CFA Session 10 Flashcards

Terms Definitions
TRUE/FALSE
The London Interbank Offered Rate (LIBOR) is an international reference rate for Eurodollar deposits and is quoted for 30-day, 60-day, 90-day, 180-day, or 360-day (1-year) terms.
True
standard deviation of two-asset portfolios
z-value
z= observation - population mean
standard deviation
 
*z-score is the number of standard deviations observation is from the mean
What index scheme would produce returns closest to those of a portfolio of index stock with an equal dollar investment in each stock in the index?
Unweighted
sampling distribution
distribution of sample statistics drawn from many same size samples from a population
 
EX: distribution sample means
P(AB)
joint probability of A & B
Maintenance Margin
investors required equity position in the account. Applicable to both margin and short sale positions.
 
Margin call- when investor has to either liquidate position or bring account back to minimum maintenance margin requirements
 
 
Trigger price(price at which at maintenance margin) =
 
Initial purchase price * ((1-initial margin)/(1-maintenance margin))
sharpe ratio
measures units of excess return recieved per unit of risk---(Rp-Rf)/st. dev. larger numbers are better--more excess return per unit of risk
multivariate distribution
relationship between two or more normally distributed variables. for a portfolio of 4 assets, a multivariate distribution can be described by 4 means, 4 standard deviations and .5n(n-1) = 6 correlations
Utilitarianism
The idea that proposes that the greatest good occurs to the greatest number of people when wealth is transferred from the rich to the poor to the point where every has the same wealth.
Utilitarnists propose that:
1) everyone wants and needs the same things and has the same capacity in life to do so
2) marginal benefit of a dollar is greater for the poor than the rich.
 
Hard to balance between FAIRNESS vs. EFFICIENCY
 
covariance
*based on historical data instead of E(R)
 
∑{[Rt,1 -R1][Rt,2 -R2]}
n-1
 
n= number of returns
Rt,1= return on asset 1 in period t
Rt,2= return on asset 2 in period t
R1= mean return on asset 1
R2= mean return on asset 2
 
 
Price-yield profile
curved line showing higher prices = lower yields
time-series data
observations taken over a period of time at specific and equally spaced time intervals
permutation formula
insert image *TI: to calculate number of differently ordered groups of 3 that can be selected from list of 8, use 8 [2nd] [nPr] 3 [=]
Market Coordination
Collaboration on a firm's part to involves many companies in different industries to assist in production or development.
 
Ex) A bull fight. A firm can do it all by itself by getting the bulls, selling tickets, and doing refreshments. A market coordination would OUTSOURCE those different tasks in hopes to focus on what its best at.
general journal
list of all journal entries by date
legal and regulatory factors
more a concern for institutional clients, but still applies to individuals. (ex. penalty for early withdrawal on retirement fund)
LIBOR-based FRA
FRAs can be based on interest rates for 30, 60, or 90-day periods
power of a test
probability of correctly rejecting the null hypothesis when it's false
 
1-P(type II error)
Majority Rule
Majority Rule is a method to allocate resources. Governmental policies such as taxation and transfer payments are examples of this type of resource allocation.
How are Held-to-trading securities reported on the balance sheet?
Held-to-trading securities reported on the balance sheet at fair value.  Unrealized gains and losses (changes in market value before the securities are sold) are recognized in the income statement
What are Exchange traded Derivatives and Over the counter markets
Exchange-traded derivative= traded on an exchange and are standardized and backed by a clearing houseOver the counter market= dealer market with no central location, largely unregulated markets
measures of central tendency
identify center, or average, of data sets--mean, median, mode, etc.
expected value
sum of probabilities (that sum to 1) * respective outcomes *gives us a "best guess" of an outcome of a random variable *a type of weighted mean
binomial random variable
number of successes in a given number of trials where outcome can be success or failure
Tax Revenue
Tax revenue si the amount of the tax times the new equiblibrium quantity.
 
%tax*Qtax = tax revenue
 
Economic agents (both sellers and buyers) in the market share the burden of the tax revenue.
 
Are borrowing costs (interest) expensed under U.S. GAAP or IFRS?
Borrowing costs (interest) is expensed in the year incurred by both IFRS and U.S. GAAP
Global stock indexes are calculated for what?
Global stock indexes are calculated for companies in many different countries
Example:
If the quoted discount yield on a 128-day, $1 million
T-bill DECREASES from 3.15% to 3.07%, how much has the holder of the T-bill gained or lost?
The actual discount has decreased by:
(.0315-.0307)*128/360=.0284% of $1 million or $284.
 
A decrease in the discount is an increase in value
 
Gained $284
 
up transition probability &
down transition probability
for stock price movement
If the probability of stock price rising is .3 any given period, then the probability of a down transition is (1-.3).
 
Similarly, and up factor of 1.01 * current price will be offset by a down factor of current price/1.01
How are Held-to-maturity securities reported on the balance sheet?
HTM securities are reported on the balance sheet at amortized cost.  Amortized cost is = to face (par) value less any unamortized discount or plus any unamortized premium. 
***Subsequent changes in fair value are ignored unless the security is sold or otherwise disposed of****
Forward contract terminate the position
A party to a forward contract can terminate the position prior to expiration by entering into an opposite forward contract with an expiration date equal to the time remaining on the original contract
Four problems that prevent arbitrageurs from correcting pricing anomalies
1. there is no guarantee of when or even if apparent mispricings will be corrected
 
2. it may be difficult to find two securities with exactly the same risk so that a mispricing can be exploited by taking a long position in an underpriced security and an offsetting position in a correctly priced security with the same risk
 
3. arbitrageurs do not have unlimited funds--only more significant mispricings may be exploited while others are allowed to persist
 
4. arbitrageurs must depend on their sources of capital and obligations under those agreements
Short position in an FRA
Short position in an FRA is the party that the right to lend at rates HIGHER THAN MARKET RATES. 
If the reference rate at the expiration date is
BELOW the contract rate,
the SHORT will receive a cash payment from the long. 
What is a reason why creating bond market indexes is more difficult than creating stock market indexes?
The universe of bonds is constantly changing because of numerous new issues, bond maturities, calls, and bond sinking funds
Can the value of property and equipment and identifiable intangible assets be revalued upward under IFRS?
Yes.  But the value of property and equipment and identifiable intangible assets CAN NOT be revalued upward unde U.S. GAAP
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