Formula Investing and Investment Strategies

Question 1

Bond ladders

Answer 1

Portfolio of bonds that mature at regular intervals thoughout various maturities of the yield curve - effective when the yield is normal or sloping upward and interest rates are fairly stable

Question 2

Barbell strategy

Answer 2

Holding more bonds at the short and long end of the yield curve allows a portfolio’s price to match the volatility of an intermediate-term liability

Question 3

Bullet strategy

Answer 3

Usually weighs heavier around intermediate term assets, benefits when the yield curve is expected to steepen

Question 4

Market timing structure

Answer 4

• Hold high beta portfolio when expected market return>Risk free return
• Hold low-beta portfolio when expected market return < risk-free return

Question 5

Technical analysis methodologies

Answer 5

• Charting strategies: historical price patterns (Head & Shoulders Pattern and Inverted Head & Shoulders Pattern), moving average/point & figure charting and trading breakout techniques
• Sentiment indicators: contrarian statistics (odd lot, short sale interest, investment advisors bullish/bearish index) and Barron’s Confidence Index (Yield on High Quality Corporate Bonds/Dow Industrial 40 Bond Index: Bullish=higher quality yields and yield differential is narrow))
• Flow of funds indicators: amount of funds that are available to invest (MFI- Money Flow Index= Typical Price x Volume)
• Market structure indicators: desirability of overall market and opportunistic entry points. Dow theory trends: major, intermediate and ST run movements

Question 6

Fundamental analysis based on

Answer 6

fundamentals, as disclosed on financial statements, balance sheet and income statement

Question 7

Different Forecasting

Answer 7

-Top-down vs Bottom up
- Probabilistic Forecasting
- Econometric Models- statistical

Question 8

Tactics to offset immunization hazards of default/call risk and multiple nonparallel shifts on a non-horizontal yield curve

Answer 8

default/call risk: solve for the effective modified duration that measures against embedded options
multiple nonparallel shifts on a non-horizontal yield curve: cash matching/dedicated portfolio

Question 9

Active bond portfolio management methods

Answer 9

Contingent immunization- If results are favorable, then actively managed; if not, then portfolio would be immunized
Swaps: substitution, intermarket spread, rate anticipation, pure yield pickup (all taxable events)
Caps: payment exchange when interest rates go above cap
Floors: payment exchange when interest rates fall below floor
Collars: inefficient way of limiting variable rate exposure

Question 10

What interest rate environment is beneficial for the buyer of a collar?

Answer 10

Rising interest rates

Question 11

Examples of empirical regularities/market anomalies

Answer 11

January Effect, day of week (Mondays), Small/neglected firm, low P/E, Value Line

Question 12

What does a contrarian investor do?

Answer 12

Buys securities that are performing poorly and sells those that are doing well

Question 13

How are reinvested dividends treated in a DRIP?

Answer 13

Under a dividend reinvestment plan (DRIP), the reinvested dividends are subject to current taxation and become part of the investor’s cost basis.

Question 14

An investor has a concentrated equity position and remains very confident in the long-term prospects of the company. As their planner, you are concerned about what a large drop in the price of the stock may represent to their ability to meet their planning goals, however, the client is not interested in paying for puts on a stock that is only going to go up.

Based on this scenario, what would be the BEST strategy to recommend?
Sell the stock
Covered call writing
Buy calls
Collar the stock

Answer 14

The collar will allow the investor to both hold the stock and offset the cost of the insurance (protective put) through the income received for call writing.