Security Analysis and Portfolio Management Midterm – Flashcards
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T-Bills
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-Issuer: Fed Gov -Denom: $100 (most common $10,000) -Maturity: 4,13,26, or 52 weeks -High liquidity -no default risk -Interest: discount -Tax: Fed owed; exempt from state and local
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CDs
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Issuer: Depository institutions Denomination: Any, $100,000 or more marketable Maturity: Varies, typically 14-day minimum Liquidity: CDs of 3 months or less are liquid if marketable Default: First $100,000 ($250,000) insured Interest type: Add on Taxation: Interest income fully taxable
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Commercial Paper
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Issuer: Large creditworthy corporations, financial institutions Denomination: Minimum $100,000 Maturity: Maximum 270 days, usually 1-2 months Liquidity: CP of 3 months or less is liquid if marketable Default risk: Unsecured, rated, mostly high quality Interest type: Discount Taxation: Interest income fully taxable New Innovation: Asset-backed commercial paper
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Banker's Acceptance
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Originate when a purchaser authorizes a bank to pay a seller for goods at later date (time draft) When purchaser's bank "accepts" draft, it becomes contingent liability of the bank and a marketable security
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Eurodollars
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Dollar-denominated (time) deposits held outside U.S. Pay higher interest rate than U.S. deposits
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Fed Funds
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Depository institutions must maintain deposits with Federal Reserve Bank Federal funds—trading in reserves held on deposit at Federal Reserve Key interest rate for economy
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LIBOR
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Rate at which large banks in London (and elsewhere) lend to each other Base rate for many loans and derivatives
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Broker's Calls
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Call money rate applies for investors buying stock on margin Loan may be "called in" by broker
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Repos/Revos
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Short-term sales of securities with an agreement to repurchase the securities at higher price RP is a collateralized loan; many RPs are overnight, though "term" RPs may have a 1-month maturity Reverse RP is lending money and obtaining security title as collateral "Haircuts" may be required, depending on collateral quality
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Market Value
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o Return equals weighted average of returns of each component security, with weights proportional to outstanding market value o S&P 500 and NASDAQ
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Equally Weighted Index
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o Computed from simple average of returns o Value Line Index
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Long Call
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buyer has right but not the obligation to buy the financial asset up to or at a specific date for a predetermined price (the strike or exercise price). In exchange for the option, the buyer pays a premium to the options writer/seller.
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Long Put
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buyer has the right but not the obligation to sell the financial asset up to or at a specific date for the exercise price. In exchange, the buyer of the put pays a premium to the seller for the put option.
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Put Option In-the-money iff strike price
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>stock price
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Call Option In-the-money iff strike
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<stock price
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Short, write/sell
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The put writer has the obligation to purchase the underlying financial asset if the buyer of the put decides to exercise his option. A call seller/writer has the obligation to sell the financial asset at the exercise price (or strike) if the buyer of the call decides to exercise his option.
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Futures
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Future commitment to buy/sell at preset price Long (Purchaser) gain if asset value increases
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Market Order
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executes immediately at best price
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Price contingent order
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buy/sell at specified price or better
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Limit buy/sell order
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specifies price at which to buy/sell; does not guarantee exceution but ensure investor does not pay more than predetermined price
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Stop order
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not to be executed until price point is hit; prices not guaranteed
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Margin
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securities purchased with money borrowed in part from broker
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Initial Margin Requirement
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min amount of money investor must when purchasing
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equity =
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position value - borrowing + addn cash
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Maintenance Margin Requirement
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min amount of equity allowed before addn funds must be put into account
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margin call
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notification from broker that you must add addn funds or have position liquidated
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short sell
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sale of shares not owned by investor but borrowed through broker and later purchased to replace loan borrow stock from broker must post margin broker sells stock and deposits proceeds into account
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covering or closing out position
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buy stock and broker returns title to the part stock was originally borrowed from
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time value of long call =
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option premium - intrinsic value
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intrinsic value of long call =
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current price - strike
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Unit trusts
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money is pooled and invested in a portfolio fixed for the life of the fund
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open end mutual funds
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- issues or redeems shares at net value - (s/o) no charge unless new stock offered -(pricing) fund share price = NAV
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Closed end mutual funds
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-shares cant be redeemed are traded at prices dif than NAV -(S/O) changes when new shares are sold or old shares are redeemed - (pricing) fund share price may trade at premium or discount to NAV
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REITS
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Similar to closed end funds; invests in real estate/ RE loans
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EFTs return at each level of p
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-offshoots of mutual funds that allow investors to trade index portfolios
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EFTs Advantages
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-trade continuously throughout the day -can be sold or purchased on margin - potentially lower tax rates- lower costs (no marketing or lower fund expenses)
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EFTs Disadvatages
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- small deviations from NAV possible - brokerage commission to buy EFT
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Soft Dollars
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value of research servcies brokerage house provides "free of charge" in exchange for business
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Holding Period Return (HPR)
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Rate of return over given investment period
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HPR=
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[PS - OB + CF]/PB
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Geometric Average
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sing per period return; gives same cumulative performance as sequence of actual returns - compound period by period returns; find per period rate that compounds to same final value
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Arithmetic Average
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sums of returns in each period divided by number of periods
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Efficient FrontIer
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graph representing set of portfolios that max expected return at each level of portfolio risk -max risk premium fir any level of standard deviation - min standard deviation`` of any level of risk premium - max Sharpe ratio for any standard deviation or risk premum
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Optimal Portfolio
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determine level of risk investor is willing to take; personal choice of risk and risk free assets
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Non systematic risk
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risk that can be eliminated by diversicfication
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Sharpe Ratio
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the slope of the CAL=Risk premium/standard deviation
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Separation property
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*implies portfolio choice separated into 2 tasks *determination of optimal risky portfolio *personal choice of best mix of risky portfolio and risk free sset
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Single Index Model
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relates stock returns to returns on broad market index/firm specific fators
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excess return
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rate of return in excess of risk free rate
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beta
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sensitivity of security's returns to market factor
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firm specific ore residual risk
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component of return variance independent of market factor
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alpha
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stock's expected return beyond that induced by market index
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CAPM
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Security's required rate of return relates to systematic risk measured by beta
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CAPM Assumptions
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-markets are competitive, equally profitable - investors are alike except for initial wealth, risk aversion
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CAPM Implications
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that security risk premiums (expected excess returns) will be proportional to beta
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Security Market Line (SML)
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- Represents expected return-beta relationship of CAPM -graphs individual asset risk premiums as function of asset risk
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Multifactor Models
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- models of security returns that respond to several systematic factors
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fame french three factor model
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estimation results: higher adjusted r squared, lower residual standard deviation, smaller value of alpha
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Arbitrage Pricing Theory (APT)
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risk return relationships from no arbitrage considerations in large capital markets
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Efficient Market Hypotheses
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Prices of securities fully reflect available info
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weak form of EMH
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Stock prices already reflect all info contained in history of trading
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semi strong EMH
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Stock prices already reflect all public info
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strong form EMH
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Stock prices already reflect all relevant info, including inside info
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Minimum variance is
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the first point on efficient frontier; higer return for lower risk; no portfolio exist with lower SD
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Separation Property
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implies portfolio choice 1.) determination of optimal risky portfolio 2.) personal choice of best mix of risky portfolio and risk free assets
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Implications of EMH - Tech Analysis Fund Analysis
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- Tech - past prices already reflected in price; cannot expect abnormal returns - fund - if rely on public info analysis not more accurate than rivals
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Callable Bonds
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may be repurchased by issuer at specified call price during call period; should offer higher ytm to ccompensate not receive full capital gains
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Convertiable bonds
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may be exchanged at holder discretion for a specified number of shares; holders pay for option by acception lower coupon rate
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Put Bond
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Holder may choose either to exchange for par value at some date or extend for a given number of years
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Expectations Hypothesis
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-theory that ytms are determined solely by expectations of future short term interest rates
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Liquidity Preference Theory
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-investors demand a risk premium on long term bonds
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Forward Rate
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-the break-even interest rate that would equate the total return on a roll over strategy to that of a longer term zero-coupon bonds
