Important Definitions Series 66

Private fund Fed Exemption

- AUM less than $150 million

List offers or sales to any of the following would be considered exempt from the registration and advertising filing requirements of the Uniform Securities Act (Exempt transactions)

- Banks - Saving institutions - Trust company - investment company as defined in the Investment Company Act of 1940 - pension or profit-sharing trust - other financial institution or institutional buyer, or to a broker-dealer, whether the purchaser is acting for itself or in some fiduciary capacity

What are some other examples of an exempt transaction under the USA?

- Isolated non-issuer transaction - Private placements (no more than 10 in 12 month) - Preorganized certificated (following regs) - Sales made by a bona fide pledgee ("Good faith")

Intrastate Exemption (For those selling them)

- all of the clients must be residents of the state and none of the clients can be private funds - no advice may be given on securities traded on a national stock exchange

Dodd-Frank Act (foreign private advisors)

- no place of business in the United States - Any investment adviser that has, in total, fewer than 15 clients and investors in the United States in private funds - AUM attributable to clients in the United States and investors in the United States in private funds advised by the adviser of less than $25 million - investment adviser that DOES NOT hold itself out to the public in the United States as an investment adviser or acts as an investment adviser to an investment company registered under the Investment Company Act of 1940

If any other information on the form changes (nonmaterial information), the SEC requires the form to be amended within how many days?

90 days of the end of the adviser's fiscal

Bottom-Up Investing

An approach to investing that focuses on the individual characteristics of securities rather than on macroeconomic or overall market forecasts.

Top-Down Investing

An investment strategy that focuses first on analyzing the "big picture economy," this approach prioritizes macro-level factors when evaluating investment options.

Discounted Cash Flow (DCF)

Compares the value of the future cash flows of the project to today's dollars.

Dollar Cost Averaging (DCA)

DCA - investing the same amount at regular intervals regardless of the share price - Investor makes money if the price per share is higher than the cost per share Test Alert: DCA has nothing to do with selling shares and does not guarantee a profit

In the field of securities analysis, there are many tools available. Which of the following would most likely be used by an analyst to approximate a reasonable price for a common stock?

Dividend Discount Model (DDM)

CAPM (Capital Asset Pricing Model)

Kcs = Rrf + B(Rm-Rrf) where Rrf = risk free rate, B = beta, Rm = return on the market, Rm-Rrf = risk premium It is a finance model that establishes a linear relationship between the required return on an investment and risk. Typically uses Treasuries to compare the risk free of the market

Sharpe Ratio Formula

R(p) = portfolio return R(f) = risk-free return S(p) = standard deviation of portfolio returns

Sharpe Ratio

Reward-to-volatility ratio; ratio of portfolio excess return to standard deviation.

What is the holding period return?

Same as TOTAL Return: Capital Appreciation PLUS dividend income received over the period (Or minus depreciation)

Book Value Per Share

Total stockholders' equity / Number of common shares outstanding

Dividend Discount Model (DDM)

a formula for the intrinsic value of a firm equal to the present value of all expected future dividends The simplest model for valuing equity is the dividend discount model—the value of a stock is the present value of expected dividends on it

CAPM (Capital Asset Pricing Model)

a model based on the proposition that any stock's required rate of return is equal to the risk-free rate of return plus a risk premium that reflects only the risk remaining after diversification does this by using the expected return on both the market and a risk-free asset, and the asset's correlation or sensitivity to the market (beta)

Standard Deviation

measures the volatility of a security, NOT its risk-adjusted returns. Standard deviation has input in the Sharpe ratio but it is the ratio itself that measures risk-adjusted returns

Internal Rate of Return

the discount rate at which the net present value of an investment project is zero; the rate of return of a project over its useful life - makes the present value of the sum of annual nominal cash inflows equal to the initial net cash outlay for the investment - IRR is ideal for analyzing capital budgeting projects to understand and compare potential rates of annual return over time