Portfolio Development and Analysis Flashcards
(38 cards)
1
Q
Fundamental Analysis
A
examines balance sheets and income statements to forecast future price movements
- consider current and past records
2
Q
Fundamental Analysis - Top Down method
A
- investor first looks at trends in the general economy then selects industries, and finally companies
3
Q
Fundamental Analysis - Bottom up method
A
- investors looks for individual stock with outstanding performance before considering impact of economic trends
- assumes company will do well even if industry doesn
4
Q
Ratio Analysis
A
- studies relationships between financial variables
- ratios can be compared between firms and let investor know if there are any trends or standouts
5
Q
Liquidity ratio
A
- compares financial variables to measure a company’s ability to meet its short term obligations
current ratio = current assets / current liabilities
6
Q
Activity ratio
A
- measure of how rapidly a firm is able to convert various accounts into cash
- the sooner a company can convert assets into sales or cash, the more effectively the firm is being run
7
Q
Profitability ratio
A
- compare two or more financial variables providing a relative measure of a firms income earning performance
8
Q
Technical Analysis
A
- use charts to identify and project price trends
- examines short or intermediate term outlook
- not concerned with specific financial position of a company
9
Q
Technical approaches
A
- dow theory
- barrons confidence index
- odd lot theory
- investment advisor opinions
- advance/ decline line
- moving average (200 day)
- mutual fund cash position
10
Q
Charting
A
- plots market variables (stock prices and market averages)
- chartist plots the price patterns of securities to identify buy/sell opportunities
- believe movements occur in patterns that are consistent and predicable
- identify resistance and support levels
11
Q
Resistance
A
- price ceiling that technical analysts note persistent selling of a commodity or security
- level sellers are expected to enter market to push prices lower
- when a stock breaks through it usually means that it will go on to new heights (bullish)
12
Q
Support
A
- where securities tend to stop falling because there is more demand than supply
- analysts identify support levels as prices a security bottomed in the past
- if it goes below its bearish
13
Q
Sentiment indicators
A
measure bullish or bearish moods of investors
- analysts will look at indicators as contrary
14
Q
Dow theory
A
aggregate measure of securities prices and thus does not predict the direction of changes in individual stock prices
- purpose is to show direction of overall market
15
Q
Barrons confidence index
A
index presumes that the differential between the returns on quality bonds and bonds of lesser quality will forecast future price movements
16
Q
Investment Policy Statements
A
- expresses clients objectives (desired returns and acceptable risk) and constraints (liquidity, time horizon, taxes)
17
Q
Dow Jones Benchmark
A
- 30 industrial stocks
- 20 transportation stocks
- 15 utility stocks
- DJIA is the 30 industrial stocks
- most widely quoted but narrowest measure of market
- price weighted average
18
Q
S&P 500 Benchmark
A
- float weighted index
- includes largest issues that trade on the NYSE and a few OTC issues
- broader measure of NYSE activityR
19
Q
Russell 2000 Benchmark
A
-popular capitalization weighted index of stock price performance of the smallest 2000 stocks in the Russell 3000 index
20
Q
Wilshire 5000 Benchmark
A
- broadest measure of activity and movement of the overall stock market
- value weighted index consists of over 7000 issues that trade on NYSE, AMEX, and in the OTC market
21
Q
Value Line Benchmark
A
- equally weighted index consisting of 1700 selected issues that are on the NYSE, AMEX< and OTC
22
Q
NASDAQ Benchmark
A
- broadest measure of OTC trading
- cap weighted index includes all issues that trade on the NASDAQ system
23
Q
Europe, Australasia, and Far East (EAFE) Benchmark
A
- typically compared to the S&P 500 index to show relative performance of the US and international equity markets
24
Q
Municipal bond allocation priorities
A
- statements in the bond indenture showing the priorities by which municipal revenue is allocated
- Gross pledge: revenue will be used for debt service before any deductions for expenses
- Net pledge: pays expenses before bondholders are paid
25
Monte Carlo Simulations - Spreadsheet risk analysis
- randomly generates values for uncertain variables over and over to simulate a model
- uses spreadsheet model (one variable at a time) and simulation to automatically analyze varying inputs and outputs
26
Monte Carlo Simulations - how to analyze results
-presents histogram of results for each forecast
- frequency distribution
- ending terminal value
27
Turnover
- number of times an asset is replaced during an accounting period
28
Timing of capital gains and losses
- MF returns are expressed before tax
- income and CG affect return the investor retains
29
Tax implication of the sale of MF shares
- taxable gain or loss measured by difference between sales price and basis
- Basis
1. FIFO
2. specific identification
3. average cost (total cost of shares/ number of shares held)
30
Stock splits
- distributions of more than 25% of the outstanding shares and are accounted for as an adjustment to par value of the outstanding stock
- par value per share is reduced and the number of common shares is increased proportionally
- reason is to make ownership more affordable to a broader base of investors
Eg. 2 for 1 split. do 2/1 then multiply by shares.
if it was a 1 to 2 split then do 1/2 and multiply by price
31
Reverse split
- company reduces number of shares outstanding
- reason is to raise price of outstanding shares because the price is too low for institutional investors or because the company is about to be delisted
Eg. 1 for 10 split, shares will decrease and price will go up
32
Wash sale rule
- no deduction is allowed for any loss from the disposition of a stock if within a period beginning 30 days before and ending 30 days after the taxpayer acquires substantially identical stock
33
Sharpe ratio
excess return of the portfolio to its standard deviation
Sp = rp - rf / st. dev p
- meaningless unless compared to market or other MF
33
Ex dividend date for common stock
- date of record for corp is first business day after ex-dividend date
- settled trades are reflected on the books
- to be on corps books as holder and receive current dividend, investor must purchase stock before the ex-dividend date
- ex div - 1 = purchase date
- weekends and holidays dont count
34
Treynor ratio
excess return of portfolio to its beta
Tp = rp - rf / beta p
- higher better
35
Jensen ratio
Alpha
- calculates portfolio return actually attained and subtracts from what return should have been based on risk assumed
alpha = rp - [rf + (rm - rf) beta]
- measures contribution of portfolio manager
-- positive number signifies return exceeded what was expected
- negative signifies portfolio return was less than expected (poor management)
36
Choosing the right performance measure
Jensen and Treynor: use beta, must be diversified portfolio
- Sharpe: uses SD, nondiversified
R2 : % of funds movements
37
Information ratio (IR)
- expresses portfolio return above returns of benchmark to volatility of those returns
- measures managers ability to generate excess returns
- higher the IR the more consistent a manager is
