Portfolio Analysis

Question 1

Types of equity securities that can be included in a portfolio include:

Answer 1

Blue chip
Growth
Emerging growth
Income
Cyclical
Counter cyclical 
Defensive 
Speculative 
Special situation

Question 2

Blue chip stock:

Answer 2

• highest quality companies
• proven earning and signed records
• large capitalization NYSE and NASDAQ listed issues

Question 3

Growth stock:

Answer 3

• growth stock represents companies that are in a period of above average growth due to rapid market expansion
• normally do not have proven track record
• very low dividend payout ratios
• sell higher P-E (price-earnings) multiples

Question 4

Emerging growth stock:

Answer 4

• companies are brand new ventures of high risk but also high potential reward
• no track record
• can’t afford to pay dividends

Question 5

Income stock:

Answer 5

• mature companies

- high dividend payout ratios (utilities)

Question 6

Cyclical stock:

Answer 6

-represents companies who’s fortunes track the business cycle closely.

Home builders
Appliance manufacturers
Automobile manufacturers

Question 7

Counter cyclical stock:

Answer 7

• represent companies whose fortunes operate in reverse to the business cycle.
• very few
• price moves in the opposite direction of the market as a whole
• earning variability due to changes in economic growth

Question 8

Defensive stock:

Answer 8

-represent companies which remain unaffected during business cycle downturns (drug companies, public utilities, food products)

Question 9

Speculative stock:

Answer 9

• from companies that fly high during business cycle upturns (toy companies)
• mirror business cycle

Question 10

Special situation stock:

Answer 10

-represents a company going through takeover, reconstructing, bankruptcy, or management change that will greatly change the nature of its operations.

Question 11

Returns provided by stock investments:

Answer 11

Dividends

Capital gains

Question 12

Total return calc:

Answer 12

Income (dividends for equities, interest for debt) + growth

Question 13

Standard deviation:

Answer 13

Measure of risk of return

Question 14

Systematic risk

Answer 14

Risk of general market decline affecting the portfolio

• called market risk
• cannot be diversified away

Question 15

Non systematic risk

Answer 15

The risk of a single investment going sour, also known as selection risk

• by diversifying the portfolio, the risk is minimized
• can be diversified away

Question 16

Capital risk

Answer 16

Risk that the amount invested may not be fully recovered

Question 17

Timing risk

Answer 17

Risk that buying and selling occur at disadvantageous price levels due to poor market timing

Question 18

Business risk

Answer 18

Risk that an issuers business declines

Question 19

Interest rate sensitive stocks

Answer 19

Utility stocks
Corporate bonds 
Preferred stocks 
Common stock ISSUED by utility
*NOT growth stock, common stock insured by manufacturer

Question 20

Stock that moves with the market

Answer 20

Blue chip stock

-price movements tend to track the overall market

Question 21

Which investment offers the Greatest hedge against purchasing power risk

Answer 21

Common stocks

Question 22

CAPM=

Answer 22

Capital asset pricing model
*methodology for finding the most efficient investments— those that give the greatest return for the amount of risk assumed

Question 23

Efficient market theory:

Answer 23

Theory holds that prices of securities in the market fully reflect all publicly available information.

States that technical and fundamental analysis is if no use in selecting stocks for a portfolio.

Undervalued securities should not exist
Overvalued securities should not exist

Securities selection based on technical or fundamental facts is irrelevant since prices reflect all available information.

Question 24

Fundamental analysis

Answer 24

Evaluating a company’s

• balance sheet
• income statement
• management
• marketing strategies
• research and development as a means of predicting the future long term price movement of its stock

Question 25

Technical analysis

Answer 25

Research that seeks to predict the future price movement of a stock or overall market by using price movement and volume indicators.
-using charts if stocks past price and volume movements to predict its future price movements

Question 26

Capital asset pricing model would identify the most efficient investment as those with the:

Answer 26

Highest return for the lowest level of risk assumed

Question 27

Market risk is the same as?

Answer 27

Systematic risk

Question 28

Beta is a measure of?

Answer 28

Market risk

-measure of price volatility of a stock or portfolio relative to the market

Question 29

Beta +1

Answer 29

Indicates that a particular security moves as fast and in the same direction as the market

Question 30

Beta +1/2

Answer 30

Indicates that the stocks price moves half as fast and in the same direction as the overall market

Question 31

Beta -1.5

Answer 31

Stock prices increased at a faster rate than the market

• negative beta stocks move opposite to the general market
• counter cyclical stocks

Question 32

What’s stock groups with low positive beta mice slower than the Market?

Answer 32

Utilities

Railroads

Question 33

Companies that have very high betas relative to the market

Answer 33

Growth companies

Technology companies

Question 34

Beta +2

Answer 34

Decliners at a faster rate than the market

Question 35

Alpha is a measure of:

Answer 35

Non systematic risk— stock specific risk

Question 36

Investments that could be considered to be defensive during deflationary periods:

Answer 36

Preferred stock
10 year bonds
30 year bonds
*fixed income securities are defensive securities in times of deflation

Question 37

Defensive in times of inflation:

Answer 37

Common stock