chapter 10
5 type of technical analysis
1. POINT AND FIGURE 2. MOVING AVERAGE 3. ADVANCES AND DECLINES 4. ODD LOT PURCHASES AND SALES 5. CHANGES IN THE PRICE-EARNINGS RATIO of Dow Jones Industrial Average during the past year
market indices (7)
1. The NYSE Composite index 2. The Dow Jones 3. The Value Line Index 4. the Standard and Poor's 500 index 5. the Wilshire 5000 index 6. the Russell 3000 index 7. the Amex Major Market Index (MMI)
8 types of asset allocation
1. active asset allocation 2. tactical asset allocation 3. growth and value investing 4. passive asset allocation 5. strategic asset allocation 6. barbell portfolios 7. contingent immunization strategy 8. income and capital appreciation investing
portfolios can be diversified (5)
1. by asset class (cash, stocks, bonds, precious metals, real estate, etc) 2. by sector (defense, utilities, durable goods, manufacturing, etc) 3. by market capitalization (small cap, mid cap, large cap, etc) 4. by market (NYSE, OTC, AMEX, CBOE, etc) 5. geographically (established markets, emerging markets, etc)
what are categories of Shareholders' equity / net worth
1. common and preferred stock 2. treasury stock 3. paid-in-surplus 4. retained earnings
6 type of investment analysis
1. fundamental analysis 2. technical analysis 3. quantitative analysis 4. bottom up investing 5. top-down investing 6. inertial inflation
The Dow Jones
1. industrial average - 30 selected large cap blue chip stocks divided by a constant. This average is considered an INDICATOR FOR LARGE CAP STOCKS 2. composite average - 65 stocks from the industrial, transportation, and utility sectors
characteristic of the Buy and Hold Strategy (4)
1. is the simplest form of portfolio management. there is no rebalancing with such a strategy, which reduces transaction related costs 2. typically end up in LOWER TAXATION RATES due to long term holding period a versus an active trading strategy which would involve short-term capital gains 3. results in FEWER OVERALL EXPENSES related to management, taxation, and transactions 4. generally buys HIGH QUALITY SECURITIES TO FINANCE A LONG TERM GOAL OR NEED such as retirement
(market capitalization) equity assets are classified as follows (per FINRA) (4)
1. micro cap - market value of less than $300 million 2. small cap - market value between $250 million to $2 billion 3. mid cap - market value between $2 billion to $10 billion 4. large cap - market value of $10 billion or more
categories of income statement (6)
1. sales 2. operating profit 3. total income 4. net income 5. net earnings 6. retained earnings
public corporations are required by the SEC to provide financial statement to their shareholders. in general, they provide three financial reports:
1. the balance sheet 2. income statement 3. cash flow statement
the Russell 3000 index (2) 1. description 2. break into: (a) and (b)
3000 of the LARGEST companies 1. Russell 2000 - is the Small Cap segment of the Russell 3000 index 2. Russell 1000 - is the Large cap segment of the Russell 3000 index
indexing (3) 1. what type of portfolio 2. this means that _ 3. the returns on indexed funds provide _
A PASSIVELY MANAGED PORTFOLIO this means weighting a portfolio to MIRROR A BROAD BASED INDEX or buying shares in an index fund the returns on indexed funds provide highly predictable returns relative to this benchmark index (S&P 500 Index)
value investors will look at (6)
BOOK VALUE overall yield dividend yield P/E RATIO PRICE/SALES and the capitalization of the company
with growth investments, the investor or PORTFOLIO MANAGERS is primarily concerned with
EARNINGS AND THE MOMENTUM OF EARNINGS
Growth stocks generally have higher than average future earnings potential and therefore generally trade with a
HIGHER P/E ratio (generally 35 or higher)
these allocations are maintained in order to achieve the
HIGHEST ANTICIPATED RETURN VERSUS RISK
since indexing mirrors a specific index, there is no need for a portfolio manager, therefore
LOWERING THE COST OF MANAGEMENT as compared to a managed fund investments may also be allocated by MARKET CAPITALIZATION
a general rule of thumb concept for asset allocation for investors (3)
OLDER INVESTORS would be primarily invested in FIXED INCOME securities (bonds) and SOME CASH YOUNGER INVESTORS would be PRIMARILY INVESTED IN EQUITIES (stocks) and SOME CASH MIDDLE-AGED INVESTORS would be invested in a COMBINATION OF EQUITIES, FIXED INCOME, AND SOME CASH
top-down investing
Starts with a global outlook, and then moves down
depreciation
a loss in value, typically associated with building and equipment, that is written of in any given year
barbell portfolios (2)
a portfolio of bonds with concentrations of short and long term maturities but very few mid-range maturities the portfolio is adjusted to maintain the long and short distributions
often, passive investment strategies are compared to
a specific index as a benchmark to gauge performance
Contingent Immunization Strategy (2)
a strategy whereby a portfolio manager has the opportunity to actively manage a portfolio, but if the returns fall below a specified level, active management ceases and immunization of the portfolio occurs immunization of a portfolio takes place when the duration of a portfolio's assets equal the duration of the portfolio's liabilities
examples of Current Liabilities include (4)
accounts payable (invoices that have been received but have not yet been paid) notes payable (short-term debt obligations) taxes dividends payable (dividends that have been declared but not yet paid)
examples of Current Liabilities include (3)
accounts payable (invoices that have been received but have not yet been paid), notes payable (short-term debt obligations), taxes, and dividends payable (dividends that have been declared but not yet paid)
The NYSE Composite index
all common stock on the NYSE including ADRs and REITs
THE BALANCE SHEET of a corporation shows
all of the assets and liabilities as of a particular date, usually the end of the year
operating profit (3)
also known as EARNINGS BEFORE INTEREST AND TAXATION this category shows profitability after expenses, but prior to payment of interest and taxes since interest is a pretax deduction (a mandatory expense), interest on debt securities is subtracted from Operating Profit (EBIT)
assets (2)
an asset is anything that carries value for the company this category includes Current Assets, Fixed Assets, and Other assets
paid-in-surplus
any amount that exceed the par value of shares sold during an offering of common and/or preferred stock
long-term liabilities
any debt obligation that extends beyond one year
index funds (3) 1. the definition 2. the purpose of the fund_ 3. the advantage
are mutual funds that have a portfolio that mirrors a broad based index portfolio (e.g., DJIA, S&P500, etc). the purpose of the fund is to keep pace with (not beat) the index chosen A BIG ADVANTAGE OF SUCH FUNDS IS LOW MANAGEMENT FEES. MOST INDEX FUNDS HAVE EQUITY-BASED INDEX BENCHMARKS
the income statement (also called a Profit & Loss Statement or a P&L)
basically shows: 1. amount of corporation revenue 2. expenses that were paid 3. amount of earning remaining after expenses
examples of long-term liabilities include (6)
bonds debentures mortgage payments owed lease obligations retirement funding long-term equipment etc
dollar cost averaging also called a
constant dollar investment plan
defined quantitative (2)
data can be accurately measured numerically therefore, all subjective data is excluded from quantitative analysis (Subjective data is obtained by communicating . Subjective data is obtained by communicating , while objective data is obtained by observing. It is data that is collected or obtained via personal interactions, i.e., talking, sharing, explaining, etc. It is collected to make an assumption about what the fact might be, what event might have occurred, what calculations may have to be done, etc. For instance, if you feel very tired, you are asked many questions regarding how you feel, whether you feel sleepy, giddy, dizzy, nauseous, etc. You can talk about these problems and communicate with people regarding why you must be feeling tired. This data is called subjective data.)
by participating in multiple markets such as
domestic established markets and emerging markets, diversification is increased for the investor
earnings momentum looks at how
earnings have been moving over a specified time period (accelerating, decelerating)
rebalancing
ensures that the portfolio is brought back to pre-determined target percentages
growth investors
focus on companies with ABOVE AVERAGE EARNINGS and prospective earnings
value investors
focus on value stocks which are UNDERVALUED COMPANIES with LOW P/E RATIOS
technical analysis
focuses on market trends, charts, and market patterns in an attempt to predict the direction of a company's stock price
quantitative analysis
focuses on quantitative (numerical) or "HARD" data only such as revenues, margins, profits, and assets in order to determine the value of a stock
tactical asset allocation (2)
focuses on short term asset mix there are targeted balances but adjustments can be and are made within a range based on CURRENT MARKET AND ECONOMIC CONDITIONS such as recessionary period
Fundamental Analysis
focuses on the fundamentals of a company such as the company's financial statements, management, and products to evaluate whether the stock of the company is properly valued
ODD LOT PURCHASES AND SALES
for stock, trades of less than 100 shares
leverage - used to describe a company's financial structure (3)
if a company is highly leveraged, it means that the capitalization of the company is focused mostly on borrowed funds (e.g., substantial amounts of bonds and loans vs. equity ownership) this financial leverage of the company can be measured by evaluating the company's debt to equity, DEBT TO CAPITAL, and debt to book value ratios these ratios simply involve dividing the total amount of debt by the equity, capital, or book value of the firm
Current Liabilities
include any liability or expense that is due within the 12 months
fixed assets
include assets that are not expected to be converted to cash, or at minimum are not expected to be converted to cash in the next 12 months (examples include land, buildings, and equipment. Accumulated depreciation is subtracted from the value of depreciable assets such as buildings and equipment)
current assets
includes any asset that is likely to be converted to cash within the next 12 months (examples include cash the market value of securities held, accounts receivable (payments due from customers), and inventory)
the GREATEST LEVELS OF DIVERSIFICATION and thus reduction of risk would result from (2)
including a broad range of both DOMESTIC AND INTERNATIONAL securities in a portfolio by diversifying on a global scale, the market risk involved in the economy is reduced
dollar cost averaging is a type of investing does not (2)
involve buying A FIXED NUMBER OF SHARES AT REGULAR INTERVALS it involves INVESTING A FIXED NUMBER OF DOLLARS AT REGULAR INTERVALS
The Value Line Index
is a broad large cap index
the Standard and Poor's 500 index
is a broad, large cap index and is generally considered to be the measure of average market perfomance
Passive Asset Allocation
is a form of asset allocation where the portfolio is set and is RE-BALANCED AT PRE-DETERMINED INTERVALS (e.g., semi-annually, annually)
POINT AND FIGURE
is a form of charting where specific entry and exit points are established
liabilities
is a pending or future financial obligation of the company this category includes Current Liabilities and Long-Term Liabilities
Buy and Hold Strategy
is a portfolio management strategy in which the investment manager or investor designs a portfolio and purchases appropriate investments to fit that portfolio, then holds the investments with the anticipation of appreciation and income
the Amex Major Market Index (MMI)
is a price-weighted average of 20 blue chip industrial stocks
income investing
is a simple and straightforward investment strategy which involves accumulating assets such as stocks, bonds, mutual funds, and real estate that generate the highest possible annual income at the lowest possible risk
contrarian investors (2)
is a simulation that runs thousands of chance scenarios to produce probable outcomes involving a number of random variables (e.g., it might be used to answer the question: Will my retirement money last?"). it creates a FREQUENCY DISTRIBUTION TABLE based on a wide range of POTENTIAL OUTCOMES
laddering
is a strategy which involves the PURCHASE OF FIXED INCOME SECURITIES with DIFFERENT COUPON RATES AND DIFFERENT MATURITIES in an attempt to REDUCE INTEREST RATE RISK AND RE-INVESTMENT RISK
Diversification
is a technique in which the portfolio manager seeks to minimize the overall risk in the portfolio by spreading investments over various markets, sectors, and types of investments
dollar cost averaging (2)
is an investing method that involves investing a SET OR FIXED SUM OF MONEY AT REGULAR INTERVALS in specific investments, regardless of the market price as a result of this method, the average cost per share will always be lower than the average price per share
scaling in
is an investment strategy where SECURITIES are PURCHASED IN INCREMENTS (such as 250 shares at a time) to achieve any overall total goal (such as 2,000 shares) to ATTAIN an AVERAGE PURCHASE PRICE as the value of the security is DECLINING
MOVING AVERAGE
is the average price of a security over a specific amount of time. By averaging price moves, the PRICE MOVE IS SMOOTHED OUT AND HELPS AN ANALYST IDENTIFY TRENDS
Market Capitilization
is the current market price per share times (X) the number of shares outstanding (Market Cap = Price Per Share × Shares Outstanding)
(the balance sheet) shareholders' equity / net worth
is the remainder of value after all liabilities are subtracted from all assets
sector rotation (2)
is when a portfolio managers move from investing in one sector of the economy to another this technique is employed in step with the stages in the business cycle (expansion, peak, contraction, trough)
examples of fixed assets include
land, buildings, and equipment. Accumulated depreciation is subtracted from the value of depreciable assets such as buildings and equipment
tactical asset allocation is a form of
market timing
when tracking an index fund, there should be (2)
no deviation between the fund's performance and the benchmark if there is a deviation, it would be referred to as a "tracking error"
style drift (2)
occurs when an investment manager strays or departs from their normal investment philosophy or style this "drift" is generally seen as a negative and historically has not proven to be successful for the manager
an efficient trading market is
one narrow or small bid/ask spreads
strategic asset allocation is form of
passive asset allocation
undervalued companies usually (3)
pay regular dividends, have LOW PRICE/BOOK RATIOS and have little or no debt high yield, low P/E stock would provide the value investor with income
leverage - margin
portfolio managers can enhance returns by leveraging, or borrowing money the most common method is to invest using MARGIN. Under current regulation, investors can purchase securities worth twice the amount of money they have to invest. Although leverage can increase returns, it comes with greater risk. Just as the value of the securities can be magnified as it rises, the opposite effect happens as the value of the securities falls. Investors could potentially incur significant losses if the value of the securities falls steeply. also, margin investors must pay interest on the amount borrowed
retained earnings
profits that are retained by the company versus paid out in the form of dividends
Active Asset Allocation
refers to active "stock picking" and market timing to CONSTANTLY REBALANCE the portfolio to attempt to obtain returns in excess of a specific benchmark or expected return
when creating a customized benchmark for a specific client, the portfolio manager must provide
relevant and obtainable alternatives which reflect the portfolio's investment objective
manage tenure (3)
represents the length of time, in years, that a person has been a portfolio manager of a particular fund this is a tool that is used to measure the performance of a portfolio manager over time there is no regulatorily-defined timeframe of what investors should consider as a respectable manage tenure but, in general, manager tenure of five years or more at a given fund would be viewed favorably
unlike the balance sheet which represent a point in time, the net income statement represents
revenues and associated items over a period of time
capital appreciation strategy (3)
seeks to maximize capital appreciation, or the increase in value of a portfolio or asset over the long term this would include a portfolio that mostly contains equities or stocks in the hopes that the value of the stock will increase over time. investing for capital appreciation brings or more risk but the potential for returns can be much greater
bottom up investing
starts with a company-by-company analysis of individual firms
treasury stock
stock that was issued and has been repurchased by the issuing entity
when investing in EMERGING MARKETS (such as Brazil, Argentina, and Mexico which have rapidly growing economy) a risk consideration is
that there is LITTLE STANDARDIZATION OF TRADING ACTIVITIES in those foreign countries
the Wilshire 5000 index
the 7,000 largest companies based on market capitalization
diversification is most effective if
the asset classes are not highly correlated this means that the broader the range of investments and type of investments, the less likely losses will be incurred based on the failure of one specific investment
Strategic Asset Allocation
the assets in a portfolio over the long term are balanced and generally kept at an ASSIGNED BALANCE
cost of good sold
the cost of producing goods
selling and administrative costs
the cost of selling goods and running the business
asset allocation (3) 1. definition 2. it refers to ___ 3. when determining asset allocation for a customer, the MOST IMPORTANT FACTORS to consider are ___
the diversification of investments in a customer's account or a managed account. it refers to the balance or mix of different asset classes (e.g., stock, bonds, cash, etc.,) within an investment portfolio and on the ability to switch investments in response to market conditions and interest rate moves (re-balancing). when determining asset allocation for a customer, the MOST IMPORTANT FACTORS to consider are the investor's CURRENT INVESTMENTS, STRATEGIES, AND OBJECTIVES
ADVANCES AND DECLINES
the ratio of advancing stock prices to declining stock prices
Inertial Inflation (3)
the tendency of an inflation rate to remain constant or consistent unless there is a demand shock or a supply shock a demand shock would result from aggregate demand, which is the sum total of national for goods and services, outstripping national supply (aka demand-pull inflation) a supply shock would result from rising material costs or long-term wage and price contracts pushing up prices (aka cost-pull inflation)
sales
this category includes all revenue generated from avriety of sources items that would be subtracted from This would include: 1. cost of good sold 2. selling and administrative costs 3. depreciation
other assets
this category would include intangible items such as intellectual property (copyrights, patents, etc) and goodwill (the company's reputation)
index strategy does NOT attempt to identify
under or overvalued securities
diversification attempt to lessen the effects of (2)
unsystematic risks these are risks that are specific to one company or one specific industry
an example of Sector Rotation (4)
when the economy is: 1. expanding (recovery) - managers invest in industrials 2. peaking (of the recovery, interest rates usually rising) - managers invest in consumer staples 3. contracting (beginning of recession) - managers invest in utilities 4. trough (bottom of recession) - managers invest in technology and as the recession nears its end, industrials