Investments Flashcards
REITs
- REITs are attractive because of the low correlation with the stock market and the diversification benefit that they provide to portfolios.
- Real estate is a hedge against inflation.
- REITs must distribute 90% of investment income to shareholders to maintain tax-exempt status.
- 3 types of REITs:
1. Equity - Invest in real estate for capital appreciation. Income is generated from rental income and appreciation.
2. Mortgage - Invest mostly in mortgages and construction loans. Make the spread between the lending and borrowing rate.
3. Hybrid - Combo of both equity and mortgage.
Unit Investment Trusts (UITs)
- Unit Investment Trusts are self-liquidating, have passive management and trading of assets within the trust.
- Can be equity or fixed income unit investment trust. Typically fixed income trust.
- Managed by a Trustee, there is no investment manager.
- A unit investment trust issues “units” not shares.
- Units can be sold back to the UIT at NAV (net asset value = (Assets - Liabilities) / Shares Outstanding.
- There is a very thinly traded secondary market.
Match the investment characteristic(s) listed below which describes an open-end investment company.
A. Only passive management of the portfolios.
B. Shares of the fund are normally traded in major secondary markets.
C. Both “A” and “B”.
D. Neither “A” or “B”.
The correct answer is D.
Option A is incorrect because open-end funds are both passively and actively managed. Option B is incorrect because open-end fund shares are traded directly with the fund, not on the secondary market.
Dollar Cost Averaging
- Dollar cost averaging allows an investor to invest the same dollar amount on a periodic basis, typically monthly.
- By investing the same dollar amount each month, an investor buys fewer shares when the price increases and more shares when the price decreases.
Which one of the following is an advantage of equity REITs over mortgage REITs?
A. Equity REITs can participate in the appreciation of the underlying properties.
B. Equity REITs participate in the capital gains of the mortgages, whereas mortgage REITs receive only the coupon payments.
C. Equity REITs retain the right to the potential appreciation of a property, but mortgage REITs retain the right to only the property’s rental income.
D. Equity REITs have the right to repossess the underlying property if the mortgage REIT fails to make its mortgage payments.
The correct answer is A.
Option B describes mortgage REITs. Option C is incorrect as mortgage REITs have nothing to do with “rental income.” Option D is an incorrect statement.
Return on Equity (ROE)
- Measures the overall profitability of a company. There is a direct relationship between ROA, earning and dividend growth.
ROE = Earnings Per Share/Stockholders Equity per Share
Fundamental Analysis
- Fundamental analysis is the process of conducting ration analysis on the balance sheet and income statement to determine the future financial performance and a forecasted stock price based upon that future financial performance.
- Ratio analysis includes calculating liquidity, activity, profitability, and common stock measurements.
- Fundamental analysis also includes a look at economic data to determine how the economy will impact various industries. Economic data would include: inflation, interest rates, GDP, and unemployment.
- Fundamental analysts believe that a stock price performance is largely driven by the financial performance of the firm.
- Fundamental analysis assumes:
- Investors can determine reliable estimates of a stock’s future price behavior.
- Some securities may be mispriced, and through fundamental analysis, it can be determined which securities are mispriced.
Technical Analysis
- Technical analysis is the process of charting and plotting a stock’s trading volume and price movements. Analysis of the trading volume and price movements will predict the future direction of stock prices long before fundamental analysis will.
- Technical analysis does not involve ration analysis or analysis of financial statements as fundamental analysis does.
- Technical analysts, who conduct technical analysis, believe supply and demand drive a stock price.
The form of technical analysis that utilizes Advance and Declines (also known as Breadth of the Market) as an indicator is known as:
A. Price Indicator
B. Volume Indicator
C. Market Indicator
D. Charting Indicator
The correct answer is A.
Advances and declines deal with price. Volume indicates the number of shares traded. Market indicators deal with directions of the market and related averages. Charts are used as indicators and in some instances, do not use the price but rather movements.
According to fundamental analysis, which phrase best defines the intrinsic value of a share of common stock?
A. The par value of the common stock.
B. The book value of the common stock.
C. The liquidating value of the firm on a per share basis.
D. The discounted value of all future dividends.
The correct answer is D.
The intrinsic value is the discounted value of a future stream of cash flows. In the case of a stock, its dividends.
Bottom-up equity managers include:
- Group rotation managers
- Value managers
- Market timers
- Technicians
A. 1 only.
B. 2 only
C. 1 and 3 only
D. 2 and 4 only
The correct answer is D.
Options 1 and 3 are both “top down” style managers.
Weak Form Market Hypothesis
- Historical information will not help investors achieve above-average market returns.
- The weak form rejects technical analysis and asserts that fundamental analysis will help an investor achieve above-average returns.
- Holds that security prices reflect all price and volume data.
- Is in direct contradiction with technical analysis, which attempts to predict future pricing based on the study of past pricing and volume patterns.
Semi-Strong Form Market Hypothesis
- The semi-strong theory asserts that both historical and public information will not help investors achieve above-average market returns.
- The semi-strong theory rejects both technical and fundamental analysis but inside information will lead to above-average market returns.
Strong Form Market Hypothesis
- The strong theory assets that historical, public and private information will not help investors achieve above-average market returns.
- The strong theory suggests that stock prices reflect all available information and react immediately to any new information.
- The strong theory holds that even with inside information the market cannot be out performed on a consistent basis.
Holding Period Return Formula
Holding Period Return = (Selling Price - Purchase Price +/- Cash Flows) / Purchase Price or Equity Invested
