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Series 7 > Chapter 19- Securities Analysis > Flashcards

Chapter 19- Securities Analysis Flashcards

1
Q

Customers who want to minimize risk in securities can

A

have the largest portion of securities in their portfolio will act differently under different economic conditions

the largest percentage of the portfolio consist of leading common stocks

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2
Q

Suitable portfolio of a pension fund looking for income

A

would include government securities, corporate bonds and covered option writing

Not municipal bonds since they are already tax free

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3
Q

Capital Asset Pricing Model (CAPM)

A

a model of the relationship between the expected risk and expected return

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4
Q

Asset Allocation

A

The diversification of investments in a customers account determining the percentage of assets that should be in stocks, bonds, real estate, or other asset classes

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5
Q

Dynamic Asset Allocation

A

involves frequent changes to the asset allocation based on economic conditions

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6
Q

Tactical Asset Allocation

A

Redistributes the percentages of assets based on the portfolio and the current market performance of each sector

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7
Q

Strategic Asset Allocation

A

Generally keeps the assets in a portfolio at an assigned balance

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8
Q

Dollar cost averaging (Constant Dollar investment plans)

A

Purchasing regular dollar amounts at pre-established time intervals

average cost per share will always be lower then the average price per share over time

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9
Q

Average cost (breakeven price) for dollar cost averaging is figured by

A

total dollars invested/total shares purchased

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10
Q

Duration

A

The degree to sensitivity in a bond’s price to small changes in interest rates and the length of maturity of the bond

Higher duration, more volatility

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11
Q

Small Cap Companies have a greater

A

Liquidity risk

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12
Q

Efficient Market Hypothesis summary

A

Does not think fundamental or technical analysis would be able to produce better than average returns

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13
Q

Fundamental Analysis

A

Concerned with a specific company and its factors

Managment of the company
Earnings
Company outlook
company’s annual report
price/earnings ratio

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14
Q

Technical Analysis

A

Concerns with supply and demand of securities

Trading volume
moving averages
advances and declines
odd lot purchases and sales
timing of purchases and sales
Support and resistance levels

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15
Q

Odd lot theory

A

Odd lot investors are always wrong

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16
Q

Advance decline theory

A

Compares the number of stocks that have advanced to the number of stocks that have declined

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17
Q

Market sentiment

A

describes the bullish or bearish sentiment of investors

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18
Q

Breadth of the Market

A

The percentage of stocks participating in a market move

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19
Q

Market Momentum

A

The measure of the rate of acceleration of a price movement

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20
Q

Short Interest Theory

A

Short sellers will eventually become buyers. This slows declining markets and accelerates rising ones

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21
Q

Random Walk Theory

A

Past performance can not be used to predict future movements

Market reacts instantly to new information

It is futile to try and out preform the market

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22
Q

Head and shoulders top formation is

A

a reversal of an upward trend

23
Q

Head and shoulders bottom formation

A

a breakout to the upward move

24
Q

Support level is

A

the price where downward trends tend to level off

25
Resistance level is
the price where an upward trend tends to level off
26
Selling Climax
Occurs at the end of a bear market it is a sharp drop in stock prices accompanied by increasing volume
27
Dow Jones industrial average is the only index that is not
Capitalization weighted It is price weighted
28
Alpha
The amount a stock will change to particular news about a particular company (change in Managment, change in earnings etc)
29
Beta
A measure of volatility of a particular stock's price when compared to the market as a whole Beta .8 - move less then the market Beta 1.0 - the same as the market Beta 1.3 - more than the market
30
Consolidataing
The market is moving sideways
31
Program trading
Computer driven trading Does not EVER consider fundamental analysis
32
Company's balance sheet shows
The assets and liabilities of a corporation on a particular date (typically the end of the year) Total Assets = Total liabilities + net worth At the bottom you will also have the total number of stocks outstanding preferred common convertible treasury
33
Three assets categories on a balance sheet
Current - Cash or will be converted into cash in the next 12 months. Listed in order of liquidity (cash is first; inventory is last) Fixed - Items that a company has or needs to produce it's product, Include building, equipment, and land etc. Other - intangible items - copyrights, patents, good will
34
Liabilities are in two catagories
Current Liabilities - Must be paid in the upcoming 12 month period (2/1 for current assets to current liabilities) Long term debt - Bonds These two added together create your total liabilities
35
Shareholders Equity has 4 groupings
Preferred stocks Common Stocks Paid in Surplus (Paid in Capital) - excess over par when the stock as sold to the public) Retained earnings All of these added together gives up total shareholder equity Total liabilities + total shareholders equity gives you total liabilities and outstanding equity of the company
36
Income Statment
Also called a P&L or a Profit and loss statement Shows the revenue, Expenses and earnings over a period of time (typically a year)
37
P&L sales
You take sales and subtract the cost of goods sold, Selling and administrative costs and depreciation This leaves the operating profit (EBIT- earnings before interest and taxes)
38
What to do with Operating profit
You take operating profit and deduct bond interest to get Total income (EBT- earnings before taxes)
39
What to do with Total income
Subtract taxes from total income and we are left with Net income (EAT - Earning after tax)
40
What to do with net income
Subtract preffered dividends on common stock from net income to get Net earnings
41
What to do with net earnings
Subtract dividends paid to common stocks and you are left with retained earnings Earnings per share you use Net Earnings/common shares outstanding
42
Capital structure and leverage
If the company has a large amount of capitalization from selling stock then they are conservative If the company has a large capitulation from selling bonds then they have a speculative structure
43
Using FIFO and valuation of inventory
When prices are sharply rising the effect of using FIFO on valuation will result in increasing the reportable income to the company
44
Dilution of stock
decreased earnings per share through a conversion of convertible securities exercise of options or warrants or additional share being issues A common stock holders interest would not be diluted by stock splits or stock dividends
45
Corporate expense ratio is determined using the
income statement NOT the balance sheet
46
On the date a corporation declares a cash dividend
It becomes a current liability on the balance sheet
47
Earnings per share ratio (formula)
Net earnings/outstanding shares
48
Earnings per share can be increased by (or changed by)
Increased by tax loss carried forward Reduction of corporate income taxes retirement of outstanding bonds Changed by Change in companies inventory valuation acquisitions and dispositions of other companies and subsidiaries
49
Fully diluted earnings per share considers
This is calculated assuming that all dilution from all available sources occurs
50
Current Ratio (formula)
Current assets / current liabilities standard minimum is 2:1 most accurately describes liquidity (NOT profitability, coverage or debt)
51
Price to earnings (P/E) Ratio (formula)
Market price/Earnings per share sometimes referred to as the multiple at which the stock is selling P/E ratio does not change when a stock split occurs Very high P/E ratios show over valued stocks
52
Total Return (Formula)
Growth + Income
53
Profit Ratio (formula)
Net income/Revenue Measures how much of each revenue dollar is net income

Series 7 (20 decks)

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