Unit 20

Question 1

Buy and Hold

Answer 1

-Rarely trades in portfolio -low transaction costs -capital gains taxed at long term rate

Question 2

Indexing

Answer 2

-Mirrors index -because not actively managed, costs are low

Question 3

Growth Style Investing

Answer 3

-management style that attempts to find stocks with positive earnings momentum. -usually buy at high end of 52 week price range -high P/E ratio -low dividend payout ratio

Question 4

P/E ratio

Answer 4

Tool to compare prices of different common stocks by assessing how much the market is willing to pay for a share of corporate earnings -Calculated by dividing current market price by earnings per share

Question 5

Earnings per share

Answer 5

Corporation’s net income available for common stock divided by its number of shares outstanding

Question 6

Value style of investing

Answer 6

-concentrate on undervalued securities whose price is low relative to company’s earnings/ book value -seek to buy undervalued securities before company reports positive earnings -tend to buy around 52 week low.

Question 7

Contrarian management

Answer 7

-takes position opposite of other managers -buy when everyone else sells

Question 8

Capital appreciation style

Answer 8

-hunt for appreciation -moderate to aggressive -options, futures, special situation stocks, IPOs, and day trading

Question 9

Income management style

Answer 9

-focus on generating portfolio income -

Question 10

Monte Carlo Simulations

Answer 10

-analytic and risk management tool widely used in finance -incorporates cimputer program to generate thousands of diff possibilities -provides both best case and worst case scenario

Question 11

Cash and cash equivalents

Answer 11

-savings and checking accounts -money market accounts -banked insured CDs -T-bills

Question 12

Fixed Income Investements

Answer 12

-corporate bonds -municipal bonds -treasury bonds -bond funds mortgage backed securities

Question 13

Equities

Answer 13

-preferred and common stocks of all kinds: growth, income appreciation, and stock mutual funds

Question 14

hard assets

Answer 14

-real estate -collectibles -precious metals -stones

Question 15

Tactical asset allocation

Answer 15

-Short term portfolio adjustments -adjust portfolio mix between asset classes in consideration of current market conditions/ investor sentiment

Question 16

Strategic asset allocation

Answer 16

-passive portfolio management -belief that no management style will outperform indexes -Low cost means of generating consistent, long term returns

Question 17

Rebalancing

Answer 17

-bringing asset mix back to target balance -% equity to % debt model -Person’s age minus 100 equals equity to debt

Question 18

constant dollar plan

Answer 18

-goal is to maintain constant dollar amount in stocks e.g. constant dollar goal of 70k then when goes over that # you sell and put in money market account

Question 19

market capitalization

Answer 19

-number of outstanding shares x current market price per share

Question 20

Micro-cap company

Answer 20

-Market capitalization below $300 million

Question 21

Small-cap company

Answer 21

-market capitalization between $300 million and $2 Billion

Question 22

Mid-cap company

Answer 22

-market capitalization between $2 billion and $10 billion

Question 23

Large-cap company

Answer 23

-market capitalization over $10 billion

Question 24

Barbell strategy

Answer 24

• aggressive form of bond trading to fight interest rate risk -Buy 1/2 year maturing bonds and an equal amount of 10 year bonds (none in between)

Question 25

Bullet strategy

Answer 25

-uses target date (eg funds needed for college tuition) -buy bonds that mature on that date -in two years buy more bonds for that date -in two more do the same -active strategy to capture current interest rates

Question 26

Laddering strategy

Answer 26

-similar to bullet strategy but instead of bonds are bought all at once and mature at different times. -as shorter maturities are due they are reinvested

Question 27

Capital Asset Pricing Model (CAPM)

Answer 27

-securities market investment theory that attempts to derive the expected return on an asset on the basis of the asset’s systematic risk

Question 28

Modern portfolio theory (MPT)

Answer 28

-attempts to quantify and control portfolio risk -focuses on relationships among all investments in portfolio -specific risks can be diversified away by building portfolios of assets whose returns are not correlated

Question 29

Efficient portfolio

Answer 29

-most return for a given amount of risk -least risk for a given amount of return

Question 30

Security Market line

Answer 30

-allows us to evaluate individual securities for the use in a diversified portfolio computed by: Market return rate - risk free rate x stock beta, then add that to RF Rate

Question 31

Capital Market line (CML)

Answer 31

-provides expected return based on the levels of risk -uses: expected return on portfolio risk-free rate return on market standard deviation of market standard deviation of portfolio

Question 32

Three forms of Efficient Market Hypothesis (EMH)

Answer 32

WEAK: - technical analysis wont work -fundamental analysis and insider info will work SEMI STRONG: -technical analysis and fundamental analysis wont work -insider information will work STRONG: -technical and fundamental analysis and insider info wont work -random walk (throwing a dart) will work

Question 33

Dollar Cost Averaging

Answer 33

-reduces timing risk -system of buying mutual fund shares in fixed dollar amounts at regular fixed intervals, regardless of price -buys more shares when prices are low, and fewer when prices are high, thus lowering average cost per share