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Investments > Portfolio Development and Analysis > Flashcards

Portfolio Development and Analysis Flashcards

1
Q

Fundamental Analysis

A

examines balance sheets and income statements to forecast future price movements
- consider current and past records

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2
Q

Fundamental Analysis - Top Down method

A
  • investor first looks at trends in the general economy then selects industries, and finally companies
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3
Q

Fundamental Analysis - Bottom up method

A
  • investors looks for individual stock with outstanding performance before considering impact of economic trends
  • assumes company will do well even if industry doesn
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4
Q

Ratio Analysis

A
  • studies relationships between financial variables
  • ratios can be compared between firms and let investor know if there are any trends or standouts
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5
Q

Liquidity ratio

A
  • compares financial variables to measure a company’s ability to meet its short term obligations
    current ratio = current assets / current liabilities
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6
Q

Activity ratio

A
  • 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
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7
Q

Profitability ratio

A
  • compare two or more financial variables providing a relative measure of a firms income earning performance
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8
Q

Technical Analysis

A
  • use charts to identify and project price trends
  • examines short or intermediate term outlook
  • not concerned with specific financial position of a company
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9
Q

Technical approaches

A
  • dow theory
  • barrons confidence index
  • odd lot theory
  • investment advisor opinions
  • advance/ decline line
  • moving average (200 day)
  • mutual fund cash position
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10
Q

Charting

A
  • 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
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11
Q

Resistance

A
  • 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)
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12
Q

Support

A
  • 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
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13
Q

Sentiment indicators

A

measure bullish or bearish moods of investors
- analysts will look at indicators as contrary

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14
Q

Dow theory

A

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

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15
Q

Barrons confidence index

A

index presumes that the differential between the returns on quality bonds and bonds of lesser quality will forecast future price movements

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16
Q

Investment Policy Statements

A
  • expresses clients objectives (desired returns and acceptable risk) and constraints (liquidity, time horizon, taxes)
17
Q

Dow Jones Benchmark

A
  • 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
18
Q

S&P 500 Benchmark

A
  • float weighted index
  • includes largest issues that trade on the NYSE and a few OTC issues
  • broader measure of NYSE activityR
19
Q

Russell 2000 Benchmark

A

-popular capitalization weighted index of stock price performance of the smallest 2000 stocks in the Russell 3000 index

20
Q

Wilshire 5000 Benchmark

A
  • 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
21
Q

Value Line Benchmark

A
  • equally weighted index consisting of 1700 selected issues that are on the NYSE, AMEX< and OTC
22
Q

NASDAQ Benchmark

A
  • broadest measure of OTC trading
  • cap weighted index includes all issues that trade on the NASDAQ system
23
Q

Europe, Australasia, and Far East (EAFE) Benchmark

A
  • typically compared to the S&P 500 index to show relative performance of the US and international equity markets
24
Q

Municipal bond allocation priorities

A
  • 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
25
Q

Monte Carlo Simulations - Spreadsheet risk analysis

A
  • 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
26
Q

Monte Carlo Simulations - how to analyze results

A

-presents histogram of results for each forecast
- frequency distribution
- ending terminal value

27
Q

Turnover

A
  • number of times an asset is replaced during an accounting period
28
Q

Timing of capital gains and losses

A
  • MF returns are expressed before tax
  • income and CG affect return the investor retains
29
Q

Tax implication of the sale of MF shares

A
  • 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)
30
Q

Stock splits

A
  • 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
31
Q

Reverse split

A
  • 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
32
Q

Wash sale rule

A
  • 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
33
Q

Sharpe ratio

A

excess return of the portfolio to its standard deviation
Sp = rp - rf / st. dev p
- meaningless unless compared to market or other MF

33
Q

Ex dividend date for common stock

A
  • 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
34
Q

Treynor ratio

A

excess return of portfolio to its beta
Tp = rp - rf / beta p
- higher better

35
Q

Jensen ratio

A

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)

36
Q

Choosing the right performance measure

A

Jensen and Treynor: use beta, must be diversified portfolio
- Sharpe: uses SD, nondiversified
R2 : % of funds movements

37
Q

Information ratio (IR)

A
  • 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

Investments (9 decks)

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