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42 Cards in this Set
- Front
- Back
Investment proces |
1. Define the investment objectives and constraints (max returns, min risk, max risk - adjusted returms) 2. Evaluation and selection of securities 3. Monitor performance relative to initial objectives and constraints |
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Classes of securitiea |
Fixed income - money market Fixed Income - capital market Equity Derivatives |
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Fixed income - money market |
Up to one year to maturity, highly liquid, low default risk |
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Types of securities - fixed income money market |
Treasury bulls Certificates of deposit Commercial paper Euro dollars Repurchase agreements |
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Treasury bills |
S - T government borrowing Considered largely risk free |
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Certificates of deposit |
Issued by depository institutions (commercial savings bank and credit unions) |
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Commercial paper |
Issued by corporations |
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Euro dollars |
Dollar denominated deposits outside US |
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Repurchase agreements |
Typically overnight borrowing/lending between banks |
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Fixed income - capital market |
Over 1 year to maturity, various degrees of default risk |
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Types of securities - fixed income capital market |
Treasury notes and bonds Corporate bonds Municipal bonds Federal agency debt Securities assets |
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Equity securities |
Common stock - represent shares of ownership in a firm Residual claims and limited liability Preferred stock No voting rights, fixed dividends that cumulative if not paid, special tax treatment for purchasing corporations,but not for issuing firm |
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Derivative securities |
Forward and futures contracts Options contracts |
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Forward and futures Contracts |
Parties agree to exchange commodity for cash at a specified date for an agreed upon price. Trader taking longer going position commits to purchasing the commodity and trader taking short position commits to delivering the commodity Futures contracts are standardized forward contracts that can be traded on a secondary market |
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Options contract |
A call option gives holder the right to buy an asset for a prespecified price on or before the expiration date Up front cost |
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Holding Period Return Equation |
rt = Dt + (Pt - Pt-1) / Pt-1 |
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Continuously Compounded Return |
Rct = ln(1 + rt) = ln(Pt/Pt-1) |
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After Tax Returns |
rbefore-tax * (1-Tax Rate) *more wealthy will want municipal bonds, lower wealth go after government bonds. |
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Inflation |
general increase in price level over time |
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Real Returns |
Depend on what money can buy over time |
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Nominal Return |
1 + rreal = (1 + rnominal) / (1 + i) rreal = rnominal - i |
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Annual Percentage Rates |
APR = per period rate* Periods per year *does not account for compounding |
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Effective Annual Rates |
1 + EAR = (1 + (APR/n)^n |
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Continuous Compounding EAR and APR |
1 + EAR = exp(APR) APR = ln(1+EAR) |
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Arithmetic Average |
with large samples, this measure provides a useful forecast of future returns. is not always a good measure of actual past performance, especially if volatility is high. rd = (r1 + r2 + r3 + .... rn) / N |
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Geometric Average |
measure equals the single period return that when compounded results in the same cumulative performance as the actual sequence of returns. rg = [(1+r1) +.....(1+rn)]^(1/n) -1 |
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Stock Market Indices |
Track the overall stock/bond market or a segment of the market. price weighted indexes value weighted indexes Equally weighted (value Line Indexes) |
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Price Weighted Indexes |
Places more weight on the highest priced stocks replicates the buy and hold return on a portfolio that invests in an equal member of shares of each stock. |
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Value Weighted Index |
places more weight on the largest market capitalization stocks replicates the buy and hold return on a portfolio that invests in each stock according to its market cap. |
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Equally Weighted (Value Line Index) |
Places equal weight on all stocks Cannot be replicated with a buy and hold investment strategy |
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Investment Companies |
Collect funds of individuals and invest them in a wide range of securities provide record keeping and admin services, diversification and divisibility benefits, and professional managment and reduced transaction costs. Net asset Value |
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Net Asset Value |
underlying value of the fund (MV of assets - liabilities) / Shares Outstanding |
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Most Common Types of Investment Companies |
Closed end funds open end funds exchange traded funds hedge funds private equity/venture captial |
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Closed End Funds |
fixed number of shares traded on a secondary market prices can differ from NAV (generally trade at discount from NAV which has been a puzzle) Time when you can take money out; can be actively managed |
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Open End Funds (mutual funds) |
sell once a day, can get out any day you want. shares are issued and redeemed directly from the investment company at NAV (but may include sales commissions) Do not trade on exchanges - bought directly from company. |
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Exchange Traded Funds (ETFs) |
traded like stocks, passively managed portfolios usually to match an index. |
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Hedge Funds |
Sophisticated investors (wealth and income) (technically not investment companies) |
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Private Equity/ Venture Capital |
invest in firms that are not publicly traded smaller startups, deep pocket individuals that finance ideas for stake in companies. |
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Momentum |
phenomenon where winners keep winning and losers keep losing. some momentum crashes -> there still is risk |
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Mutual Fund Fees |
Front End Load Back End Load Operating expenses 12 b - 1 Charges (distribution costs paid by the fund, alternative to load) indirect tax costs |
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Securitization |
security that's performance relies on how well those that owes pays back. Repackage asset in a way that investors can buy mortgages credit card debt if they default, owners of security lose debt, not company. |
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Hedge Funds |
can keep customer funds longer than mutual funds so they can invest in more illiquid assets and earn higher returns charge higher management fees than MFs |