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Series 65 > Part 2: Chapter 10 - Investment Recommendations - Strategies > Flashcards

Part 2: Chapter 10 - Investment Recommendations - Strategies Flashcards

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1
Q

What are the TWO types of investment strategies?

Define each.

A

Active: stock picking and market timing to constantly rebalance.

Passive: a portfolio is set and rebalanced at set intervals.

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2
Q

What is another form of Active Allocation? Define it.

A

Tactical Asset Allocation: focuses on short term assets with adjustments based on economic conditions.

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3
Q

What is “rebalancing?”

With what type of investment strategy is it associated?

A

Adjusting portfolio assets in response to economic conditions.

Active Asset Allocation

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4
Q

What is Asset Allocation?

A

Diversification of assets in a portfolio between different asset classes (stocks, bonds, cash).

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5
Q

What is another form of Passive Asset Allocation? Define it.

A

Strategic Asset Allocation: assets in a portfolio are balanced over a long term and kept at an assigned percentage.

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6
Q

When designing a portfolio, what are the THREE most important factors to consider?

A

Current Investments
Strategies
Objectives

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7
Q

Complete this sentence:

Tactical Asset Allocation is a form of market ___________.

A

timing

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8
Q

On what types of companies do growth investors focus?

Are the typical earnings and P/E ratios of growth stock typically high or low?

With respect to the P/E Ratio, why?

What is the typical P/E Ratio on a growth stock?

A

Companies with higher than average earnings / potential earnings.

High (both)

The P/E is high because these companies have higher stock prices along with unrealized revenue potential and thus a lower EPS. This results in a higher price, divided by a lower EPS and thus a higher P/E.

35 or higher

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9
Q

On what types of companies do value investors focus?

Are the P/E ratios of value stocks typically high or low?

With respect to the P/E Ratio, why?

A

Undervalued companies

Low

They generally have a lower stock price (hence the “undervalued”).

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10
Q

What is a Barbell portfolio?

A

A portfolio made up of short and long term bonds with few mid-range bonds.

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11
Q

What is a Contingent Immunization Strategy?

When does this “contingency” occur?

A

A defensive maneuver to combat returns falling below a set level.

It occurs when the duration of the assets match the duration of the liabilities.

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12
Q

Generally speaking, what should the following investors have in their portfolios:
- Younger
- Middle-age
- Older

A

Equities and some cash

Equities, fixed income and some cash

Fixed income and cash

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13
Q

What is a Capital Appreciation strategy?

A

Seeks to maximize the portfolio value over a long period of time.

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14
Q

What is an Income Investing?

A

A portfolio that generates the most income with the least amount of risk.

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15
Q

What is Indexing?

What type of investing strategy is this (Active or Passive)?

What does this type of strategy NOT do with respect to individual stocks?

If there’s deviation between the fund’s performance and its respective index, what is this called?

A

Creating a portfolio that matches an index (i.e., S&P 500).

Passive

It does NOT try to identify growth or undervalued stocks.

Tracking Error

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16
Q

What is the Market Capitalization formula?

A

Stock Price X Outstanding Shares

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17
Q

What is the Micro to Large Cap continuum?

A

<—-$250MM—$2B—$10B—->
Micro | Small | Mid | Large

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18
Q

What is a Buy & Hold Strategy?

When is the strategy rebalanced?

How is this different than a Passive Allocation strategy?

What type of securities are typically bought for this portfolio?

A

Designing a portfolio and holding the same positions.

Never

There’s no rebalancing

High quality

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19
Q

What does Dollar Cost Averaging involve? NOT involve?

What’s another name for this?

A

Systematic investments of the SAME dollar amount.

NOT the systematic purchase of the same amount of shares.

Constant Dollar Investment Plan

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20
Q

What do Contrarian investors do?

A

The opposite of the general investing public.

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21
Q

What is Laddering?

What is the goal?

A

Purchasing fixed income products with different maturities and coupon rates.

Limit Interest risk

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22
Q

Define Diversification?

What is the ultimate goal?

A

Minimizing risk by spreading portfolio assets over a variety of markets, sectors, and asset classes.

Reduce Unsystematic risk.

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23
Q

What THREE countries are considered emerging markets?

What is a primary risk consideration for investing in these countries?

A

Brazil
Argentina
Mexico

Standardization of trading

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24
Q

What are FIVE ways a portfolio can be diversified?

GAMMS

A

Geographic
Asset class
Market (i.e. NYSE, NASDAQ)
Market Cap
Sector

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25
What is the best way to achieve diversification?
Investing domestically and internationally.
26
What is Sector Rotation? In each step, what is the primary investment?
Rotating a portfolio's assets to mirror that business cycle. Expansion = industrials Peak = consumer staples Contraction = utilities Trough = technology
27
What is the Debt to Capital ratio?
Total Debt ------------------- Total Capital
28
What are THREE types of stock analysis?
Fundamental: looks at a company's financial statements and management. Technical: looks at market trends, patterns, and charts. Quantitative: focuses only on hard data like revenue, profit, losses, etc. NO subjective data is used.
29
How do Bottom-Up and Top-Down analysis differ?
Bottom-Up starts with individual companies and broadens. Top-Down starts globally and becomes more focused.
30
What is Manager Tenure and what is generally considered a respectful time?
The length of time a portfolio manager has overseen a fund. 5 years +
31
What is the Value Line Index?
A broad large cap index
32
Of what are these comprised: - Dow Jones Industrial Average - Dow Jones Composite Average Which is considered the "indicator" for large cap stocks?
30 Large Cap blue chip stocks 65 stocks from the industrial, utility and transportation sector. DJIA
33
What is the S&P 500 Index? Of what is it considered to be the measure?
Broad large cap index Average market performance
34
What is the Wilshire 5000 Index?
7,000 largest market cap companies
35
What is the Russell 3000 Index? Russell 2,000? Russell 1,000?
3,000 of the largest companies Small Cap segment of the Russell Large Cap segment of the Russell
36
What is the NYSE ARCA Major Market Index?
Price weighted average of 20 blue chip industrial stocks
37
What is the purpose of an Index Fund?
To match (NOT beat) the performance of a chosen index.
38
With respect to financial reporting, what are the THREE primary reports?
Income Statement Balance Sheet Cash Flow Statement
39
With respect to financial report reviews, what are the following: - Unqualified Opinion - Qualified opinion - Adverse opinion -
Unqualified Opinion: a review which agrees the financial statements are accurate. Qualified Opinion: a review which states any limitations imposed on the auditors work --- in other words a QUALIFYING statement. Adverse Opinion: a review which DOES NOT agree the financial statements are accurate.
40
What are the THREE types of Assets?
Current: converted to cash within 12-months. Fixed: NOT converted to cash within the next 12-months. Other: intangible assets like intellectual property
41
What does a Balance Sheet show? An Income Statement? Cash Flow? - Where do Cash Flow results ultimately appear?
All assets and liabilities as of a PARTICULAR DATE (i.e. end of a company's fiscal year). Revenues and expenses and the remainder of earnings after expenses over a PERIOD of TIME. The record of cash flowing in and out of an organization. - Balance Sheet
42
What are the TWO types of Liabilities?
Current: due within 12-months. Long-Term: NOT due within 12-months.
43
What is Shareholder's Equity? What's another name for this? What are some examples of this?
Remainder of value after subtracting liabilities. Net Worth Common and Preferred stock Treasury stock Retained earnings
44
What appears on the income Statement? What's another name for this? Name some categories that appear on an Income Statement.
Revenue, expenses, and earnings after expenses. Profit & Loss Sales Profit Income Earnings Retained Earnings
45
What are Retained Earnings? How are they commonly distributed by the following: - Growth Stocks - Blue Chip Stocks - Utility Stocks
Overall profitability after expenses, interest, taxes and dividends have been paid. Growth Stocks: retain the majority to reinvest. Blue Chip Stocks: distribute about 50% in dividends. Utility Stocks: distribute the majority in dividends.
46
What is the calculation order on the Income Statement?
Sales - COGS - Admin - Depreciation --------------------------------- Operating Profit (EBIT) - Interest (on Bonds) --------------------------------- Total Income (EBT) - Taxes --------------------------------- Net Income (EAT) - Preferred Stock Divs --------------------------------- Net Earnings - Common Stock Divs --------------------------------- Retained Earnings =================== Net Earnings -------------------------------- = EPS Common Stock Shares
47
Are dividends paid to stockholders a before or after-tax deduction?
After
48
With respect to Capital Structure, what is the distribution (large or small) of stock and bonds for these organizations: - Conservative - Speculative
Conservative - Large % of Common stock - Small % of Bonds Speculative - Small % of Common stock - Large % of Bonds
49
What is the P/E Ratio? Does it change when a stock split occurs? How do Trailing and Forward P/Es differ?
A measure of the stock price as compared to it's dividends. No Trailing uses earnings of the past 12-months, while Forward uses earnings of the upcoming 12-months.
50
How is the Price to Book ratio used? What does a High P/B indicate? A Low P/B?
To determine if a stock is over or under valued. Growth stock Undervalued stock
51
What are these THREE Corporate filings, with whom, and when must they be filed: - 10-Q - 10-K - 8-K
All filed with the SEC 10-Q: Performance - Quarterly 10-K: Performance - Annually 8-K: Material Changes - 4 Bus Days
52
What is the difference between Cash and Accrual accounting?
Cash enters an item when cash is received or Paid. Accrual enters an item when the event (i.e. invoice) is created.
53
What do Measures of Tendency mean? What are the THREE types?
The measurement of averages and frequencies. Mean Median Mode
54
What is the Mean?
Arithmetic mean Average
55
What is Median?
Halfway point on a set of numbers
56
What is Mode?
Value that occurs most frequent in a set of numbers.
57
What is Range?
The difference between the high and low points in a series of numbers.
58
What is a Correlation Coefficient? What do the following mean: 1 0 -1
A data point that indicates if an investment is directly, indirectly or NOT correlated with a benchmark. 1 = correlated 0 = NOT correlated -1+ inversely correlated
59
What is R-Squared?
The degree to which a portfolio is correlated to a benchmark.
60
Match the Asset Allocation strategy: Active / Passive / Strategic / Tactical 1) An investor makes frequent stock picks in an attempt to beat the market. 2) An investor maintains an assigned asset mixture over the long-term. 3) The investor rebalances the portfolio at set intervals. 4) An investor adjusts asset allocations with market timing as the goal.
1) Active 2) Strategic 3) Passive 4) Tactical
61
What is the following an example of--Tactical or Strategic Asset Allocation? Portfolio Balance ------------------------------------------ 30% Large Cap Equities 20% Small Cap Equities 35% Long Term Corp Debt 15% T-Bills How does the other option mentioned above differ?
Strategic Tactical Asset Allocation may also use the same asset classes (or different ones), but it sets minimum and maximum ranges and then adjusts these to time the market.
62
What does inertial inflation mean?
It means that the rate of inflation will remain the same unless there is a supply or demand shock to the economy.
63
With respect to Bid and Ask prices, what indicates an efficient trading market?
A narrow spread between Bid and Ask
64
What are Retained Earnings? What is this considered on the Balance Sheet (Asset or Liability)? Under what main category? Does it show on the Income Statement?
Profit retained by an organization versus being paid out in dividends? Liability Shareholder's equity Yes
65
What is the Current Ratio formula?
Current Assets ------------------------------ Current Liabilities
66
What is the Current Ratio formula? What does this formula represent on a company? What is considered a standard measure for the Current Ratio? - What does this mean? What's the standard ration for the Acid Test Ratio?
Current Assets ------------------------------ Current Liabilities Liquidity 2:1 The company should have $2 in Assets for every $1 in Liabilities 1:1

Series 65 (14 decks)

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