Portfolio Management and Investment Risk Flashcards
Working Capital
Total Current Assets - Total Current Liabilities = Working Capital
Current Ratio
Measure of liquidity
Total Current Assets/Total Current Liabilities
Quick Asset (Acid Test) Ratio
Total Current Assets - Inventory
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Total Current Liabilities
Debt to Equity Ratio
Bonds + Preferred Stock
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Common Stock at Par + Capital Surplus + Retained Earnings
Large Cap Stocks
Mature companies with market cap above $10 mil and history of consistent dividend payments
Mid Cap Stocks
Growth companies with market cap from $2 bil to $10 bil
Small Cap Stocks
Newer growth companies with market cap from $300 mil to $2 bil
Micro Cap Stocks
Speculative companies with market cap from $50 mil to $300 mil
Order of payment to creditors and owners when forced to liquidate
Secured debt
Unsecured Debt
Preferred Stock
Common Stock
Earnings Per Share
Net Income - Preferred Dividends
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Number of Outstanding common shares
Price/Earnings Ratio
Market Price/Earnings Per share
Growth Analysis
High P/E Ratio
High retained earnings
Low dividend payout ratios
Value Analysis
Low P/E
History of Profits
High dividend yield
Low price to book ratio
Top Down Approach
Analyze economy first, then specific industries
Bottom Up Approach
Evaluate company, then determine if company is undervalued relative to its peers
Modern Portfolio Theory
Theory that analyzes relationship between risk, correlation, diversification, and returns.
Assumes investors are risk averse
Expected Return
Possible return on investment weighted by likelihood that return will occur
Sum of all possible returns multiplied by probability of return
Standard Deviation
Measure of risk as evidenced by the variability between returns
Correlation
Degree to which different investments move in the same direction
Monte Carlo Simulation
Risk analysis simulation that identifies list of economic factors that may affect an investment and assigns each factor a range of values.
Optimal Portfolio according to MPT
Diversified assets with no correlation
Capital Asset Pricing Model (CAPM)
Describes relationship between risk and expected returns with focus on two types of risk: Diversifiable and Non-Diversifiable
Diversifiable Risk
Business or non-systematic risk specific to a particular security or sector
Non-Diversifiable Risk
Systematic or market risk
Beta
Measure of volatility
Risk Free Return
Rate of return attributed to an investment with zero risk, usually a T Bill
Risk Premium
Additional return above risk free return
Alpha
Risk adjusted return
Sharpe Ratio
Risk adjusted return measurement
(Ri - Rrf)/Oi
Efficient Market Hypothesis
If markets are efficient, then prices will reflect all known information
Weak Form Efficiency
All past market prices and data are fully reflected in securities prices
Semistrong Form Efficiency
Security prices reflect all publicly available information and investors would receive no benefit from using either technical or fundamental analysis
Strong Form Efficiency
Price of stock incorporates all current information including both public and private information
Passive Strategies
Strategic asset allocation
Future Value
Pn = P0(1+r)^n
Present Value
P0 = Pn/(1+r)^n
Capital Needs
A capital goal that needs to be achieved within a specific period
Internal Rate of Return
Compounded interest rate or yield used to calculate present value, future value, and discounted cash flows
Dollar Weighted Return
Solves for rate of return that makes present value equal to present value of future cash flows
Time Weighted Return
Compounded growth over period being measured, used to rate performance of money managers
Annualized Return
Total return/Periods = Annualized Returns
Inflation Adjusted Return
Yield - Inflation = Inflation adjusted return
After Tax Yield
Taxable Interest Rate x (100% - Tax %)
Taxable Equivalent Yield
Tax Free Interest Rate/(100% - Tax bracket %)
Total Return
(Ending Value - Beginning Value + Investment Income)/Beginning Value
Market Order
Buy or sell stock at current market price
Limit Order
Buy or sell stock at specified price or better
Stop Order
Buy or sell stock once market price reaches specific price
