back 97

C - P = D(F-K)

C is the current value of a call

P is the current value of a put

D is the discount factor

F is the forward price of the asset

K is the strike price of the options