Chapter 8 Flashcards
Risk Profile
A description of the type of risk associated with a particular investment
Real Rate of Return and it’s calculation
The return adjusted for the effects of inflation. Determines purchasing power
Real Return = Nominal Rate - Annual Inflation Rate
Norminal Return
The return that has not been adjusted for the impact of inflation
Arithmetic Mean Calculation
Sum of individual holding period returns / the number of holding period returns
Eg. year 1($45-$50) / $50 = -10%
Year 2($55-$45) / $45 = 22.22%
(-10% + 22.22%) / 2 aka 0.02 = 6.11%
Geometric Mean Calculation
Calculates the average compound return over several periods. Used to determine the periodic increase or decrease in wealth
Return on a Security and Calculation
Can be measured in Absolute Dollars but it is more common to express return as a percentage.
Return % =
cash flow + (ending value - beginning value)
/
Beginning value
X 100
Common Measures of Risk : Variance
Measures the extent to which the possible realized returns differ from the expected return or mean
Common Measures of Risk : Standard Deviation
The measure of risk commonly applied to portfolios and to individual securities within the portfolio. The square root of variance.
Probable Range of Returns Calculations
Average return + standard return = positive outcome
Average return - standard deviation = negative outcome
Portfolio Beta
Statistical measure that links the risk for individual equity securities or a portfolio or equities to the market as a whole.
Higher beta means that the portfolio is exposed to more risk
Measures that part of the fluctuation in returns driven by changes in the stock market
Risk and Return Relationship (low to high)
Low to High Risk:
Treasury Bills
Bonds
Debentures
Preferred shares
Common shares
Derivatives
Index Fund
Investor believes that the markets are completely efficient, there is no justification for active portfolio management
The value of a share is primarily influenced by…
The company’s future earnings
Liquidity Ratios
Are used to judge a company’s ability to meet short-term commitments.
Fixed Asset
Assets that are expected to last longer than one year (not intended to be sold and are used for day to day operations to produce goods and services
Current Asset
Assets that are expected to be converted to cash within 1 year (deposit accounts, inventories, trade receivables)
Current Liabilities
1: Trade Payables (goods that have not received payment for)
2: Accured Liabilities (wages or taxes not yet paid)
3: Notes Payable (loans)
Total shareholder’s Equity
The amount contributed to the financing of the company by shareholders over time by 2 means:
1: buying shares when they were in the peimary market
2: all of the company’s annual profits that have not been distributed to shareholders but reinvested into the company
Common shares + retained earnings
Gross Profit
Revenue less cost of sales
The revenue, net cost of sales (the cost of producing those goods), cost of inventories used to produce the goods and labor in production
Closing Retained Earnings for a Fiscal Year Calculation
Retained Earnings at beginning of period - dividends + profit for the period = closing retained earnings
4 Common Types of Ratios used in Financial Analysis: Liquidity Ratios
Used to judge the company’s ability to meet it’s short-term commitments
4Common Types of Ratios used in Financial Analysis: Risk Analysis Ratio
Shows how well the company can deal with it’s debt obligations
4 Common Types of Ratios used in Financial Analysis: Operating Performance Ratio
How well management is making use of the company’s resources
4 Common Types of Ratios used in Financial Analysis: Value Ratio
Show the investor what the company’s shares are worth or the return on owning them
Meaningful External Comparisons
Not only should the companies be similar in operation but also in basis used to calculate each ratio compared should be the same
Mutual Fun Performance Calculation
Investment x Year 1 % return / 100 = A
A + Investment = Mutual fund Year 1 Return
Year 1 return x Year 2 % return / 100 = Year 2 mutual fund return
Geometric Return Calculation
[(1 +or- r1)(1 +or- r2)] ^0.5 - 1 x100
Fundamental Analysis
The use of analytical tools to determine the intrinsic value of securities
Technical Analysis
The study of historic prices and stock market behaviour to identify recurring patterns in the data
Fundamental Analysis
Involved assessing the short, medium and long range prospects of different industries and companies
Tax Rates on Types of Investments
Interest Income: Highest - Treasury Bills, bonds, money market mutual funds
Dividend Income: Middle - common and preferred shares
Capital Gains: Lowest - selling an investment for more that the price paid
Duration
A measure of the security of a bond’s price to changes in interest rates (approx % change in price/value of a bond for 1% change in interest rates)
Portfolio Alpha
The excess return earned on the portfolio
Asset Allocation
The selection of the classes of securities to be held and in what portion to hold them
Security Analysis
Evaluation of risk and return characteristics of securities.
Fundamental Analysis
Assessing the short, medium and long range prospects of different industries and companies.
This means studying everything
