AFP Chapter 4- Investment Planning Flashcards
Technical and Fundamental Analysis
What are the three assumptions of Technical Analysis
Technical Analysis: studies the effects of supply and demand and how it impacts stock prices and trading volume
Fundamental Analysis: Studies the causes behind price movements
3 Assumptions for “Technical Analysis”
- All market influences are already accounted for
- Price move in trends which persist for long periods of time
- History repeats itself, investors are impacted by fear, panic, greed, optimism
A fixed income investment always pays on ______?
BC preferred shares have a par value of $100, they are currently trading at 105% of the par value, they have a stated 4% annual dividend, how much income will you receive annually
par value
par value x stated dividends
=$100 x 4%
=$4
What can you do if a client’s retirement goals are unrealistic?
- Increase the time to retirement
- Reduce the income in retirement
- Increase investment returns by accepting more risk
- Reduce expenses to save more
Risk- Adjusted Return
The fund that has the better sharpe ratio has the better risk adjusted return
What is weak, semi strong, strong efficient market theory
Weak: past market information is fully reflected in current prices, fundamental analysis has value
Semi-Strong: All public available information is fully reflected in the current price
–> technical and fundamental analysis have little value
Strong: All information is fully reflected in the current prices
–> technical and fundamental analysis have little value
Fee Based Account
- fees are tax deductible outside of a registered account
- fees tend to be lower than mutual funds
- fee on managed account can be negotiable
- fees are transparent
Cyclical Unemployment
Frictional Unemployment
Structural Unemployment
Frictional Unemployment: No matter how healthy the economy is there will always be unemployment
Cyclical Unemployment: Changes in the business cycle
Structural Unemployment: Not caused by changes in the business cycle. Long term because workers don’t have the skills, do no live close to jobs, or they don’t accept the wages
ex: changes in technology, factories moving
Perpetual Preferred Shares
What is the formula?
Shares that are issued without a maturity date or shares that have a callable date but the date has passed
an investment that will never mature
market value of a perpetual preferred share=
annual dividend/yield on investments with similar risk
Bond Terminology
Face Value, Coupon Rate, Par, Premium, Discount, Denomination, Call Feature, Convertible
Face Value: The amount on which the coupon payment is based
Coupon Rate: The interest rate
Par: The bond is trading at its price
Premium: The bonds is trading above its market price
Discount: The bond is trading below its market price
Denomination: Minimum purchase of the bond usually $1000
Convertible: Allows the conversion into common shares
Call Feature: Allows the issuer to redeem the bond prior to maturity, must redeem bond slightly above par
Escalating Rate GIC Laddered GIC Index-Linked GIC Instalment GIC Interest Rate Linked GIC
Escalating Rate GIC: the rate increases each year over the life of the GIC
Laddered GIC: investment is divided into several terms where the investment matures each year
Index-Linked GIC: Guarantee the initial investment as well as exposure to equity markets
Instalment GIC: initial lump sum is invested and further minimum contributions made weekly, biweekly, monthly
Interest-rate-linked GIC: Interest rate would vary as it is tied to the changes in interest rate, inflation
NAVPS
NAVPS= Fund assets- fund liabilities/ # of outstanding units
Value Managers
looks for stocks that are overlooked and undervalued
- bottom up approach
- management style works in stagnant or declining markets
- look for high dividend yield
Bond Pricing Principle
How are interest rates and bond yield related
- Bonds and interest rate have an inverse relationship
- Long term bonds are more volatile than short term bonds
- Low coupon bonds are more volatile than high coupon bonds
- Bond yields and bond prices move in opposite directions
interest rate and bond yields move in the same directions
Risk Premium
Required Rate of Return
ABC stock return is 8% the risk free rate is 2%
Risk premium= return on stock- risk free rate
=8%-2%= 6%
Required rate of return= nominal risk free rate + risk premium
How do you calculate intrinsic value?
(dividend discount model)
DEM Enterprise: today’s dividend ($1.50)
projected growth of dividends (4%)
yield of similar investments (7%)
todays market price $50.75
- $1.5 x 4%= 1.56
- 1.56/7%-4%
- $52
