Chapter 4-Investing In A Fund Flashcards
Stanford University showed that increasing the number of stocks in a portfolio significantly(!) reduced ___. Increasing from even 19 to ___ stocks showed significant reduction in ___.
Standard deviation dropped a little after this to where the difference in __ between 20-, 50-, & ___-stock portfolios was ____.
Risk; 20; risk; risk; 100; insignificant
Standard deviation is normally calculated using ____.
36 month observations (data).
That Stanford study also showed return potential for a 1-2 stock portfolio was ___ a 20-stock or even 200-stock portfolio.
almost identical to
From 1971 when Nixon legalized gold ownership, gold funds ___ 5-year T-notes despite having much more ____ than aggressive growth stocks.
Underperformed; volatility
One way to minimize mutual fund taxation for clients is to put _____ into an IRA.
Tax-inefficient funds
Typical tax inefficient funds include …
- Taxable bond funds
- Taxable money market accounts
- High-dividend paying stock funds
You can also help clients avoid excessive taxation by choosing equity funds with ___, use equity funds with _____-paying stocks, and of course putting ____ in tax sheltered funds.
Low turnover; low dividend; fixed income assets
The difference between bid-ask prices is often ____, but can be as high as ___% for foreign stocks or thinly traded US stocks.
1/32 of a point; 1-2
Impact costs
A large purchase of a stock can push its price up whereas a large sale can push its price down.
Impact costs range from well under ___ or in emerging markets up to ____. Large cap index funds have less than ___ per year on average.
1%; several percentage points; .5%
Despite many people believing real estate has performed better than US stocks… real estate prices have risen about ___ % above inflation since 1975. This number is even less if the ____ is taken into account. ___ have performed substantially better since 1975.
1-2; 2007-2011 recession; stocks
Total return for mutual funds is calculated by …
For example, someone buys 100 shares of GHU fund for $20 a piece. Then GHI fund increases value to $25 per share. GHI sells some stocks resulting in $3 per fund share capital gains that are then distributed to fund shareholders. That someone buys $300 of fund shares valued at $22 a share after the capital gain payout (13.63 shares). GHI fund NAV increases to $24 per share. Plug into formula!
“A study” showed that of 12,000 stock portfolios for 10-18 year periods, ___ stocks increased odds of outperforming market.
A 250-stock portfolio had 1 in ___ chance to outperform versus 1 in ___ for 15-stock portfolio.
“You concentrate to create wealth; you diversify to preserve it.”
fewer; 50; 4
A fund is diversified in a technical sense if it meets the following criteria…
- Invests no more than 5% in a single company
- Fund owns no more than 10% voting stock of a company
- Funds following 1 & 2 for 75% of its assets are diversified. If not, they’re more volatile.
A fund is diversified in a technical sense if it meets the following criteria…
- Invests no more than 5% in a single company
- Fund owns no more than 10% voting stock of a company
- Funds following 1 & 2 for 75% of its assets are diversified. If not, they’re more volatile.
Some funds follow the Warren Buffett approach of concentrating on a small number of ___companies, maybe owning less than ___. This is a safer approach with ___ vs small stocks.
Big; 2 dozen; blue chip
Following the previous year’s best performing advisory newsletter resulted in an annual return of ___ over 20 years vs 9% annualized return adjusted for dividends from the ____
-17%; Wilshire 5000 Index
What has the most volatility?
Gold mine stocks
Gold bullion
Gold coins
Silver
Silver
Which share class offers break points to investors?
A shares
Dealer reallowance
Dealer concession aka a sales concession that a securities firm receives for selling securities that are subject to an offering; usually a percentage of the underwriting spread, but it can also be a specific price based on the number of shares sold
Which class of shares is generally more profitable over the long haul… class A, B, or C?
Class A shares up front fees are usually better then spread out recurring fees from other classes AND you get lower rates the more that you invest on the front end.
What class of shares accounts the most for client impatience and frustration?
Class C because the recurring fees don’t punish somebody for exiting in a few months or years as much as Class A funds.
All mutual funds are sold to the public at …
NAV + applicable sales charges
Three taxable events for a mutual fund are …
1) the sale of securities within a portfolio by the portfolio manager(s)
2) declaration and payment of dividends or interest from the portfolio’s securities
3) A client selling their fund shares
