• Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off
Reading...
Front

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key

image

Play button

image

Play button

image

Progress

1/69

Click to flip

69 Cards in this Set

  • Front
  • Back
Underwriting: Best efforts
Risk resides with the issuing firm. Unsold shares are returned to the company.
Underwriting: Firm commitment
Underwriter agrees to buy the entire issue of stock from a company. Risk lies with the underwriter. Underwriter profits from the spread [public price minus purchase price].
Key documents:
Prospectus
- Outlines risks, management team, business operations, fees and expenses.
- Must be issued by an investment company prior to selling shares to an investor.
Key documents:
Red Herring
Preliminary prospectus, not approved by SEC, used to determine investor interest.
Key documents:
10K, 10Q
10K - Annual financial reports (audited)
10Q - Quarterly financial reports (NOT audited)
Filed with the SEC
Key documents:
Annual report
Message from the Chairman of the Board about the past year and outlook for the next year, sent to shareholders.
Liquidity
How quickly something can be turned to cash, with little or no loss of cash. Usually short-term investments. Stocks, bonds, mutual funds are not considered liquid because of potential price fluctuations.
Marketability
Existence of a ready-made market. Are there buyers? For example, real estate is marketable, but not very liquid.
Types of Orders:
Market Order
For buys and sells:
Timing and speed are the priority. Price is not a factor in transaction. Appropriate for high volume securities.
Types of Orders:
Limit Order
Buy or sell a set number of shares at a specified price or better. May not be executed. ex: limit buy will buy if the price falls to X. Limit sell will sell if the price rises to Y. Appropriate for low volume or highly volatile securities.
Types of Orders:
Stop Order - Buy
A buy order that is held until a security rises to a specified price, then turns into a market order.
Types of Orders:
Stop Order - Sell
A sell order that is held until a security falls to a specified price, then turns into a market order.
Types of Orders:
Stop-Limit or Stop Loss Limit Order Buy
An order that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or sell) at the limit price or better.

For example, ABC is trading at $40 and an investor wants to buy the stock once it begins to show some upward momentum. The investor has put in a stop-limit order to buy with the stop price at $45 and the limit price at $46. If the price of ABC moves above $45 stop price, the order is activated and turns into a limit order. As long as the order can be filled under $46 (the limit price), then the trade will be filled. If the stock gaps above $46, the order will not be filled.
Types of Orders:
Stop-Limit or Stop Loss Limit Order Sell
An order that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to sell at the limit price or better.

For example, XYZis trading at $100 and an investor wants to sell the stock once it begins to drop in value. The investor has put in a stop-limit order to sell with the stop price at $95 and the limit price at $90. If the price of ABC moves below $95 stop price, the order is activated and turns into a limit order. As long as the order can be filled above $90 (the limit price), then the trade will be filled. If the stock gaps below $90, the order will not be filled.
Short Selling
- Sell "borrowed shares" in hopes of buying at a lower price to return it to the original owner
- Make money when price falls
- No time limit
- When dividends are paid, short seller must pay the amount to the original owner
Margin:
Initial margin
The % of equity an investor must contribute to enter a martin transaction.

e.g. to purchase 100 shares of ABC @$50 with an initial margin requirement of 75%, you must deposit 100 x $50 x 0.75 = $3,750 in cash or securities. Then you borrow the rest, $1,250, from the broker.
Margin:
Reg T (Initial Margin)
The Federal Reserve has set the initial margin at 50%. The required initial margin can be more restrictive (higher), as set by the broker.
Margin:
Maintenance Margin
The minimum amount of equity required before a margin call.
Margin:
Margin Position
The equity position of the investor.
Margin position = Equity ∻ FMV = [stock price - loan] ∻ FMV.

e.g. Buy ABC at $100 using 75% initial margin. Stock falls to $80. New margin position = [$80- ($100 x 0.25)] ∻ 80 = 68.75%
Margin:
Margin Call Formula (not provided on exam)
Margin Call =

Loan per share
--------
[1 - Maintenance Margin]
Margin:
Margin Call Definition and example
The price at which an investor will receive a margin call.

Question: Purchase 100 shares DEF at $50 with initial margin 75% and maintenance margin 25%. At what price is there a margin call?

Answer: [Loan per share]/[1-Maintenance Margin]. [$50x0.25]/[1-0.25] = $16.66
How much equity to contribute?
Contribute to get back to maintenance margin.
[Required equity] - [Actual equity] x # of shares.

e.g. purchase 100 shares of JKL at $50 with initial margin of 75% and maintenance margin of 35%. Price calls to $15. How much to contribute?
[Required Equity = $15 x 0.35 = $5.25] - [Actual Equity = $15- [loan = $50 x 0.25 = $12.50] = $2.50. Must add $2.75 per share, or $275.
Research Reports:
Morningstar
Rates Mutual Funds, 1 to 5 stars
Research Reports:
Value Line
Rates stocks, 1 (buy), 5 (sell)
Dividend Dates:
Ex-Dividend Date
The day the stock trades without the dividend. If you sell on the ex date, you get the dividend. If you buy on or after the ex date, you will NOT get it. It is 2 days before the date of record.

e.g. ex date Jan 3, rec date Jan 5.
Dividend Dates:
Date of Record
Date on which you need to be the registered shareholder in order to receive the dividend. 2 days after the ex-date. Must purchase 3 days before the date of record to receive the dividend.
Dividend Dates:
When do you need to purchase a stock in order to receive the dividend?
At least 3 days before the date of record or 1 day before the ex date, since on the ex date, the seller would receive the dividend.
Securities Act of 1933
Regulates new issues (Primary market), requires prospectus.
Securities Act of 1934
Regulates the secondary market (trading). Created the SEC.
Investment Company Act of 1940
Authorizes SEC to regulate investment companies (open, closed, UITs).
Investment Advisors Act 1940
Requires advisors to register with the SEC or state.
Securities Investors Protection Act of 1970
Established SIPC.
Insider Trading and Securities Fraud Enforcement Act of 1988
Defines insider as anyone with non-public information; insiders cannot trade on that information.
4 Types of Money Market securities
T-Bills
Commercial Paper
Bankers Acceptance
Eurodollars
Money Market:
Treasury Bills
- Come in 4, 13, 26, 52 week maturity
- Denomination of $1,000
Money Market:
Commercial Paper
- ST loans between corporations
- 270 days or less
- Not registered with SEC
- $100K and sold at discount
Money Market:
Bankers Acceptance
- Used in import/export
- 9 months or less maturity
- Can be held to maturity or traded.
Money Market:
Eurodollars
US dollars deposited in foreign banks
Investment Policy Statement
Establishes objectives and invesment manager limitations.
- Return and Risk objectives
- Time, Liquidity, Tax, Law limitations
Indicies:
Dow Jones
Simple price weighted average:
Add the prices of each stock in index and divide by the number of different stocks.
Indicies:
S&P 500
Value weighted, takes into account market cap. Large companies.
Indicies:
Russell 2000
Value weighted for small market cap stocks.
Indicies:
Wilshire 5000
Broadest index, value weighted.
EAFE
Value weighted, Europe, Australia, FAR EAST
Standard Deviation definition
- Measure of risk and variability of returns
- Variation around an average
- TOTAL RISK in an undiversified portfolio
- 68%, 98%, 99% for 1, 2, 3δ
Standard deviation key strokes on 10BII
- enter [return #1 (as decimal, 0.075 for 7.5%)] then E+ (sigma)
- enter return #2....
- Orange key, SxSy (on number 8)
- Also x,y average available
Coefficient of Variation definition
The likelihood of actually experiencing a return close to the average.
Higher = riskier
Coefficient of Variation formula
CV = Standard Deviation / Average Return.

If std is low, spread is low so return are tighter around the average..
Monte Carlo
- Simulation in which probabilistic distribution of events is given
- Multiple iterations with different value for variables (such as returns)
Covariance definition
- The measure of interactive risk between two securities, since:
COV12 = sd*sd2*Correlation12.
- A relative measure
Correlation Coefficient definition
- Ranges from +1 to -1
- Diversification begins anytime correlation is less than +1
- 0 = completely uncorrelated.
Perfect opposite correlation = -1
Correlation Coefficient formula
ρ1,2 = [SD1*SD2]/ COV
Beta
- Coefficient that measures volatility relative to the market.
- Best used to measure the volatility of a DIVERSIFIED portfolio (has a high r^2)
- Market beta =1
- A higher beta indicated greater systematic risk
- Measure or systematic risk (vs. sd which is total risk)
R^2 (definition)
Measure of how much return is due to the market or what % of return is due to the market.
R^2 (formula)
r^2 = correlation coefficient^2.

e.g. if correlation coefficient is 0.60 then r^2 = 0.36 which means 36% of the fund's return is due to the market.
Systematic Risk definition
- Undivirsifiable risk
- Market Risk
- Economy-based
Unsystematic Risk definition
- Diversifiable
- Unique
- Company specific
- Goes down as # holdings increase
Kinds of Systematic Risk
PRIME
P- Purchase power (inflation)
R - Reinvestment rate risk (bonds)
I - Investment rate (inverse relation to bond pricing)
M - Market risk (Economic)
E - Exchange Rate
Kinds of Unsystematic Risk
ABCDEFG
A - Accounting
B - Business (industry risks)
C - Country (Instability)
D - Default
E - Executive (poor management)
F - Financial (too much leverage)
G - Government regulations
Modern Portfolio Theory
Acceptance of a given level of risk while maximizing return objectives.
Efficient frontier
Best possible returns given level of risk for ALL portfolios/combinations
Efficient portfolio
When indifference curve is tangent to efficient frontier.
Capital Market Line
MARCO level of CAPM
Rp= Rf+δm((Rm-Rf)/δm
Return/Risk relationship for all efficient PORTFOLIOS
Uses SD of PORTFOLIO as risk measure.
Capital Asset Pricing Model (CAPM)
Security Market Line
MICRO level of CAPM
R= Rf+B(Rm-Rf)
Measure both security and portfolios.
Beta is risk measure.
Security Market Line
- Risk and return graph for s security
- If a portfolio is above the line, it's undervalued and s/b purchased.
If below, it is overvalued and s/b sold.
Information Ratio
- Relative risk-adjusted performance measure.
- Measures excess return by a PM vs. benchmark
- Can be +/-
= IRa = (Rp-Rbench)/δa
Treynor Index
- Risk-adjusted performance measure.
- Relative (must be compared to another Treynor)
- Measures return per unit of risk (Beta)
- Assumes well diversified (unsystematic risk =0)
- Tp= (Rp-Rf)/B
Sharpe Index
- Risk-adjusted performance measure.
- Relative (must be compared to another Sharpe).
- Return gained per unit of stdev.
Jensen Model/Jensen Alpha
- Measures performance on an absolute risk-adjusted basis (not relative)
- + is good. - is bad, 0 is expected per CAPM
- = Actual return of Portf - Expected.
- Uses BETA as risk measure, so good for higher R^2.