Portfolio Development and Analysis Flashcards
Fundamental Analysis
examines balance sheets and income statements to forecast future price movements
- consider current and past records
Fundamental Analysis - Top Down method
- investor first looks at trends in the general economy then selects industries, and finally companies
Fundamental Analysis - Bottom up method
- investors looks for individual stock with outstanding performance before considering impact of economic trends
- assumes company will do well even if industry doesn
Ratio Analysis
- studies relationships between financial variables
- ratios can be compared between firms and let investor know if there are any trends or standouts
Liquidity ratio
- compares financial variables to measure a company’s ability to meet its short term obligations
current ratio = current assets / current liabilities
Activity ratio
- measure of how rapidly a firm is able to convert various accounts into cash
- the sooner a company can convert assets into sales or cash, the more effectively the firm is being run
Profitability ratio
- compare two or more financial variables providing a relative measure of a firms income earning performance
Technical Analysis
- use charts to identify and project price trends
- examines short or intermediate term outlook
- not concerned with specific financial position of a company
Technical approaches
- dow theory
- barrons confidence index
- odd lot theory
- investment advisor opinions
- advance/ decline line
- moving average (200 day)
- mutual fund cash position
Charting
- plots market variables (stock prices and market averages)
- chartist plots the price patterns of securities to identify buy/sell opportunities
- believe movements occur in patterns that are consistent and predicable
- identify resistance and support levels
Resistance
- price ceiling that technical analysts note persistent selling of a commodity or security
- level sellers are expected to enter market to push prices lower
- when a stock breaks through it usually means that it will go on to new heights (bullish)
Support
- where securities tend to stop falling because there is more demand than supply
- analysts identify support levels as prices a security bottomed in the past
- if it goes below its bearish
Sentiment indicators
measure bullish or bearish moods of investors
- analysts will look at indicators as contrary
Dow theory
aggregate measure of securities prices and thus does not predict the direction of changes in individual stock prices
- purpose is to show direction of overall market
Barrons confidence index
index presumes that the differential between the returns on quality bonds and bonds of lesser quality will forecast future price movements
Investment Policy Statements
- expresses clients objectives (desired returns and acceptable risk) and constraints (liquidity, time horizon, taxes)
Dow Jones Benchmark
- 30 industrial stocks
- 20 transportation stocks
- 15 utility stocks
- DJIA is the 30 industrial stocks
- most widely quoted but narrowest measure of market
- price weighted average
S&P 500 Benchmark
- float weighted index
- includes largest issues that trade on the NYSE and a few OTC issues
- broader measure of NYSE activityR
Russell 2000 Benchmark
-popular capitalization weighted index of stock price performance of the smallest 2000 stocks in the Russell 3000 index
Wilshire 5000 Benchmark
- broadest measure of activity and movement of the overall stock market
- value weighted index consists of over 7000 issues that trade on NYSE, AMEX, and in the OTC market
Value Line Benchmark
- equally weighted index consisting of 1700 selected issues that are on the NYSE, AMEX< and OTC
NASDAQ Benchmark
- broadest measure of OTC trading
- cap weighted index includes all issues that trade on the NASDAQ system
Europe, Australasia, and Far East (EAFE) Benchmark
- typically compared to the S&P 500 index to show relative performance of the US and international equity markets
Municipal bond allocation priorities
- statements in the bond indenture showing the priorities by which municipal revenue is allocated
- Gross pledge: revenue will be used for debt service before any deductions for expenses
- Net pledge: pays expenses before bondholders are paid
Monte Carlo Simulations - Spreadsheet risk analysis
- randomly generates values for uncertain variables over and over to simulate a model
- uses spreadsheet model (one variable at a time) and simulation to automatically analyze varying inputs and outputs
Monte Carlo Simulations - how to analyze results
-presents histogram of results for each forecast
- frequency distribution
- ending terminal value
Turnover
- number of times an asset is replaced during an accounting period
Timing of capital gains and losses
- MF returns are expressed before tax
- income and CG affect return the investor retains
Tax implication of the sale of MF shares
- taxable gain or loss measured by difference between sales price and basis
- Basis
1. FIFO
2. specific identification
3. average cost (total cost of shares/ number of shares held)
Stock splits
- distributions of more than 25% of the outstanding shares and are accounted for as an adjustment to par value of the outstanding stock
- par value per share is reduced and the number of common shares is increased proportionally
- reason is to make ownership more affordable to a broader base of investors
Eg. 2 for 1 split. do 2/1 then multiply by shares.
if it was a 1 to 2 split then do 1/2 and multiply by price
Reverse split
- company reduces number of shares outstanding
- reason is to raise price of outstanding shares because the price is too low for institutional investors or because the company is about to be delisted
Eg. 1 for 10 split, shares will decrease and price will go up
Wash sale rule
- no deduction is allowed for any loss from the disposition of a stock if within a period beginning 30 days before and ending 30 days after the taxpayer acquires substantially identical stock
Sharpe ratio
excess return of the portfolio to its standard deviation
Sp = rp - rf / st. dev p
- meaningless unless compared to market or other MF
Ex dividend date for common stock
- date of record for corp is first business day after ex-dividend date
- settled trades are reflected on the books
- to be on corps books as holder and receive current dividend, investor must purchase stock before the ex-dividend date
- ex div - 1 = purchase date
- weekends and holidays dont count
Treynor ratio
excess return of portfolio to its beta
Tp = rp - rf / beta p
- higher better
Jensen ratio
Alpha
- calculates portfolio return actually attained and subtracts from what return should have been based on risk assumed
alpha = rp - [rf + (rm - rf) beta]
- measures contribution of portfolio manager
– positive number signifies return exceeded what was expected
- negative signifies portfolio return was less than expected (poor management)
Choosing the right performance measure
Jensen and Treynor: use beta, must be diversified portfolio
- Sharpe: uses SD, nondiversified
R2 : % of funds movements
Information ratio (IR)
- expresses portfolio return above returns of benchmark to volatility of those returns
- measures managers ability to generate excess returns
- higher the IR the more consistent a manager is
