Equity Investments QBank

What are the three main functions of the financial system?

1.) allow individuals to participate

2.) equilibrium interest rates

3.) determining money supply

What are pro forma financial statements?

projected financial statements based on historical numbers

How do you find the value of an equal weighted portfolio?

1.) find the individual returns

2.) average returns

3.) multiply by 1,000

What is included in the front matter section of a report?

issuer name

buy/sell recommendation

target price

legal disclosures

Difference between a limit and stop order

Limit => an order to buy or sell at a specific price or better

• Sets the price you want

Stop => order that becomes a market order only when a trigger price is reached

• Sets a price that activates the order

Which index must be adjusted for stock splits?

Price Weighted

Are the gains on sales of fixed assets excluded on the pro forma financial statements?

no

What is the difference between the Ex-Date and the Record Date?

Ex ==> when buyer is eligible for dividend

Record ==> when firms checks their books to see who is entitled

When does the ex-date generally occur relative to the record date?

1 or 2 days before

in reality they occur on the same day but for CFA Level I it is 1 or 2 days before

An investor bought a stock on margin. The margin requirement was 60%, the current price of the stock is $80, and the stock price was $50 one year ago. If margin interest is 5%, how much equity did the investor have in the investment at year-end?

Margin debt = 40% × $50 = $20; Interest = $20 × 0.05 = $1.

Equity % = [Value – (margin debt + interest)] / Value

$80 - $21 / $80 = 73.8%

What is an…

• Order-Driven Market

• Quote-Driven Market

Order-Driven ==> primarily OTC using trading rules

Quote-Driven ==> dealers post B&A spreads

What is the price hierarchy of order matching rules?

orders with the lowest bid and highest ask are prioritized first

Uniform Pricing Rule

• all orders trade at the same price which is the price that results from the highest volume of trading

Does market efficiency assume that individuals correctly estimate asset prices?

no, individuals are unbiased

What are noncurrent liabilities typically recorded at?

amortized cost

What market index is typically adjusted for free float?

value-weighted index