FIN 440 Fall 2017 2nd ½ Course Crib Sheet

1. Top-down vs. bottom-up investment approach

2. Currency affects returns in foreign assets traded in local currencies
3. Prefer dollar to weaken vs. foreign currency if you own an asset priced in that currency
4. Gross domestic product (GDP) – 3 largest economies are U.S. ($19T in 2016), China ($11T), &
Japan ($5T) – ultimately, China will be #1
5. Trough to peak to trough business cycle
6. Who defines recessions in the U.S.? National Bureau of Economic Research
7. Leading (e.g., stock market), coincident, & lagging economic indicators
8. Monetary policy – the Fed buys bonds to increase the U.S. money supply to juice the economy –
the Fed sells bonds to decrease the money supply to slow the economy to lessen inflation
9. The Fed has 2 mandates: lower unemployment & rein in inflation
10. Yield curve – upward sloping indicates a healthy economy – an inverted yield curve is the best
predictor of a recession
11. Banks & other financial institutions make money on “the spread”
12. Market “correction” = 10% drop from the high
13. “Bear” market = 20% drop from the high
14. “Bull” market is up & away
15. Since the market (i.e., S&P 500) trough in March 2009, U.S. stocks have risen 3.9 times, or 289%
16. Bond prices move inversely with interest rates
17. Interest have been historically & artificially low since the Great Recession (2007-2009)
18. FTM or TTM Price/earnings ratio – “earnings” = EPS, or earnings per share – “FTM” = forward 12
months, or estimated, EPS – “TTM” = trailing 12 months, or reported, EPS
19. Can measure a stock’s P/E, or any other valuation measure, vs. its own trading range, its peers,
or the market (e.g., the S&P 500, which trades now at 20.0 times forecasted 2018 EPS)
20. Monetary policy vs. fiscal policy, which is tax & spend & controlled by Congress
21. Hierarchy: Market to sector to industry to stock – e.g., S&P 500 to Technology to Software to
Microsoft (MSFT)
22. Sector rotation as a trading strategy – we’ve seen it recently with the selling of Technology
stocks that had led 2017 & using those proceeds to buy sectors that may benefit from U.S. tax
reform
23. Industry life cycle: pioneering; expansion; stabilization; declining
24. Porter’s 5 competitive factors
25. Cyclical vs. defensive industries
26. A company’s “intrinsic value”
27. Financial Accounting Standards Board (FASB)
28. Balance sheet
29. Income statement
30. Cash flow statement – most important
31. Free cash flow = operating cash flow less capital expenditures (aka plant, property, &
equipment)
32. Reported vs. “pro forma” earnings
33. 10-K
34. 10-Q
35. Proxy statement
36. Securities & Exchange Commission (SEC)
37. Return on assets (ROA)
38. Return on equity (ROE)
39. Dividend payout ratio – the percentage of earnings paid to shareholders in dividends
40. Earnings “surprise” – how do you play this Wall Street earnings game?
41. PEG ratio = (P/E) / G – “G” = forecasted EPS growth rate – find it in “Analysts” on Yahoo! Finance
42. Fundamental vs. technical analysis
43. 50-day moving average
44. 200-day moving average
45. RSI, or relative strength index
46. Technical moves are only confirmed by higher than average trading volume that day
47. Support & resistance
48. Market breadth
49. Short interest & short interest ratio
50. Be Buffett! Contrarian investor
51. EMH = Efficient Market Hypothesis – strong, semi-strong, & weak market efficiency – I’m
probably in the middle
52. Basis point
53. Calculate percentage change
54. Risk-free rate = rate on U.S. treasury securities (bills, notes, or bonds)
55. Risk premium
56. Maturity premium
57. Nominal vs. real rate of interest
58. Yield spreads
59. S&P’s bond rating system – the dividing line between investment grade & speculative, high
yield, or junk bonds is between BBB & BB
60. Bond priced at a premium
61. Bond priced at a discount
62. Callable bond
63. Yield to maturity
64. Reinvestment risk
65. Zero coupon bond
66. Bonds can be actively & passively managed too
67. Active bond strategies
68. Bond’s duration
69. Derivative security
70. Call
71. Put
72. Options terms
73. In, at, & out of the money options
74. Factors affecting option prices
75. Spot vs. forward markets
76. Futures contracts for hedging
 77. Commodities Futures Trading Commission (CFTC)
78. Futures ROI = (selling price – purchase price) / margin deposit
79. Currency futures
80. Interest rate futures
81. Life cycle approach to investing – you should be aggressive now!
82. Investment Policy Statement (IPS)
83. Asset allocation
84. Taxes
85. Portfolio rebalancing
86. Return after expenses
87. How much risk are you taking?
88. Portfolio performance vs. that of its benchmark
89. Money vs. time-weighted returns
90. Portfolio risk measures – r-squared, Sharpe ratio, alpha, etc.
91. Style analysis
92. Portfolio (performance) attribution
93. Who were the key characters in the Great Recession / Inside Job?
94. Securitization & securitization chain
95. Mortgage-backed security
96. Collateralized debt obligation (CDO)
97. Credit default swap (CDS)
98. AIG
99. Financial deregulation
100. Credit rating agencies
101. 33:1 leverage at Bear Stearns
102. Academics in Wall Street’s pocket
103. Glass-Steagall repealed
104. Financial industry lobbying
105. Predatory lending
106. Subprime mortgage loan
107. Regulators like the Fed & the U.S. Treasury did nothing or didn’t do enough