Investment grade bonds: BBB and above



Unit 7 Review

Given the risk and return characteristics of several portfolios, determine which portfolios could/could not line on the efficient frontier.

Remember that the optimal portfolio for an investor is identified as the point where an indifference curve is tangent to the efficient frontier.

Understand the concept of CAPM.

Use CAPM to determine the required rate of return. Then compare to expected return and make the investment decision.

Compare and contrast the CML with the SML.

Black Scholes option pricing model.

One question on EMH (efficient market hypothesis)

What is an anomaly?

Behavioral finance uses psychology-based theories to explain investor behavior and stock market anomalies.

What are the assumptions of Harry Markowitz’ modern portfolio theory?

APT - arbitrage pricing theory – holds that expected returns are based on a variety of unexpected or unanticipated factors.

Unit 8 Review

Investment grade bonds: BBB and above

Zero coupon bonds are not appropriate for an investor who requires periodic income

What does a normal yield curve imply? What about an inverted yield curve?

Given four bonds, identify the one that will be most (least) sensitive to interest rate changes.

When interest rates go down, value goes up. When interest rates go up, value goes down.

Be familiar with the relationship between duration and coupon rate, time to maturity, and YTM. Also know for convexity.

Portfolio duration involves balancing interest rate risk with reinvestment rate risk.

The duration of a portfolio of bonds is equal to the weighted average of the duration of the bonds that make up the portfolio.

An investor’s bond portfolio is immunized if its DURATION matches the time horizon of his/her liabilities.

Modified duration is used to estimate bond price changes.

Unit 9 Review

Use the constant growth dividend model to value a stock. Compare to the market price to determine whether or not it is a good purchase.

Use the free cash flow model (assuming constant growth) to value a stock. Compare to the market price to determine whether or not it is a good purchase.

There are many different valuation methods. When a firm is privately owned, probably the best method of evaluation is the discounted earnings approach. The PE approach is appropriate for publicly traded firms.

Calculate the value of a common stock with the following characteristics: $4 dividend paid this year. Growth rate is expected to be 8% for the next two years, then at 5% thereafter. You expect to sell the stock for $110 six years from now. Your required rate of return is 12 percent.

Calculate the value of a common stock with the following characteristics: $3 dividend paid this year. Growth rate is expected to be 7% for the next two years, then at 4% thereafter. Your required rate of return is 12 percent.

Unit 10 Review

Dollar cost averaging is purchasing the same dollar amount of a security every period.

DRIP plans are a great way to reinvest earnings (compounding). However, one should note that reinvested dividends are still taxed as though they have been received by the shareholder.

Bond ladders and bond barbells are strategies to manage interest rate risk. Bond barbells require more active management than does a bond ladder.

Know the definition of a substitution swap, an intermarket spread swap, a rate anticipation swap, and a pure yield pickup swap.

There are various bond management strategies. Indexing and buy-and-hold are considered passive strategies.

Stop, limit, market orders

Calculate the price at which an investor will receive a margin call. (loan/1-MM).

Assume the price falls to a point where a margin call occurs. Calculate the amount of the margin call.

When would a short straddle be appropriate? A long straddle?

What techniques are associated with fundamental analysis?

A qualifying lump sum distribution of employer securities permits special tax treatment (long-term capital gain instead of ordinary income) for the portion that represents NUA, if the distribution is from a qualified plan.

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