Equities Flashcards

Question

2 advantages private equity

Answer 1

diversification in unlisted unquoted companies potentially higher and faster returns at early stage

Answer 2

high charges high losses due to young cos failing one product cos so vulnerable to recession iliquid volatile as trading volume low Hard to value

Answer 3

the amount, in pence, that the company has earned during the year for each ordinary share. EPS enables an investor to see the trend in a company’s profitability.

Answer 4

measures the dividend as a percentage return on the current share price. to compare the current return on a share with the return that could be obtained from bonds or deposits, or from an alternative share

Answer 5

* Some companies distribute a smaller proportion of the profits - Any retained earnings are not lost to shareholders because they will finance future profits and dividends. * The yield will fluctuate with the share price and can look attractive simply because the share price has slumped. * It is not necessarily a reliable predictor of future income, as the level of dividend could change

Answer 6

measures how many times the dividend could be paid out of the available current earnings. It indicates the riskiness of the investment and the margin of safety the company has in paying the dividend

Answer 7

* The higher the figure, the more likely it is that the company will be able to maintain the existing dividend if profits fall in the future. * A relatively high dividend cover implies that the company is retaining the majority of its earnings for reinvestment in the business. * A company may pay a larger dividend than it has available profits for the year. It would then draw on its reserves and is said to be paying an uncovered dividend,

Answer 8

relationship between the share price and the EPS. It is a measure of how highly investors value the earnings of a company. It can be viewed as a reflection of the market’s optimism or pessimism about the potential for future growth in earnings

Answer 9

* P/E ratios should only be used to compare companies in the same sector and should be considered in relation to the average of the sector. * higher than the average for an industry sector, the shares of that company are in demand. The shares will be relatively more expensive, but investors would expect to be compensated by higher than average earnings in the future. * A lower ratio than average would suggest that a company is not greatly favoured by investors, probably because it has poor growth prospects. * a share with a higher P/E ratio is not automatically a better buy than a share with a lower ratio. The higher growth expectations may already have been taken into account in the share price, or it may just be that it is overpriced.

Answer 10

value of the tangible assets that are attributable to the ordinary shareholders. the capital provided by the shareholders plus all of the profits the company has retained in the business

Answer 11

* When calculating NAV, it is the nominal value of preference shares that is used £1 *useful guide to the price at which shares should trade for companies whose assets are generally readily realisable, such as property companies or investment trusts. However, the share price will also be influenced by supply and demand. * It is less useful for companies that are valued on their earnings potential, where the shares would generally trade above the NAV. This is because investors are willing to pay something for the goodwill inherent in the business. * The NAV is a useful valuation figure in key circumstances: – If a takeover bid is made, shareholders can compare the bid price to a realistic NAV to check if the assets are being given away too cheaply. – If a liquidation seems a possibility, the NAV provides shareholders with an indication of the amount they might receive, and helps them to judge whether to hold onto or sell the shares.

Answer 12

* Different accounting policies can be used to calculate profits and value assets, making comparisons between companies in the same industry difficult. * The management may decide to change the accounting policy of a company over the years, making comparisons over time misleading. * Many ratios have to be calculated using historical data from accounts. This may not be the best guide to future performance and investment potential. * When considering trends over several years, periods where there has been high inflation can produce misleading figures. The reported figures may show an upward trend but, in real terms, they could be static or even declining.

Answer 13

In a price-weighted index, the weight of each stock is based on its share price. Higher-priced stocks have a greater impact on the index value. Example: The Dow Jones Industrial Average (DJIA) is a well-known price-weighted index. market-capitalization weighted index, stocks are weighted according to their market capitalization (i.e., the total market value of a company’s outstanding shares). Larger companies have a greater influence on the index. The S&P 500 is a prominent market-capitalization weighted index. equal-weighted index assigns the same weight to each stock, regardless of its price or market capitalization. Each company contributes equally to the index’s performance. Example: The S&P 500 Equal Weight Index is an example of an equal-weighted index.

Answer 14

100 largest market cap weighted reviewd quarterly and cos can be added removed

Answer 15

Provides a snapshot of the performance of the largest and most liquid companies in the UK. Widely recognized and used as a benchmark for UK equity investments. The market-cap weighting approach ensures that the index reflects the overall market sentiment. Heavily influenced by a few large companies, which can skew the index performance. Does not represent the entire UK market, as it excludes smaller companies. Sector biases may exist, particularly in industries where large companies dominate.

Answer 16

Fees Outperformance / underperformance market risk v manager risk passive more diversified as whole of market Goals - A passive approach may suit those seeking market returns with minimal cost, while an active approach might appeal to those looking for potential outperformance.

Answer 17

benchmarks to measure the performance Indices help in determining the geographic and sector allocation of the portfolio. Risk Management: Indices provide a reference for managing risk by ensuring diversification across different regions and sectors. . Passive vs. Active Management: A fund manager may choose to replicate an index (passive management) or seek to outperform it (active management) by selectively investing in stocks that are expected to perform better than the index constituents.

Answer 18

Benefits: Diversification: A global index provides broad diversification across multiple regions and sectors, reducing the risk associated with any single country or market. Simplicity: Using a single index simplifies the investment process and performance evaluation, as it provides a clear, unified benchmark. Global Exposure: It allows investors to gain exposure to global economic growth and different market dynamics, including both developed and emerging markets. Drawbacks: Over-diversification: A single global index might lead to over-diversification, where the impact of individual stock or sector performance is diluted, potentially limiting upside potential. Sector Biases: Global indices might have inherent sector biases (e.g., technology or financials dominating the index), which may not align with the investor's desired exposure. Currency Risk: Investing in a global index exposes the portfolio to currency fluctuations, which could affect returns depending on the investor's base currency. Tracking Error: If a fund aims to outperform the index, there may be a tracking error if the fund manager's stock selection does not align well with the index performance.

Answer 19

Advantages: Mid-Cap Focus: This makes it a better benchmark for funds targeting growth through mid-sized companies. Diversification: The FTSE 250 includes a broader range of sectors and companies, Limitations: Market Capitalization not be appropriate for funds that invest significantly in large-cap stocks, as those would be better benchmarked against the FTSE 100. Liquidity Concerns: Sensitivity: Mid-cap companies may be more sensitive to economic downturns, making the FTSE 250 more volatile

Equities Flashcards

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