jpm superday technicals Flashcards
(29 cards)
Define a balanced portfolio
GOAL: manage risk while aiming for consistent returns
A “balanced” portfolio includes diversification across various asset classes to minimize risk. What a balanced portfolio looks like depends on investment objectives and risk tolerance.
Asset classes?
Equities: owning shares in a business
Fixed income: investment that pays a fixed income
Cash/cash equivalents: least risk, least return
Alternatives: 1. commodities (raw materials that can be turned into other goods) 2. real estate 3. PE/hedge funds (private equity)
Investment objectives
- Time horizon
- Liquidity
- Risk tolerance
Portfolio risks
Market risk:
Credit risk
Liquidity risk
Interest rate risk
How to evaluate an equity investment?
Company financials
Valuation metrics
Industry trends
Macro conditions
Risk factors
Valuation metrics?
-Equity multiples:
1. P/E (stock price/EPS) - how much ppl pay for shares of the stock compared to the stocks earnings
2. Price/book ratio (P/B) - stock price vs. company’s net assets
3. P/S ratio - how much investors are paying for each dollar of revenue
- Enterprise multiples:
1. EV/EBITDA -
2. EV/EBIT
3. Equity / levered FCF
4. EV / unlevered FCF
What happens to yield curve when interest rates rise?
If interest rates plan to rise in the future:
Treasury yields will rise in anticipation of the hikes
- Investors adjust for future higher rates by demanding higher yields on bonds today
What can asset managers do for clients that they can’t do themselves?
Invest in PE/hedge funds
Provide more in-depth research from banks that is not public
How would you assess an investment
Methods of valuations and pros and cons
Relative
- Company Comparables (valuation multiples)
Can’t use for companies where there’s not much public data
- Precedent transactions
HIGHEST – companies need to pay premium to acquire another
Intrinsic:
- DCF
Use for stable, mature companies
Can vary greatly based on assumptions
Walk me through a DCF
Discounting our future cash flows back to present using a discount rate or WACC
First, you project out a company’s financials using assumptions for revenue growth, expenses and Working Capital; then you get down to Free Cash Flow for each year, which you then sum up and discount to a Net Present Value, based on your discount
rate – usually the Weighted Average Cost of Capital.
Once you have the present value of the Cash Flows, you determine the company’s Terminal Value, using either the Multiples Method or the Gordon Growth Method, and then also discount that back to its Net Present Value using WACC.
Finally, you add the two together to determine the company’s Enterprise Value.
What are credit spreads?
Difference in yield (return) between corporate bond and a government bond of same maturity
- Corporate bonds riskier than government bonds so investors require higher return
- Wide credit spreads: investors see more risk and want higher returns to compensate (general economic distress)
- Tight credit spreads: lower risk and more confidence in the market, investors don’t require as much return
Raising debt vs raising equity
Two ways for a company to raise capital
Debt: short/long term loans, repaid with interest. Need to pay periodic interest payments.
Equity: issuing common and preferred stock. Dilutes
How would you invest given different investment objectives?
3 Types of Portfolio
Conservative
Moderate
Risky
Equities products
Modern portfolio theory
Geopolitical events currently and how they’re impacting market
Russia Ukraine war: oil prices up
Unlevered vs. levered FCF
Levered is after paying back all debt obligations, unlevered is without paying off debt. Also, levered includes interest income and expense.
WACC formula
Cost of Equity * (% Equity) + Cost of Debt * (% Debt)
Cost of equity formula
CAPM
Cost of equity = risk - free rate + beta * equity risk premium
Enterprise vs. equity value
Enterprise value: total value of the company, including operations and obligations.
Formula: equity value + debt + pref. stock + NCI - cash/cash equiv.
Equity value: what’s available to shareholders after debts are settled. Represents company’s residual value after liabilities have been settled.
Formula: share price * # of shares
Metrics to valuate a stock?
Valuation:
P/E: stock price/EPS
price investors are willing to pay for each dollar of earnings (higher = overvalued or high expected growth, lower = undervalued or difficulties), good for companies in same industry/sector
P/S: stock price/revenue per share , good for
EV/EBITDA: measures value of a company relative to its earnings (higher = overvalued, lower = undervalued)
Profitability:
ROE
ROA
Financial health:
Debt to equity
Current ratio
