Portfolio Development And Analysis Flashcards
What is fundamental analysis?
Process of determining the fair or intrinsic value of a security, value is then compared with the current market value to determine what course of action will be undertaken buy sell or hold
What is the top down approach in fundamental analysis?
Analyzing in order, economy, the specific industry, and then the specific company
What is the bottom up approach in fundamental analysis?
Analyzing in order, a specific company, a specific industry, then the economy
What are the factors considered by fundamental analyst
Economic environment
Stock market tendencies
Interest rates and business cycles
Money supply
Monetary policy
Fiscal policy
Industry analysis
Fundamental analysis
What are the liquidity ratios?
Current ratio
Acid test or quick ratio
What is the current ratio and what is the formula?
Ability of a firm to meet his short term obligations
Current assets / current liabilities
Fundamental analysis
What is the acid test or quick ratio and what is the formula?
Companies ability to meet at short term obligations with cash and highly liquid acids, such as receivables and marketable securities
Current assets - inventory / current liabilities
What is an activity ratio and what are the activity ratios used?
Measure the companies effectiveness and managing its business operations
Inventory turnover ratio, accounts receivable turnover, fixed asset turnover
Fundamental analysis
What is the inventory turnover ratio and what is the formula?
Speed at which inventory is turned into cash
Cost of good sold / average inventory
Fundamental analysis
What is the accounts receivable turnover and what is the formula?
Higher the ratio, the quicker the company receives cash to service its short term obligations
Sales / average accounts receivable
Fundamental analysis
What is the fixed asset turnover and what is the formula?
Indicates the sales per dollar investment of fixed assets plant equipment
Annual sales / fixed assets
Fundamental analysis
What are profitability ratios and what ratios are used?
Different measures of a companies earning capacity
Operating profit margin, net profit margin, return on assets, return on equity
Fundamental analysis
What is the formula for operating profit margin?
Earnings before interest in taxes / sales
Fundamental analysis
What is the formula for net profit margin?
Net income / Sales
Fundamental analysis
What is the formula for return on assets? ROA
Net income / Total assets
Fundamental analysis
What is the formula for turn on equity? ROE
Net income / equity
Fundamental analysis
What are leverage ratios and which ones are they?
Analyst should not only know whether a company conserve its debt, but also whether it’s earnings and losses have been magnified
Debt ratio, debt to equity ratio
Fundamental analysis
What is the formula for debt ratio?
Total debt / total assets
Fundamental analysis
What is the formula for debt to equity ratio?
Total debt / totality equity
Fundamental analysis
What is the ratio for bond analysis?
Times interest earned ratio
Earnings before interest in taxes / annual interest expense
Fundamental analysis
What are the ratios used for stock analysis?
Dividend payout ratio
Price to earnings ratio P/E
Price to free cash flow ratio P/FCF
Price to sales ratio
PEG ratio
Fundamental analysis
What is the dividend payout ratio and what is the formula?
Indicates what portion of net income has been paid to stockholders in the form of dividends
Dividends / net income
Fundamental analysis
What is the price to earnings ratio and what is the formula?
Indicates what the market is willing to pay per dollar of earnings
Higher ratio could indicate an overpriced stock while a lower ratio could indicate a buying opportunity
P/E = market price per share / earnings-per-share
Fundamental analysis
What is the price to free cash flow ratio and what is the formula?
Cash flow is generally preferred over accounting earnings
Ratio captures the cash flow impact, instead of accounting earnings, which can be manipulated or may be different from industry to industry
Fundamental analysis
What is the price of sales ratio and what is the formula?
How much an investor is paying for a specific revenue stream
Price / sales
Fundamental analysis
What is the PEG ratio and what is the formula?
A measure of relative valuation that can be used to compare companies with different growth rates
Companies with low PEG ratio will have higher rates of return
Stocks with PEG less than one are considered a possible value company
PE / Growth
Technical analysis
Technical analysis believe there are basic economic assumptions that support the theories of technical analysis. What are they?
Interaction between supply and demand is the foundation for the value of any good or service
Both rational and irrational factors control supply and demand. Market weighs each of these factors.
Securities Tend to move in trends that endure for substantial periods of time
Shifts or variations and supplying demand can always be detected in the movement of the market
Technical analysis
What is Dow theory?
Are either major, intermediate or short run
Dow Jones industrials and transportation averages are expected to confirm each each other for a trend to be considered valid
Technical analysis
When prices cross the 200 day moving average, it is an indication of what?
If the stock price falls through a 200 day, moving average technicians would view this move as a signal to sell the security likewise a stock increasing above the 200 day moving average would indicate a buy signal
Technical analysis
Relative strength analysis is what
Trend will generally continue until a major event occurs to change the direction
Technical analysis
What is the contrary opinion theory?
Majority of investors are generally wrong regarding investment decisions
Act opposite to the majority of investors
Investors believe market is going to increase a contrarian will trade as if the market is going to decline
Technical analysis
What are some of the contrary opinion theories?
Odd lot theory
Short interest theory
Mutual fund cash position
Investment advisory opinions
Put call ratio
Technical analysis
What is the odd lot theory?
Smaller, investors, more likely to trade in odd lots than larger, institutional investors
When odd lot traders buy, then you sell sell
When odd lot analysis are Berish you become bullish
Technical analysis
What is the short interest theory?
Increase sign of shortselling as an indicator that the market is near a trough and will soon turn around
Technical analysis
What is the mutual fund cash position theory?
Large cash balances would indicate that mutual funds believe that the market was Berish technicians Use this information to conclude that the market should be near its bottom.
Extremely low cash balances indicate that mutual funds are fully invested technicians conclude that the market is near its peak and begin liquidating their positions in the market
Technical analysis
Investment advisory opinions, theory what is it?
Moore investment advisory opinions become bullish more a contrarian becomes
Technical analysis
What is the put call ratio theory?
When puts exceed calls, it indicates bearish sentiment, a contrarian takes the opposite view and is bullish
Technical analysis
What is the confidence index and how it used?
Relative measure of the strength of the economy
Bond holders shift their holdings to high-grade bonds when the economy is weak and shift to lower grade bonds when the economy is strong
Technical analysis
Specialist proportion of short sales of 65% or more is what?
Bearish
Technical analysis
Specialist proportion of short sales of 40% or less is what
Bullish
Technical analysis
What is the breadth of the market?
How is it used?
Used to determine the strength of market advances and declines
More than 80% of the market stocks are selling above their 200 day moving average market is considered overvalued, indicating a decline may be coming
If less than 20% are above their 200 day moving average, the market is considered undervalued and gains may follow
What is value investing?
Concentrates on the numerator of the P/E ratio, the P (Price)
If the P/E ratio is below its natural level an efficient market will soon recognize this situation and drive the stock price upward
What is growth investing?
Focuses on the denominator of the P/E ratio (earnings)
PE ratio will remain constant over the near term, stock price in an efficient market will increase as the forecasted earnings growth of the issuing company is realized
Usually have a superior rate of growth , low dividend payouts above average price to earnings ratio, more volatile, higher beta
Is a more aggressive approach
What is an investment policy statement?
Written document with clients objectives and limitations on the investment manager
Gives guidance to the investment manager and provides a means for evaluating investment performance
What is Stochastic modeling?
A method of financial analysis
Attempts to forecast how investment returns on different asset classes, very overtime by using thousands of simulations to produce probability distributions for various outcomes
What is the Monte Carlo simulation and what is it used for?
Computer generated distribution technique used to model uncertainty
Used to determine the probability that an investor will actually realize and expected rate of return given and assumed risk
Used to determine whether an investor will actually outlive the accumulated amount of retirement savings given, and assumed annual rate of withdrawal and associated, continuing rate of investment return
What is sensitivity analysis?
Used to evaluate the risk associated with a given investment and assesses the impact of different variables on an investments returns
What are the three major performance measures?
Sharp ratio
Treynor ratio
Alpha
What is the sharp ratio and what is its formula?
Relative measure of risk of a portfolio based on total risk (systematic, and unsystematic risk)
Uses standard deviation as a measure of portfolio risk
Can only be used to compare alternative investments
What is the Treynor ratio and what is the formula?
Relative measure of the risk adjusted rate of return of a given portfolio
Uses beta, which is a measure of systematic or market risk
Depends on beta the ratio yield valid result only if beta is meaningful, meaning R squared at least .70
Must be used to compare alternative investments
What is alpha and what is the formula?
Is an absolute measure of performance
Tells you how well the managed portfolio performed relative to an unmanaged portfolio of equal risk when comparing the portfolios actual return versus the portfolios expected return
Uses beta, therefore, only produces meaning results when R squared is at least .70
What is the information ratio?
Measures the portfolios, average rate of return in excess of a comparison benchmark portfolio divided by the standard deviation of the excess return
What is the coefficient of variation (CV) and what is the formula?
Relative measure of risk per unit of expected return
Used to compare investments with varying rates of return and standard deviations
Smaller than the better the risk adjusted result
CV = standard deviation of assets / expected return of asset
