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43 Cards in this Set
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Formula for Future Value and Present Value

FV = PV × (1 + r)t
PV = fV ÷ (1 + r)t 

Investment Return Measurements

Total Return = income plus growth of principal from an investment.
Current Yield = Annual Dividends per share (or interest) /market value per share (price of bond) 

Holding Period Return

HPR is the total return expressed as a percentage of an investment over a variable time period. It is essentially the same as total return, but although total return is usually computed on an annual basis, holding period return can be for any period. Holding period return is not an annualized return.


Inflation Adjusted Return

1 + rate of return / 1 + rate of inflation


Net Present Value

is the difference between an investment’s present value and its cost. An nPV of $10 means that an investment that cost $100 must have a discounted present value of $110, for an nPV of $10.


Internal Rate of Return (IRR)

The internal rate of return (IRR) is the discount rate (r) that makes the future value of an investment equal to its present value. The yield to maturity of a bond is actually the bond’s internal rate of return because it is the interest rate that equates the value of the bond’s future cash flows with its current price.


Time Weighted Returns

A method of determining an internal rate of return by evaluating the performance of portfolio managers without the influence of additional investor deposits or withdrawals to or from the portfolio.


Dollar Weighted Returns

A method of determining the internal rate of return that an individual investor earned on the basis of the investor’s particular cash flow into and out of the portfolio.


Time Weighted vs. Dollar Weighted

TWR are used to evaluate the performance of portfolio managers separate from the influence of additional investor deposits or withdrawals. DWR are used to determine the rate of return an individual investor earned on the basis of the investor’s particular cash flows into and out of a portfolio.


Dividend Valuation Models >> Dividend Discount Model (DDM) and Dividend Growth Model (DGM)

DDM states that the value of a stock should be equal to the present value of all future dividends.
DGM assumes that the amount of the annual dividend will grow at a constant rate. Since projections of future growth can be hazy, this model is best used in conjunction with other forecasting tools. 

Working Capital

Current assets minus the current liabilities. Measure of the firm’s liquidity.


Current Ratio and Quick Ratio

Divide the Current Assets by the Current Liabilities and the higher the ratio, the more liquid the company is.
Quick assets are current assets minus the inventory. QA/ Current Liabilities 

Debt to Equity

It should be called the debt tototal capitalization ratio. Total debt / total capitalization (or Co. value incl debt)


Book Value per Share

NAV per share of an investment company. In the case of a corporation, it is basically the liquidation value of the enterprise.
Net Tangible Assets – Liabilities – Par Value of Preferred Stock / # of Shares of Common Stock Outstanding 

Corporate SEC Filings

Form 8K  used to report newsworthy events. Filed within 4 biz days of the occurrence. Used only by domestic issuers; foreign issuers are exempt.
Form 10K  annual report. Incl audited financial statements. Form 10Q  Qtrly unaudited statements. Filing due within 40 days of Qtr end. 

Geometric Mean

The geometric mean of any given set of numbers (n) is obtained by multiplying all of them together, and then taking the nth root of them. for example, over the past five years, a stock has annual returns of 10%, 5%, 15%, 8%, and 12%. Its geometric mean is 9.36%.


Formula for a Perpetuity

Expected rate of return & the desired annual income, divide that income by the rate of return, and you will arrive at the lump sum required to throw off that income perpetually. e.g. $1,000/4% = $25,000


Beta as a measure of Risk

Beta measures a security' 'systemic' risk, or the risk of the market in general.
Risks specific to a stock, such as from competition, mismanagement, or product deficiencies, are indepen dent of the general market. This is nonsystematic risk. 

Beta Vs, Standard Deviation as a Measure of Risk

Beta is a volatility measure of a security, compared with the overall market; it is a measure of systematic risk. Standard deviation is a volatility measure of a security, compared with its expected performance. It includes both systematic and nonsystematic risk, making it a mea surement of the total risk inherent in investing in that particular security.


Sharpe Ratio

(1) Actual return  (2) the riskfree rate (the 90day Tbill rate) / by (3) the standard deviation. This ratio measures the amount of return per unit of risk taken. The higher the ratio, the better or more return per unit of risk taken.


Risk Factors

Risk premium is a premium demanded for internal and external risk factors. Internal risk factors are diversifiable & incl biz risk, credit risk, liquidity risk, currency risk, & country risk. External risk factors, such as market risk & interest rate risk, are macroeconomic in nature & are nondiversifiable. The required rate of return on any investment is a combination of the riskfree rate plus a risk premium.


Duration

The lower the coupon rate, the greater a bond’s duration—the higher the coupon rate, the lower the duration. The longer a bond’s maturity, the greater the bond’s duration. For coupon bonds, duration is always less than the bond’s maturity. Duration for a zerocoupon bond is always equal to its maturity.


Convexity

Comparing 2 bonds, the 1 with the higher convexity will show a > price increase
when yields fall and a smaller decrease when yields rise (that is a good thing). If we find two bonds with the same duration, the one with the higher convexity offers greater interest rate risk protection. 

Monte Carlo Simulations

Well suited to addressing:
1) Situations where no realworld data exists; 2) Problems with unknown variables; 3) Problems for which no analytical solution exists. 

Risk Types

Business Risk = Unsystematic Risk  can be diversified away
Market Risk = Systematic risk  inherent in market  cannot be diversified away 

Individual Bond Strategies to Reduce Interest Rate Risk >> Barbells

1) Barbells  The investor purchases ST bonds (maturing in <=1 or 2 yrs) & an equal amount maturing in >=10 yrs with no bonds in between. Assuming a normal yield curve, the LT end of the barbell contains bonds offering the higher LT interest rates, while the ST end provides you with soon to be realized cash (as they mature) that may be reinvested at higher rates if that is the direction the market takes.


Individual Bond Strategies to Reduce Interest Rate Risk >> Bullets

Bullets  used for a particular accumulation goal. Various bonds bought at different times but all maturing at the same time.


Individual Bond Strategies to Reduce Interest Rate Risk >> Ladders

Ladder  the bonds are all purchased at the same time but mature at different times (like the steps on the ladder). As the shorter maturities come due, they are reinvested and now become the longterm ones.


Regulatory Risk Types

Regulatory risk  change in regulations;
Legislative risk  change in the law. Changes to the tax code is the most obvious legislative risk. Political Risk  potential instability in the political underpinnings of the country 

Liquidity Risk

Liquidity measures the speed or ease of converting an investment into cash. Liquidity risk is the risk that when an investor wishes to dispose of an investment, no one will be willing to buy it, or that a very large purchase or sale would not be possible at the current price.


Main Types of Systematic and Unsystematic Risks

Top Systematic; 1) Market, 2) Interest rate and 3) inflation risk.
Top Unsystematic risk types; 1) business, 2) liquidity, 3) political and 4) regulatory. 

Which Indexes Relate to Which Market Cap Size

Large Cap—S&P 500
Mid Cap—S&P 400 Small Cap—Russell 2000 International Stocks—EAfE 

S&P 500 Index

The composition of the S&P500 Composite Index includes 4 main groups of securities: 400 industrials, 20 transportation companies, 40 public utilities, and 40 financial institutions. The S&P is a baseweighted index using a base period of 1941–1943 equal to 10. Most listed on NYSE but some are on AMEX, NASDAQ. This is a capweighted, or sometimes referred to as market value
weighted, index. 

Which index represents the OTC market

The NASDAQ composite index, which cov ers more than 3,000 overthecounter companies.


Efficient Markets Hypothesis
(1 of 2) 
EMH maintains that security prices adjust rapidly to new info with security prices fully reflecting all available info (aka 'random walk theory'). Weak form: Current asset prices already reflect all past info relating to price & volume. SemiStrong: inclds all info reported in a Co.'s financial statements, company’s announcement, economic factors, & others.


Efficient Markets Hypothesis
(2 of 2) 
Strong: Inclds all public and private (insider) info. Therefore, under the strong form, all info, whether public or private, is fully reflected in a security’s current market price. The belief is that the market itself looks ahead and projects based on anticipated future corporate developments.


Efficient Portfolios and the Efficient Frontier

An efficient portfolio is one that offers: a) the most return for a given amount of risk; or b) the least risk for a given amount of return. The collection of efficient portfolios is called the efficient set or efficient frontier.


Capital Market Line (CML)

The CML provides an expected return based on the level of risk. The equation for the CmL uses the: a) expected return of the portfolio; b) riskfree rate; c) return on the market; d) SD of the market; and e) SD of the portfolio.
CmL is generally used to evaluate diversified port folios. 

Security Market Line (SML)

Derived from the CML, allows us to evaluate individual securities for use in a diversified portfolio. In focusing on a specific asset, the SML uses the following: a) The expected return for the asset; b) The riskfree rate c) The return on the market d) The beta of the asset.
The security market line determines the expected return for a security on the basis of its beta and the expectations about the market and the riskfree rate. 

Optimal Portfolio

An optimal portfolio is one that returns the highest rate of return consistent with the amount of risk an investor is willing to take. In other words, an optimal portfolio is the port folio that makes the best tradeoff between risk and reward for a given investor’s investment profile.


What is the tax treatment on highly appreciated company stock not rolled over into an IRA but left in a 401K?

Under IRS rules, if part of your retirement plan assets includes company stock, taking that as a distribution (not rolling it over into an IRA) subjects the cost basis to ordinary income tax and any unrealized appreciation is taxed as longterm capital gain when sold.


Which of the following is TRUE of the tax consequences when a participant in a noncontributory pension plan withdraws a monthly income at retirement?

The income is taxable as ordinary income. The employer has been making all of the contributions to the pension plan. Noncontributory means that the employee has made no contributions. Under the IRC, the income to the retiree from the plan is ordinary income.


In the past month, several negative reports have been published about GEMCO's product line. This has caused a drop in the market price of the stock even though the GEMCO has just reported earnings that exceeded analyst's projections. This is an example of:

Market risk is the uncertainty that a stock’s price will move in a manner unrelated to the company’s fundamentals. A prime example of this is when earnings go one way and the stock price the other.
