Investment Strategies Flashcards
Market timing
-attempt to buy low and sell high
- short term price patterns
- some use fundamentals to pick securities then rely on market timing to trade
Passive investing (indexing)
- weight portfolio to match a broad based index such as S&P to try to match its performance
- index funds
Buy and hold
EMH is to employ passive strategy
- no active strategy could beat a truly efficient market
- buying securities and holding them until needed
Portfolio immunization
- passive strategy to safeguard bond portfolio against interest rate volatility
-average duration of portfolio is made equal to preselected time horizon
Bond swaps
- entails selling a certain bond or bonds and replacing it with another
Stock option collar
- hedging strategy
- investor owns stock and wants to hedge against the stock declining in value
- sells call at one strike price (out of the money)
- buying put at lower strike price (out of the money)
3 simultaneous positions
- long in the stock (owns it)
- short in the call (sold call received premium)
- long in the put (owns it and pays premium)
- obtains downside protection but limits upside potential
Floating rate note collar
- floating rate note is debt with variable interest rate
- collar specifies max and min rate of interest that will be paid on a floating rate note
- tied to t-bills or other MM
- usually mature in 5 years and interest adjustments made periodically
- provide protection but pay lower yields than fixed rate at same maturity
Dollar cost averaging
- equal amount of dollars is invested each period
Laddered portfolio
- bonds are purchased with different maturity dates
- as each bond matures a new longer term bond is purchased
Bullets
- investor purchases intermediate duration bonds an does not acquire long duration or short duration bonds
Barbells
- half short term and half long term bonds
- requires periodic rebalancing
Investing on margin
- Reg T sets initial margin at 50%
- only for actively traded securities, not MF or options (NYSE, AMEX, NASDAQ qualify)
- second level margin regulation is by exchanges and FINRA (25%), minimum maintenance after Reg T met
- Reg T margin required to open it
- maintenance margin required to keep it
Maintenance margin formula
margin requirement = (1 - initial margin percentage) / (1 - maintenance margin percentage) * purchase price of stock
Short Selling
- believes stock value will decline
- need margin account
- net proceeds from sale plus required margins are held by the broker
- no funds are immediately received by the short seller
- no time limit
- dividends on short stock must be covered by short seller
Option straddles and combinations
- thinks there will be future movement but doesnt know in which direction
- will profit as long as either side goes in the money greater than the combined premium