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CFP > Portfolio Development And Analysis > Flashcards

Portfolio Development And Analysis Flashcards

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CFP® flashcards
1
Q

What is fundamental analysis?

A

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

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2
Q

What is the top down approach in fundamental analysis?

A

Analyzing in order, economy, the specific industry, and then the specific company

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3
Q

What is the bottom up approach in fundamental analysis?

A

Analyzing in order, a specific company, a specific industry, then the economy

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4
Q

What are the factors considered by fundamental analyst

A

Economic environment

Stock market tendencies

Interest rates and business cycles

Money supply

Monetary policy

Fiscal policy

Industry analysis

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5
Q

Fundamental analysis

What are the liquidity ratios?

A

Current ratio

Acid test or quick ratio

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6
Q

What is the current ratio and what is the formula?

A

Ability of a firm to meet his short term obligations

Current assets / current liabilities

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7
Q

Fundamental analysis

What is the acid test or quick ratio and what is the formula?

A

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

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8
Q

What is an activity ratio and what are the activity ratios used?

A

Measure the companies effectiveness and managing its business operations

Inventory turnover ratio, accounts receivable turnover, fixed asset turnover

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9
Q

Fundamental analysis

What is the inventory turnover ratio and what is the formula?

A

Speed at which inventory is turned into cash

Cost of good sold / average inventory

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10
Q

Fundamental analysis

What is the accounts receivable turnover and what is the formula?

A

Higher the ratio, the quicker the company receives cash to service its short term obligations

Sales / average accounts receivable

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11
Q

Fundamental analysis

What is the fixed asset turnover and what is the formula?

A

Indicates the sales per dollar investment of fixed assets plant equipment

Annual sales / fixed assets

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12
Q

Fundamental analysis

What are profitability ratios and what ratios are used?

A

Different measures of a companies earning capacity

Operating profit margin, net profit margin, return on assets, return on equity

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13
Q

Fundamental analysis

What is the formula for operating profit margin?

A

Earnings before interest in taxes / sales

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14
Q

Fundamental analysis

What is the formula for net profit margin?

A

Net income / Sales

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15
Q

Fundamental analysis

What is the formula for return on assets? ROA

A

Net income / Total assets

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16
Q

Fundamental analysis

What is the formula for turn on equity? ROE

A

Net income / equity

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17
Q

Fundamental analysis

What are leverage ratios and which ones are they?

A

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

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18
Q

Fundamental analysis

What is the formula for debt ratio?

A

Total debt / total assets

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19
Q

Fundamental analysis

What is the formula for debt to equity ratio?

A

Total debt / totality equity

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20
Q

Fundamental analysis

What is the ratio for bond analysis?

A

Times interest earned ratio

Earnings before interest in taxes / annual interest expense

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21
Q

Fundamental analysis

What are the ratios used for stock analysis?

A

Dividend payout ratio

Price to earnings ratio P/E

Price to free cash flow ratio P/FCF

Price to sales ratio

PEG ratio

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22
Q

Fundamental analysis

What is the dividend payout ratio and what is the formula?

A

Indicates what portion of net income has been paid to stockholders in the form of dividends

Dividends / net income

23
Q

Fundamental analysis

What is the price to earnings ratio and what is the formula?

A

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

24
Q

Fundamental analysis

What is the price to free cash flow ratio and what is the formula?

A

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

25
Q

Fundamental analysis

What is the price of sales ratio and what is the formula?

A

How much an investor is paying for a specific revenue stream

Price / sales

26
Q

Fundamental analysis

What is the PEG ratio and what is the formula?

A

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

27
Q

Technical analysis

Technical analysis believe there are basic economic assumptions that support the theories of technical analysis. What are they?

A

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

28
Q

Technical analysis

What is Dow theory?

A

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

29
Q

Technical analysis

When prices cross the 200 day moving average, it is an indication of what?

A

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

30
Q

Technical analysis

Relative strength analysis is what

A

Trend will generally continue until a major event occurs to change the direction

31
Q

Technical analysis

What is the contrary opinion theory?

A

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

32
Q

Technical analysis

What are some of the contrary opinion theories?

A

Odd lot theory

Short interest theory

Mutual fund cash position

Investment advisory opinions

Put call ratio

33
Q

Technical analysis

What is the odd lot theory?

A

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

34
Q

Technical analysis

What is the short interest theory?

A

Increase sign of shortselling as an indicator that the market is near a trough and will soon turn around

35
Q

Technical analysis

What is the mutual fund cash position theory?

A

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

36
Q

Technical analysis

Investment advisory opinions, theory what is it?

A

Moore investment advisory opinions become bullish more a contrarian becomes

37
Q

Technical analysis

What is the put call ratio theory?

A

When puts exceed calls, it indicates bearish sentiment, a contrarian takes the opposite view and is bullish

38
Q

Technical analysis

What is the confidence index and how it used?

A

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

39
Q

Technical analysis

Specialist proportion of short sales of 65% or more is what?

A

Bearish

40
Q

Technical analysis

Specialist proportion of short sales of 40% or less is what

A

Bullish

41
Q

Technical analysis

What is the breadth of the market?

How is it used?

A

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

42
Q

What is value investing?

A

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

43
Q

What is growth investing?

A

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

44
Q

What is an investment policy statement?

A

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

45
Q

What is Stochastic modeling?

A

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

46
Q

What is the Monte Carlo simulation and what is it used for?

A

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

47
Q

What is sensitivity analysis?

A

Used to evaluate the risk associated with a given investment and assesses the impact of different variables on an investments returns

48
Q

What are the three major performance measures?

A

Sharp ratio

Treynor ratio

Alpha

49
Q

What is the sharp ratio and what is its formula?

A

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

50
Q

What is the Treynor ratio and what is the formula?

A

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

51
Q

What is alpha and what is the formula?

A

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

52
Q

What is the information ratio?

A

Measures the portfolios, average rate of return in excess of a comparison benchmark portfolio divided by the standard deviation of the excess return

53
Q

What is the coefficient of variation (CV) and what is the formula?

A

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

CFP (17 decks)

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