Investment Planning Flashcards
Beta
Beta reveals the level of over or underperformance of the security relative to market expectations
Measures an individual security’s volatility relative to that of the market
Best used to measure volatility of a diversified portfolio
Market has a beta of 1
Standard deviation
Standard deviation measures a security’s performance relative to expectations of performance
correlation coefficient
familiarity bias – giving the most weight to the first information she encountered
during her analysis
representativeness – thinking a good company is a good investment
naïve diversification –split her investments equally amongst all her available options
belief perseverance – investing only in companies she is familiar with
Overconfidence -The client has been successful with one stock selection that was the
recommendation of a friend.
The efficient frontier. The efficient frontier measures what portfolios are attainable
and which are unattainable.
The indifference curve. The indifference curve measures what level of risk an
investor will accept for given levels of return
The unattainable.
The optimal portfolio. On the Markowitz Model, at the point of tangency
Bottom Up Management-
A bottom-up investing approach focuses on the analysis of individual stocks. In bottom-up investing, therefore, the investor focuses his or her attention on a specific company rather than on the industry in which that company operates, or on the economy as a whole,
Open End Funds – open-end funds are both passively and actively managed.
open-end fund shares are traded directly with the fund, not on the secondary market.
Correlation Coefficient = R = Relative strength that one security moves with the other
Coefficient of Correlation = R squared = r-squared measures the percentage of return due to the market
ETF’s vs. INDEX FUNDS
ETF shares can be purchased at any time during the day, while index fund shares can only be purchased at the end of the trading day
ETFs can be purchased on margin or shorted, whereas index funds require the full purchase price and can’t be shorted.
ETFs more readily track the underlying index as compared to an index fund, because the index fund will incur transaction costs, fund cash flows, and changes to the index
ETFs can trade at a discount to their net asset value, Index funds always trade at net asset value
FRAMING
The way an investment is presented
Representativeness
An assessment by investors of new information or decisions based on superficial traits rather than fundamental analysis
Can Lead To High Turnover
Anchoring
The use of immaterial information in making investment decisions
Cognitive Dissonance
Ignoring or discounting any new information that is not consistent with the fundamental view that the investor has of the company (TYPE OF OVERCONFIDENCE BIAS)
Gambler’s Fallacy
The mistaken notion that the onset of an outcome either increases or decreases the probability of that outcome occurring again.
Mental Accounting
Occurs when investors make decisions based on individual mental categories, which can be unique to each investor.
Hindsight Bias - When investors conveniently forget bad outcomes and remember good ones. (TYPE OF OVERCONFIDENCE BIAS)
Confirmation Bias - When investors search for news articles or opinions that confirm their own personal viewpoint while avoiding ones that disagree with their positions
