Chapter 12 Flashcards
Ch 12 PORTFOLIO MANAGEMENT AND INVESTMENT RISK
What is a stop order?
A suspended market order
A stop-limit order becomes a limit order once activated.
What does fundamental analysis involve?
Researching a company’s sales, long-term strategy, and information in financial statements
Financial statements include balance sheets and income statements.
What is a Form 8-K?
Filed with the SEC upon the occurrence of any event that could materially affect a company’s share price or financial condition
Events are listed in Sections 1-6 and 9 of the form.
When must a Form 8-K be filed?
Within four business days upon the occurrence of a material event.
What can the income statement be used to estimate?
A company’s cash flows.
What do leverage ratios measure?
The amount of debt that a company has and the additional debt it can issue.
What does the debt-to-equity ratio measure?
The degree of leverage for a company.
What does a low debt-to-equity ratio indicate?
A company is primarily capitalized by its shareholders.
What does a debt-to-equity ratio of 1.0 indicate?
The accounting value of a company’s liabilities and equity are equal.
How is the Price-to-Earnings (PE) Ratio calculated?
Stock Price ÷ Earnings Per Share (EPS).
What is an asset’s book value?
The accounting value, not the market value.
What does the price-to-book ratio compare?
The market price of a company’s stock to the accounting value of the company.
What values can be used to calculate the debt-to-equity ratio?
Market value or book value of the debt and shares.
If a company’s PE ratio recently fell, what could have happened?
Either the share price declined or EPS increased.
If a company’s PE ratio recently rose, what could have happened?
Either the share price increased or EPS declined.
What is the Wilshire 5000-to-GDP ratio used for?
To determine whether U.S. stocks are over- or under-valued.
What is the basic measure of risk in Modern Portfolio Theory?
Standard deviation.
According to CAPM, what are the two specific types of risk?
- Diversifiable (non-systematic risk)
- Non-diversifiable (systematic risk)
What does alpha measure?
Non-systematic risk.
What does beta measure?
Systematic risk.
What does beta correlate with?
A stock’s covariance or correlation with the overall stock market (e.g., S&P 500 Index).
What may tactical asset allocation include?
Sector rotation.
What do strategic investors believe about markets?
Markets are efficient and active investment management doesn’t produce excess risk-adjusted returns.
What are tax-adjusted returns adjusted for?
Taxes, but not inflation.
According to the dividend discount model, when is a stock a good investment?
When its market value is less than the present value of future dividends.
What is the formula for net yield (after-tax yield)?
Taxable yield x (100% - tax bracket %)
What is the formula for calculating inflation adjusted return (real return)?
Nominal yield – inflation rate.
How many times per year must a reporting company file a Form 10-Q?
Three times.
How often is a Form 10-K filed?
Annually.
How do you calculate the amount needed to assure payments in perpetuity?
Divide the annual income desired by the rate of interest needed to produce the future income.
What is a measure of profitability?
Earnings per share (EPS).
How is a company’s market capitalization calculated?
Multiplying the current market value of its stock by the number of shares outstanding.
What happens if a company purchases an asset and finances it through debt?
It increases its percentage of debt capital-to-equity capital.
What does technical analysis use to make trading decisions?
Charts, pricing trends, and support and resistance levels.
What moving averages might a technical analyst examine?
- 50-day moving average
- 200-day moving average
What characterizes value stocks?
- Low P/Es
- Low price-to-book ratios
- High dividend payout ratios
What characterizes growth stocks?
- High P/Es
- High price-to-book ratios
- Low dividend payout ratios
What is the dividend discount model?
A stock valuation method that estimates future dividends and discounts them to their present value.
What formula does the dividend discount model use?
The same formula as the present value of a perpetuity (e.g., PV = Perpetual Payment ÷ Discount Rate).
What concept is covered in behavioral finance?
Loss aversion.
What type of index is the S&P 500 Index?
A capitalization-weighted index.
What type of index is the Dow Jones Industrial Average (DJIA)?
A price-weighted index.
What does the MSCI EAFE index represent?
An index of foreign (non-U.S.) stocks.
What is the best way to calculate a fund’s annual return over several years?
Geometric means.
What is the formula for Total Return?
(Sale Price – Purchase Price + Dividends/Interest) ÷ Purchase Price
What is the formula for Net Present Value (NPV)?
Discounted Value of Cash Flows – Market Price (i.e., NPV = PV – Market Price)
What is an investment’s internal rate of return (IRR)?
The return that makes the net present value (NPV) of the investment equal to zero.
What cash flows does an investment’s IRR consider?
Only the positive cash flows and negative cash flows from an investment.
If the net present value (NPV) of an investment is greater than zero, what does it indicate?
The investment’s current market price is less than the discounted cash flows.
If the net present value (NPV) of an investment is less than zero, what does it indicate?
The investment’s current market price is greater than the discounted cash flows.
What will buying investments with a positive NPV do?
Increase an investor’s wealth.
