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FINC302 - Applied Investments > 5. Returns, TVM, Fundamental & Technical Analysis > Flashcards

5. Returns, TVM, Fundamental & Technical Analysis Flashcards

1
Q

Arithmetic return is

A

simple average

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2
Q

Geometric return measures

A

the average growth of an investment computed by multiplying n variables and taking the nth root –> average return of an investment over time

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3
Q

Positive geometric return indicates

A

economic gain

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4
Q

How to calculate holding period returns?

A

Geometric returns

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5
Q

Simple gross returns are compounded via

A

multiplication

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6
Q

Continuously compounded returns (e.g. log returns) compounded via

A

addition

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7
Q

What is Fundamental analysis?

A

In-depth analysis of a company’s business, management team and market opportunity to determine a stock’s attractiveness

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8
Q

Fundamental law of active management

A

IR approximately equals IC x Breadth
* Information coefficient - correlation between forecast and realised active returns (how well is the portfolio manager forming correct predictions?
* Breadth - number of independent investment opportunities p.a

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9
Q

Smart Beta Technique

A

Weights are based on fundamental factors

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10
Q

Quantitative Investing (3)

A
  • data driven analysis to find patters
  • relies on factors identified overtime by portfolio managers to build portfolios with attractive characteristics
  • often related to quality (ROE), momentum and value (P/E)
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11
Q

Momentum

A

velocity of price changes as opposed to the actual price levels, momentum stocks are those that move with the momentum of the stock market

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12
Q

6 types of investments in the stock market

A
  1. Fast growers - 20-25% p.a
  2. Slow growers (becoming mature) - 2-5% p.a.
  3. Stalwarts - large cap, slow, steady growth
  4. Cyclical - high beta
  5. Turnaround - potential to turnaround despite losses
  6. Asset plays - under-appreciated
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13
Q

Companies with no debt cannot

A

Go bankrupt

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14
Q

PVGO (4)

A

Present value of growth opportunities - represents the component of a company’s stock value that corresponds to the investors’ expectations of growth in earnings.
* simple way to think about P/E
* PVGO - value of stock - value no growth
* price with no growth = e/r or d/r - like a perpetual bond

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15
Q

Extra share value comes from…

A

positive NPV projects

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16
Q

For PVGO we need… (2)

A
  • Value creation (ROE > r)
  • Retained earnings (b > 0) - b = 1-d (dividend payout)
  • if one is missing then no PVGO
17
Q

Gordon-Shapiro Growth Model assumes…

A

stocks pay dividends, dividends grow at a constant rate

18
Q

Fact 1: P/E ratio simply means…however…

A

how many years it takes a company to earn back today’s investment however, stock with high P/E are high because earnings are expected to grow.F

19
Q

Fact 2: P/E can be used as a…

A

margin of safety
* when the earnings yield on stocks is higher than the YTM of bonds
* equity risk premium

20
Q

Fact 3: P/E tends to be high for companies with…

A

forecast fast growing earnings

21
Q

Buy high P/E stocks if you expect…

A

high growth in earnings (high PVGO) or safe earnings

22
Q

Fact 4: P/E can be inflated due to

A

optimistic investors

23
Q

Fact 5: P/E of two randomly selected stocks cannot be…

A

meaningfully compares (differs within industry) - firm can compare P/E with historical P/E

24
Q

Fact 7: PEG Ratios a fairly priced stock has a P/E ratio equal to

A

its growth rate in earnings

25
Q

Fact 8: higher PVGO =

A

higher P/E

26
Q

Fact 9: riskier a firms earnings =

A

lower P/E (higher discount rate reduces the P/E)

27
Q

Fact 10: Firm life cycle is a key determinant of the

A

P/E ratio - young company with high future earnings potential = high P/E

28
Q

Fact 11: Popularity of industry groups =

A

key determinant in P/E (popularity = higher)

29
Q

Fact 12: High P/E ratio stocks are inherently..

A

riskier than lower P/E stocks (mistake in the forecast of high g in earnings are most costly than low g in earnings)

30
Q

Fact 13: Changes in the level of stock market will…

A

have different impacts on different industries

31
Q

Fact 14: Changes in interest rates will have different impacts on…

A

P/E ratio of different firms

32
Q

Fact 15: g in earnings is tied to the…

A

retention ration (g = b x ROE)

33
Q

Fact 16: P/E ratio is sensitive to…

A

gearing (changes in capital structure)

34
Q

Technical Analysis

A

uses patterns in stock prices and volumes to predict future returns - short-term = waste of time

35
Q

Classic technical analysis techniques (3)

A

charting (heads and shoulders, double top, lines of support, resistance), momentum and reversal

FINC302 - Applied Investments (13 decks)

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