Regulation T - Margin Requirement

50%

Margin Call Formula and Related Definitions

Loan Amount

1 - Maintenance Margin

Maintenance Margin = minimum equity required before margin call

Margin call = addition of equity - cash or securities

Ex-Dividend Date

2 days prior to Date of Record

(To receive dividend, investor must own stock PRIOR to ex-dividend date, i.e. 3 days prior to date of record.)

T-Bills - Maturities and Denomination

4 weeks  (one month)

13 weeks  (one quarter)

26 weeks (half-year)

52 weeks (one year)

$1,000 denomination for all maturities

Commercial Paper - Maturities and Denomination

Maturities - 270 days or less

$100,000 denomination (sold at a discount)

Bankers Acceptances - Maturities and Denomination

Maturities - 9 months or less

Any denomination

Eurodollars - Definition

Deposits in foreign banks denominated in US Dollars

Investment Policy Statement Elements

RR TTLLU

"RRaTTLLe yoU"

Risk/Return/Taxes/Timeline/Liquidity/Legal/Unique issues

Standard Deviation Ranges

1 SD = 68% of outcomes (32% above/below mean)

2 SD = 95% of outcomes (47.5% above/below mean)

3 SD = 99% of outcomes (49.5% above/below mean)

Coefficient of Variation - Formula & Definition

Stnd Deviation

Average Return

Defintion:  Likelihood of achieving actual return close to the average.  Higher CV = Higher Risk

Systematic Risks -

Definition and Types

Definition: Undiversifiable Risk / Market Risk

Types:  P R I M E

Purchasing Power (Inflation)

Reinvestment

Interest Rate

Market

Exchange Rate

Unsystematic Risks -

Definition and Types

Definition: Diversifiable Risks / Company-specific Risks

Types:  A B C D E F G

Accounting

Business (Industry)

Country

Default

Executive (Management)

Financial

Government (Regulatory)

Most important factors in portfolio design

Risk / Return / Covariance of Asset Classes

Measure of Risk for the

Capital Market Line (CML)

Standard Deviation

Note:  CML is not used to evaluate

single security performance.

Beta -

Definitions & Concepts

1)  Measure of volatility for DIVERSIFED portfolios

2)  Beta is a measure of systemic (market) risk

3)  Beta of the market (or market index) is always 1.

4)  Higher beta = higher risk

5)  Beta formula = security return / market return

6)  Beta of 1 should move in 100% correlation with the market (in any direction - up, down, sideways)

7)  Beta of .5 should move half as much as the market (in any direction - up, down, sideways)

Sharpe Ratio -

Formula, Defintion and Key Concepts

Formula:  return of portfolio - risk free rate

standard deviation of portfolio

Measure of return achieved for each unit of risk.

Uses Standard Deviation as measure of risk.  Most appropriate for poorly diversified portfolio.  (r² < .70)

Treynor Ratio

Formula, Defintion & Key Concepts

Formula:  Portfolio return - Risk-free rate

beta of the portfolio

Definition:  Measure of return achieved for each unit of risk

Most appropriate for well-diversified portfolios

Jensen Index (Jensen's Alpha)

Defnition and Key Concepts

Definition:  Measure of risk-adjusted absolute performance.  No comparison needed to other benchmarks.  Higher alpha = better performance.

Positive Jensen = More return than expected for each unit of risk

Negative Jensen = Less return than expected for each unit of risk

Zero Jensen = Return AT expected level for each unit of risk

Holding Period Return Formula

Selling Price - Purchase Price +/- Cash flows

Purchase Price or Equity Invested

Mutual Funds Returns Reporting Method

Time-Weighted Basis

 Calculation of IRR.  Assumes buy and hold.

(Does NOT consider the INVESTOR'S cash flow;

only the SECURITY'S cash flow, including initial purchase)

Arbitrage Pricing Theory (APT)

Mulit-factor model to explain returns

Factors include:  Inflation, Risk Premium, Expected Returns and Sensitivity to the Factors.

NOTE:  Stnd Deviation and Bet are NOT inputs to APT

Dividend Payout Ratio Formula

Dividend per Share

Earnings per Share

Return on Equity Formula

Earnings per Share

Shareholders Equity per Share

Dividend Yield Formula

Dividend per Share

Stock Price per Share

Technical Analysis -

Definition and Tools

Technical Analysis = Trend Analysis

Uses Charting, Dow Theory, Market Breadth, Odd Lot Trading Stats, etc.

Does NOT use financial data analysis.  Supply and demand are stock price drivers.

Financial Analysis -

Definition and Tools

Fundamental Analysis = Financial Analysis

Uses ratio analysis of financial data such as: liqudity, activiety, profitability

Stock price is driven by financial performance of the company.

Efficient Market Hypothesis -

Key Concepts

Above average market returns are unachievable.

Supports passive investment strategy, index investing.

Supports "random walk" theory - Stock prices are unpredictable, but not arbitrary.

Efficient Market Hypothesis -

Weak Form

What leads to above average returns:

Weak Form -

Rejects: Historical data and technical analysis.

Supports: Financial Analysis + Inside Info

Efficient Market Hypothesis -

Semi-Strong

What leads to above average returns:

Semi-Strong Form -

Rejects: Technical Analysis and Fundamental Analysis

Supports: Inside Information Only

Efficient Market Hypothesis -

Strong Form

What leads to above average returns:

Strong Form -

Rejects: All Informatiion

Supports: All Information is Reflected in Stock Price

Municipal Bonds -

Types & Descriptions

General Obligation - Backed by taxing authority of issuer

Revenue Bonds - Backed by revenue of specific project (i.e., tolls from roads and bridges)

Private Activity Bonds - Used to finance stadium contstruction

Tax Exempt Rate / Tax Equivalent Rate

Tax EXempt = Gross Down = Corp. Rate X (1- Marginal Tax Rate)

Tax Equiv. Rate = Gross Up = Tax Exempt Rate / (1 -Marginal Tax Rate)

Coupon Rate Formula

Coupon Rate =

Coupon Payment

Par Value of Bond

Par Value is usually $1,000

Coupon Payment amount is always constant

Bonds -

Current Yield Formula

Coupon Payment (Annual)

Current Bond Price

Bond Yield Grid

Coupon  Current  Maturity  Call

Premium       Prem                                Disc

Par               Par       Par          Par        Par +

Discount        Disc                                Prem

Bond Duration -

Indicator of:

1)  Price sensitivity to interest rate changes.  (Longer/higher duration indicates greater price swings relative to interest rate changes.)

2)  The moment in time when investor is immunized from interest rate risk and reinvestment rate risk.

3)  The weighted average time until investor receives all coupon payments and principal.

4)  A bond portfolio that is effectively immunized when duration equals investor's time horizon for the portfolio.

Zero Coupon Bond Duration:

 Is always equal to its maturity

So: As coupon rate increases, duration decreases.

As Yield to Maturity increases, duration decreases.

As Yield to Maturity decreases, duration increases.

Coupon Rate and YTM (both INterest rates), have INverse relationship.

Term of bond and duration have direct relationship.

1) Hedging

2) Speculation

3) Income

Call = Stock Price - Strike Price

 Put = Strike Price - Stock Price

Intrinsic Value cannot be < 0

Options Grid for In/Out of the Money

Remember to Keep the Grid in Alphabetic Order

               IN                     At                     OUT

Call   Stock > Strike     Stock = Strike     Stock < Strike

Put    Stock < Strike     Stock = Strike     Stock > Strike

Black/Scholes Model Variables:

1) Current price of underlying asset

2)  Time until option expiration

3)  Risk-free rate of return

4)  Volatility of the unerlying asset

Put/Call Parity Variables:

Attempts to value a PUT based on a Call option.

Binomial Pricing Model Variables:

Pricing is based on underlying asset's pricing moving in one of two directions only - Up or Down.

LEAPS - Expiration Period Duration

2 years

(Traditional Options have expirations of

up to 9 months)

Market risk premium increase causes stock price to:

Decrease

(Higher return requirement for higher risk acceptance leads to lower stock price.)