Mutual Funds/ ETFs

Question 1

Selecting a Mutual Fund:

Answer 1

• investment objectives- what is the point of the fund and does it line up with your goals and strategies, every mutual fund before you invest is provided with a prospectus

Question 2

ETFs -Exchange Traded Funds

Answer 2

• A Mutual Fund Alternative
• Combine the elements of stocks and mutual funds
• You own shares that track specific indexes or a certain investment type
• Your stock really represents an entire portfolio
• They are bought and sold as individual shares of stock

Question 3

Benefits of ETFs

Answer 3

• Index performance except for actively traded ETFs and others employing speculative techniques
• Some track specific market sectors
• Immediate diversification
• Liquidity - traded anytime during US market hours
• Flexibility - traded just like stocks through market or limit orders, bought on margin, or sold short
• Cost effective - low fees (usually < .5%)
• Tax efficient

Question 4

Risks of ETFs

Answer 4

• Pricing – shares could be priced at a premium to the NAV
• Tracking Error
• Expense ratios
• Low volume can increase the bid/ask spread
• Watch out for the use of speculative techniques – leveraging and shorts
• Proliferation of ETFs

Question 5

Available ETFs

Answer 5

• Diamonds (DIA)
• track the DJIA
• Beta vs. S & P 500 = 0.94
• Expense ratio = 0.167%
• Turnover – changes as the DJIA changes

Question 6

SPDRs

Answer 6

• Offered by State Street Global Advisors
• Index and sector offerings
• Varying betas
• Expense ratios - varies
• Turnover - varies

Question 7

iShares

Answer 7

• Offered by Barclays
• Many types of index funds
• Betas vary
• Turnover varies

Question 8

Vipers

Answer 8

• Offered by Vanguard
• Similar to their mutual funds
• Mutual fund money can be transferred to Vipers
• VWO – Emerging Markets; expense ratio - 0.27

Question 9

Achieving Wealth:

Answer 9

• stop acting rich… Thomas Stanley ( there are lots of people in the world who pretend to be rich, live lavish lives, but deep down there really not and are in serious debt) Don’t wear yourself out to get rich
• build a portfolio that supports your type of style

Question 10

Investors need some kind of strategy:

Answer 10

• studies have shown that many investors have no strategy
• investments made haphazardly
• often stock are purchased with not regard to how they relate to other holdings
• investors believe in diversification but don’t practice it

Question 11

Tolerance for Risk

Answer 11

• all of us have different ideas about what’s risky and what’s not, nothing wrong with risk as long there is the possibility of an acceptable return

Question 12

Return Needs

Answer 12

• income vs. growth (some people are interested in one more than the other)

Question 13

Time Horizon-

Answer 13

• if you’re 25 years old and your investing for your retirement thats not for 40 years

Question 14

Your Personal Investment Profile

Answer 14

Total Return- What is acceptable?

How Much Volatility is acceptable?

Why is Return Important?

• Allow us to keep score
• Tells us if we are being adequately

Question 15

Required Return

Answer 15

• the rate of return on each investment that an investor must earn to be fully compensated for its risk

Question 16

The Investment Pyramid:

Answer 16

• Speculation
• Growth
• Foundation
• form the foundation ( real estate, emergency savings account(3-6 months of savings) ), then move toward investments more growth oriented, then with small portion of portfolio make some speculative higher risk investments

Question 17

What is a Portfolio?

Answer 17

• a collection of investment vehicles assembled to meet one or more investment goals

Question 18

Efficient Portfolio

Answer 18

• a portfolio that provides the highest return for a given level of risk, want more return for lower risk

Question 19

Traditional Approach:

Answer 19

• emphasizes “balancing” the portfolio using a wide variety of stocks and or bonds
• uses a broad range of industries to diversify the portfolio

Question 20

Modern Portfolio Theory

Answer 20

• uses statistical measures to develop a portfolio plan
• focuses on : expected returns, standard deviation of returns, correlation of returns
• combines securities that have a negative ( or low positive) correlations between each others rates of return.

Question 21

Key Aspects of Modern Portfolio Theory

Answer 21

• Beta: a measure of non-diversifiable risk or volatility
• Portfolio Beta
  - the beta of a portfolio; the weighted average of the betas of the individual assets
  - to earn more return, one must bear mor risk
  - build a portfolio

Question 22

Beta values:

Answer 22

2: twice as volatile as the market
1: same volatility as the market
.5: only half as volatile as the market
0: Unaffected by market movement

combine all betas in portfolio to find beta risk for portfolio: use weighted average

Question 23

Positively Correlated

Answer 23

move together (stocks, bonds and funds)

Question 24

Negatively Correlated:

Answer 24

move apart (…) add negatively correlated funds to diversify portfolio

Question 25

Sharpe ratio

Answer 25

• tells us whether a portfolio’s return are due to smart investment decisions or a result of excess risk.
• higher- the better its risk adjusted performance

Question 26

Alpha-

Answer 26

• the excess return of the fund relative to the return of the benchmark index (market value) ; the value that a portfolio manager adds to or subtracts from the return