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26 Cards in this Set
- Front
- Back
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Put these 6 types of assets in order of most liquid to least liquid — Municipal bonds, small-cap stocks, cash, large-cap stocks, artwork, real estate |
Money market mutual fund
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Money market account |
Restricted savings accounts offered by Bank. Restricted to six withdrawals per month |
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Money market mutual funds |
Money market mutual fund, not a bank product. Maintains high degree of liquidity by investing in low-risk short term securities like T bills or high credit quality commercial paper. Not insured by FDIC. |
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FDIC insured products |
Traditional bank products, IRAs and keoghs. $250,000 per depositor |
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How fixed income securities work (bonds) |
Debt obligation issued by corporation, government or government. Coupon a.k.a. interest-rate paid semi annually until date of maturity when principle is paid back |
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Correlation and Correlation of domestic stocks with natural resources, collectibles, precious metals |
Measures degree to which two assets are related. All have LOW correlation with domestic stocks, provides inflation hedge. |
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Derivatives |
Instrument that derives its value from performance or movement of another instrument such as commodity, equity security, or fixed income security. Involves trading of rights or obligations based on underlying instrument but do not directly trade asset |
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Nominal return, real return, pre-tax return, after-tax return |
Nominal: before adjusting for inflation Real: After adjusting for inflation |
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Yield and current yield |
Yield: flow of cash from investment. Stocks = dividends, bonds = interest Current yield: dividend or coupon divided by current price. Gives annual rate of cash flow being earned on investment |
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Total return |
Yield plus price change. Stock purchased for $20, earns $5 in dividends, sold for $30. Total return $15. Five dollars in dividends $10 in capital gain |
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Three types of assets |
Cash and equivalents, investments, personal use |
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Annual growth rate of one dollar over 25 years for S&P 500, bonds, 91-day T bills, inflation (1994-2008) |
S&P 500: 7.9% Bonds: 5.7% 91-day T bills: 2.37% Inflation: 2.1% |
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Average mean vs. geometric mean - which is used when calculating the average return of investments? |
Average mean is simple mean. Geometric mean accounts for compound growth over time. A.k.a. annualized return or compounded rate of return. [(1+TR1)(1+TR)...(1+TRn)] to the 1/n minus 1 |
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Holding period rturn |
Sales price + yield - purchase price Divide by purchase price |
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Inflation adjusted total return |
Inflation adjusted total return |
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Total Risk is made up of what 2 types of risks |
Systematic and nonsystematic. Systematic is attributed to broad economic factors affecting all securities. Cannot be eliminated by diversification. Nonsystematic is attributed to factors unique to specific security, business or industry. Can be diversified away. |
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Factors that influence systematic risk. Acronym PRIME |
Purchasing power risk (inflation risk) Reinvestment rate risk (Risk that proceeds or distributions available for reinvestment will be invested at a lower interest rate than the original) Interest rate risk Market risk Exchange rate risk |
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Factors that influence nonsystematic risk |
Management risk Financial risk Default risk (on bond interest payments or pay maturity value) Liquidity risk (no buyers) Concentration (all eggs in 1 basket) |
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Total investment risk is measured by what? |
Standard deviation versus beta. Standard measures variability about comes around the average or mean. Goal of asset allocation is to reduce standard deviation. Beta measures volatility of rate of return or price relative to volatility of overall market. Systematic, and diversifiable risk. |
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Total investment risk is measured by what? |
Standard deviation versus beta. Standard measures variability about comes around the average or mean. Goal of asset allocation is to reduce standard deviation. Beta measures volatility of rate of return or price relative to volatility of overall market. Systematic, and diversifiable risk. |
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Large versus small deviation |
Large deviation considered riskier than smaller. |
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Correlation coefficient |
Measures how securities move against each other. Negative correlation (-1) means securities move in opposite directions. Positive correlation (+1) mean securities move in same direction Zero Means they move independent of each other |
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Exam tip: when is beta considered an appropriate rest measurement tool? |
Beta appropriate risk measurement tool when R squared is higher than 0.7. If R squared is lower than 0.7 indicates poorly diversified portfolio and then we should use standard deviation as risk measurement tool. |
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What is the concept of risk premium? |
Investors expect additional compensation for taking on greater risk than a risk-free security like T bills |
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CFP exam Q |
Back (Definition) |
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Liquidity |
Ease with which assets can be converted quickly into cash and without substantial loss in value. Assets usually held for less than 1 year |
