Investment Strategies Flashcards

1
Q

Market timing

A

-attempt to buy low and sell high
- short term price patterns
- some use fundamentals to pick securities then rely on market timing to trade

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2
Q

Passive investing (indexing)

A
  • weight portfolio to match a broad based index such as S&P to try to match its performance
  • index funds
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3
Q

Buy and hold

A

EMH is to employ passive strategy
- no active strategy could beat a truly efficient market
- buying securities and holding them until needed

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4
Q

Portfolio immunization

A
  • passive strategy to safeguard bond portfolio against interest rate volatility
    -average duration of portfolio is made equal to preselected time horizon
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5
Q

Bond swaps

A
  • entails selling a certain bond or bonds and replacing it with another
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6
Q

Stock option collar

A
  • 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
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7
Q

Floating rate note collar

A
  • 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
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8
Q

Dollar cost averaging

A
  • equal amount of dollars is invested each period
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9
Q

Laddered portfolio

A
  • bonds are purchased with different maturity dates
  • as each bond matures a new longer term bond is purchased
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10
Q

Bullets

A
  • investor purchases intermediate duration bonds an does not acquire long duration or short duration bonds
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11
Q

Barbells

A
  • half short term and half long term bonds
  • requires periodic rebalancing
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12
Q

Investing on margin

A
  • 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
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13
Q

Maintenance margin formula

A

margin requirement = (1 - initial margin percentage) / (1 - maintenance margin percentage) * purchase price of stock

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14
Q

Short Selling

A
  • 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
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15
Q

Option straddles and combinations

A
  • 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
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16
Q

Protective put

A
  • holding a long position in stock and buying put for it
  • put acts as insurance against decline
  • costs premium
17
Q

Currency futures

A
  • contracts for future delivery of currencies
  • hedge positions to lock in price of currency and avoid risk associated with foreign currency