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