Formulas Flashcards
What is the Dividend Payout Ratio?
Common Stock Dividend / Earnings Per share
Measures relationship between amount of earnings paid to shareholders in for form of dividend, relative to earnings per share. Typically higher the dividend payout ratio, the more mature the company. High Dividend payout ratio may indicate possibility of dividend being reduced. A low dividend payout ratio may indicate that the dividend may increase
What is Return on Equity? (ROE)
Earnings Per Share / Stockholder’s Equity Per Share
EPS: $2.00
Total Equity: $7,000,000
Shares Outstanding 1,000,000
Return on Equity = 28.5%
What is the difference between fundamental analysis vs. technical analysis?
Fundamental analysis includes the following: ratio analysis on balance sheet and income statement, looking at economic data such as inflation interest rates, GDP, and Unemployment
Assumptions include: Investments can determine reliable estimates of stock’s future price behavior
Technical analysis is the process of charting and plotting a stock’s trading volume and price movements. Doesn’t involve ratio analysis. Believe supply and demand drive stock price. Resistance (at the top) may develop when investors who bought early may view this as chance to get even (or take a profit)
Support (at the bottom) Purchase opportunity that may have previously been passed
What are common tools of technicians?
Charting, market volume, short interest, odd lot trading, Dow theory, breadth of market and advance decline line
What are the three forms of efficient market hypothesis?
Weak Form- Historical information will not help investors achieve above-average market returns. Rejects technical analysis and asserts fundamental analysis will help investor. reflects all price and volume data. DIRECT CONTRADICTION WITH TECHNICAL ANALYSIS
Semi-Strong Form - Rejects both technical analysis and fundamental analysis, but insider information will lead to above-average market returns
Strong Form - Stock prices reflect all available information and react immediately to new information . Even with inside information the market cannot be preformed on a consistent basis
Proponents of investing in index funds would be strong form, because Semi-Strong technically still believes in insider trading.
What are 4 different types of market anomalies?
January Effect - January tends to be a better month because of tax loss selling in November and December
Small Firm Effect - Small firms can grow more quickly than larger firms. Easier for them to grow revenue
Value Line Effect - Stocks that receive highest ranking outperform stocks with lowest rankings
PE Effect- Low P/E Stock tend to outperform High P/E stocks
What do Active vs Passive Investment Strategies believe?
Active- markets are inefficient, can achieve above - average market returns through active investing and market timing
Passive - Believe markets are efficient and it’s difficult to achieve above-average market returns. Passive buy and hold is best, such as laddered bonds, ETFs, barbell bond strategy, UITs, and index investing
What is difference between Strategic Asset Allocation vs Tactical Asset Allocation?
Strategic- involves assessing likely outcomes for various allocation mixes between asset classes. Done every few years. ACTIVE allocation Strategy
Tactical- Investor determines expected returns for various asset classes, then rebalances the portfolio to take advantage of expected returns
