Portfolio Analysis Flashcards
Types of equity securities that can be included in a portfolio include:
Blue chip Growth Emerging growth Income Cyclical Counter cyclical Defensive Speculative Special situation
Blue chip stock:
- highest quality companies
- proven earning and signed records
- large capitalization NYSE and NASDAQ listed issues
Growth stock:
- growth stock represents companies that are in a period of above average growth due to rapid market expansion
- normally do not have proven track record
- very low dividend payout ratios
- sell higher P-E (price-earnings) multiples
Emerging growth stock:
- companies are brand new ventures of high risk but also high potential reward
- no track record
- can’t afford to pay dividends
Income stock:
- mature companies
- high dividend payout ratios (utilities)
Cyclical stock:
-represents companies who’s fortunes track the business cycle closely.
Home builders
Appliance manufacturers
Automobile manufacturers
Counter cyclical stock:
- represent companies whose fortunes operate in reverse to the business cycle.
- very few
- price moves in the opposite direction of the market as a whole
- earning variability due to changes in economic growth
Defensive stock:
-represent companies which remain unaffected during business cycle downturns (drug companies, public utilities, food products)
Speculative stock:
- from companies that fly high during business cycle upturns (toy companies)
- mirror business cycle
Special situation stock:
-represents a company going through takeover, reconstructing, bankruptcy, or management change that will greatly change the nature of its operations.
Returns provided by stock investments:
Dividends
Capital gains
Total return calc:
Income (dividends for equities, interest for debt) + growth
Standard deviation:
Measure of risk of return
Systematic risk
Risk of general market decline affecting the portfolio
- called market risk
- cannot be diversified away
Non systematic risk
The risk of a single investment going sour, also known as selection risk
- by diversifying the portfolio, the risk is minimized
- can be diversified away
Capital risk
Risk that the amount invested may not be fully recovered
Timing risk
Risk that buying and selling occur at disadvantageous price levels due to poor market timing
Business risk
Risk that an issuers business declines
Interest rate sensitive stocks
Utility stocks Corporate bonds Preferred stocks Common stock ISSUED by utility *NOT growth stock, common stock insured by manufacturer
Stock that moves with the market
Blue chip stock
-price movements tend to track the overall market
Which investment offers the Greatest hedge against purchasing power risk
Common stocks
CAPM=
Capital asset pricing model
*methodology for finding the most efficient investments— those that give the greatest return for the amount of risk assumed
Efficient market theory:
Theory holds that prices of securities in the market fully reflect all publicly available information.
States that technical and fundamental analysis is if no use in selecting stocks for a portfolio.
Undervalued securities should not exist
Overvalued securities should not exist
Securities selection based on technical or fundamental facts is irrelevant since prices reflect all available information.
Fundamental analysis
Evaluating a company’s
- balance sheet
- income statement
- management
- marketing strategies
- research and development as a means of predicting the future long term price movement of its stock
Technical analysis
Research that seeks to predict the future price movement of a stock or overall market by using price movement and volume indicators.
-using charts if stocks past price and volume movements to predict its future price movements
Capital asset pricing model would identify the most efficient investment as those with the:
Highest return for the lowest level of risk assumed
Market risk is the same as?
Systematic risk
Beta is a measure of?
Market risk
-measure of price volatility of a stock or portfolio relative to the market
Beta +1
Indicates that a particular security moves as fast and in the same direction as the market
Beta +1/2
Indicates that the stocks price moves half as fast and in the same direction as the overall market
Beta -1.5
Stock prices increased at a faster rate than the market
- negative beta stocks move opposite to the general market
- counter cyclical stocks
What’s stock groups with low positive beta mice slower than the Market?
Utilities
Railroads
Companies that have very high betas relative to the market
Growth companies
Technology companies
Beta +2
Decliners at a faster rate than the market
Alpha is a measure of:
Non systematic risk— stock specific risk
Investments that could be considered to be defensive during deflationary periods:
Preferred stock
10 year bonds
30 year bonds
*fixed income securities are defensive securities in times of deflation
Defensive in times of inflation:
Common stock
