Chapter 8

Question 1

The growth of the firm and keeping employees motivated requires strong and stable ownership. Favourable characteristics include the following:

Answer 1

1. A large portion of the company owned by employees (aligns the interests of employees with the corporation)
2. Current owners authorized to grant equity in the firm to attract and retain for key positions
3. A succession plan in place; for example, which existing employees can fulfill the role when personnel move on to other positions or leave the firm

Question 2

When making such an investment, the investor should consider the following four elements:

Answer 2

People
Philosophy
Process
Performance

Question 3

What are some examples of good compliance practices?

Answer 3

1. Compliance control should be the domain of a non-investment manager, who is less likely to be biased
2. Trades should be audited frequently
3. Key investment staff should be required to disclose personal holdings
4. Firms have varying philosophies on personal trading.
5. Under no circumstances should portfolio managers be able to place trades for their own accounts.

Question 4

What are the two qualities for a sound process?

Answer 4

1. Elements that are transparent and verifiable
2. Team-based decision-making procedures

Question 5

How are investment firms generally organized?

Answer 5

1. Team approach
2. Individual approach

Question 6

Name a few Equity Management styles?

Answer 6

1. Value approach
2. Growth
3. Sector rotation
4. Momentum (high-risk, high-return strategy)
5. Growth at reasonable growth (GARP)

Question 7

Define value approach?

Answer 7

Look for stocks that are out of vogue or overlooked by the market and may be undervalued. This strategy takes time to work, at least five years. This approach can take two forms, passive screening and contrarian investing.

Passive screening: the manager partitions the stock universe using fundamental metrics such as price-to-book, price-to-equity and price-to-sales.

Contrarian investing: uses those indicators to determine what most investors will do and then do the opposite.

Question 8

Define growth at a reasonable price (GARP)?

Answer 8

• applies a value approach to growth investing
• will avoid stock with high price-to-earnings or price-to-book ratios
• instead will use price-to-earnings-to-growth (PEG) ratios

1. An ideal PEG is less than one and ideally closer to 0.50
2. A PEG of less than one suggests the stock price is less than it should be given its price, earnings and growth projections
3. A PEG of more than one suggests the stock is overpriced given its prospects for growth

Question 9

Name a few Fixed-Income Management styles?

Answer 9

1. Interest rate anticipation
2. Value or Security Selection
3. Sector trading
4. High yield

Question 10

Define explicit costs and some examples:

Answer 10

• Are those that are borne directly by the investor

1. Management fees
2. Operating costs
3. Sales charges

Question 11

Define implicit costs:

Answer 11

• Trading costs

Question 12

What is investment philosophy?

Answer 12

Is a logical way of thinking about how markets work and how they may be incorrectly priced.