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Series 7 > Chapter 19- Securities Analysis > Flashcards

Chapter 19- Securities Analysis Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Customers who want to minimize risk in securities can

A

have the largest portion of securities in their portfolio will act differently under different economic conditions

the largest percentage of the portfolio consist of leading common stocks

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2
Q

Suitable portfolio of a pension fund looking for income

A

would include government securities, corporate bonds and covered option writing

Not municipal bonds since they are already tax free

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3
Q

Capital Asset Pricing Model (CAPM)

A

a model of the relationship between the expected risk and expected return

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4
Q

Asset Allocation

A

The diversification of investments in a customers account determining the percentage of assets that should be in stocks, bonds, real estate, or other asset classes

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5
Q

Dynamic Asset Allocation

A

involves frequent changes to the asset allocation based on economic conditions

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6
Q

Tactical Asset Allocation

A

Redistributes the percentages of assets based on the portfolio and the current market performance of each sector

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7
Q

Strategic Asset Allocation

A

Generally keeps the assets in a portfolio at an assigned balance

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8
Q

Dollar cost averaging (Constant Dollar investment plans)

A

Purchasing regular dollar amounts at pre-established time intervals

average cost per share will always be lower then the average price per share over time

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9
Q

Average cost (breakeven price) for dollar cost averaging is figured by

A

total dollars invested/total shares purchased

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10
Q

Duration

A

The degree to sensitivity in a bond’s price to small changes in interest rates and the length of maturity of the bond

Higher duration, more volatility

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11
Q

Small Cap Companies have a greater

A

Liquidity risk

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12
Q

Efficient Market Hypothesis summary

A

Does not think fundamental or technical analysis would be able to produce better than average returns

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13
Q

Fundamental Analysis

A

Concerned with a specific company and its factors

Managment of the company
Earnings
Company outlook
company’s annual report
price/earnings ratio

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14
Q

Technical Analysis

A

Concerns with supply and demand of securities

Trading volume
moving averages
advances and declines
odd lot purchases and sales
timing of purchases and sales
Support and resistance levels

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15
Q

Odd lot theory

A

Odd lot investors are always wrong

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16
Q

Advance decline theory

A

Compares the number of stocks that have advanced to the number of stocks that have declined

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17
Q

Market sentiment

A

describes the bullish or bearish sentiment of investors

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18
Q

Breadth of the Market

A

The percentage of stocks participating in a market move

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19
Q

Market Momentum

A

The measure of the rate of acceleration of a price movement

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20
Q

Short Interest Theory

A

Short sellers will eventually become buyers. This slows declining markets and accelerates rising ones

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21
Q

Random Walk Theory

A

Past performance can not be used to predict future movements

Market reacts instantly to new information

It is futile to try and out preform the market

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22
Q

Head and shoulders top formation is

A

a reversal of an upward trend

23
Q

Head and shoulders bottom formation

A

a breakout to the upward move

24
Q

Support level is

A

the price where downward trends tend to level off

25
Q

Resistance level is

A

the price where an upward trend tends to level off

26
Q

Selling Climax

A

Occurs at the end of a bear market

it is a sharp drop in stock prices accompanied by increasing volume

27
Q

Dow Jones industrial average is the only index that is not

A

Capitalization weighted

It is price weighted

28
Q

Alpha

A

The amount a stock will change to particular news about a particular company (change in Managment, change in earnings etc)

29
Q

Beta

A

A measure of volatility of a particular stock’s price when compared to the market as a whole

Beta .8 - move less then the market
Beta 1.0 - the same as the market
Beta 1.3 - more than the market

30
Q

Consolidataing

A

The market is moving sideways

31
Q

Program trading

A

Computer driven trading

Does not EVER consider fundamental analysis

32
Q

Company’s balance sheet shows

A

The assets and liabilities of a corporation on a particular date (typically the end of the year)

Total Assets = Total liabilities + net worth

At the bottom you will also have the total number of stocks outstanding
preferred
common
convertible
treasury

33
Q

Three assets categories on a balance sheet

A

Current - Cash or will be converted into cash in the next 12 months. Listed in order of liquidity (cash is first; inventory is last)
Fixed - Items that a company has or needs to produce it’s product, Include building, equipment, and land etc.
Other - intangible items - copyrights, patents, good will

34
Q

Liabilities are in two catagories

A

Current Liabilities - Must be paid in the upcoming 12 month period (2/1 for current assets to current liabilities)

Long term debt - Bonds

These two added together create your total liabilities

35
Q

Shareholders Equity has 4 groupings

A

Preferred stocks
Common Stocks
Paid in Surplus (Paid in Capital) - excess over par when the stock as sold to the public)
Retained earnings

All of these added together gives up total shareholder equity

Total liabilities + total shareholders equity gives you total liabilities and outstanding equity of the company

36
Q

Income Statment

A

Also called a P&L or a Profit and loss statement

Shows the revenue, Expenses and earnings over a period of time (typically a year)

37
Q

P&L sales

A

You take sales and subtract the cost of goods sold, Selling and administrative costs and depreciation
This leaves the operating profit (EBIT- earnings before interest and taxes)

38
Q

What to do with Operating profit

A

You take operating profit and deduct bond interest to get Total income (EBT- earnings before taxes)

39
Q

What to do with Total income

A

Subtract taxes from total income and we are left with Net income (EAT - Earning after tax)

40
Q

What to do with net income

A

Subtract preffered dividends on common stock from net income to get Net earnings

41
Q

What to do with net earnings

A

Subtract dividends paid to common stocks and you are left with retained earnings

Earnings per share you use Net Earnings/common shares outstanding

42
Q

Capital structure and leverage

A

If the company has a large amount of capitalization from selling stock then they are conservative

If the company has a large capitulation from selling bonds then they have a speculative structure

43
Q

Using FIFO and valuation of inventory

A

When prices are sharply rising the effect of using FIFO on valuation will result in increasing the reportable income to the company

44
Q

Dilution of stock

A

decreased earnings per share through a conversion of convertible securities exercise of options or warrants or additional share being issues

A common stock holders interest would not be diluted by stock splits or stock dividends

45
Q

Corporate expense ratio is determined using the

A

income statement

NOT the balance sheet

46
Q

On the date a corporation declares a cash dividend

A

It becomes a current liability on the balance sheet

47
Q

Earnings per share ratio (formula)

A

Net earnings/outstanding shares

48
Q

Earnings per share can be increased by (or changed by)

A

Increased by
tax loss carried forward
Reduction of corporate income taxes
retirement of outstanding bonds

Changed by
Change in companies inventory valuation
acquisitions and dispositions of other companies and subsidiaries

49
Q

Fully diluted earnings per share considers

A

This is calculated assuming that all dilution from all available sources occurs

50
Q

Current Ratio (formula)

A

Current assets / current liabilities
standard minimum is 2:1
most accurately describes liquidity (NOT profitability, coverage or debt)

51
Q

Price to earnings (P/E) Ratio (formula)

A

Market price/Earnings per share

sometimes referred to as the multiple at which the stock is selling

P/E ratio does not change when a stock split occurs

Very high P/E ratios show over valued stocks

52
Q

Total Return (Formula)

A

Growth + Income

53
Q

Profit Ratio (formula)

A

Net income/Revenue

Measures how much of each revenue dollar is net income

Series 7 (20 decks)

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