Unit 20

Round lot

100 shares is a ______________.

High

A _________ P/E ratio might indicate that a investors are expecting high growth rates in the future.

Overvalued

A company with a high P/E might be ______________ OR they could be expecting high growth rates in the future.

Efficient portfolio (aka optimal portfolio)

A feasible portfolio that provides the greatest expected return for a given amount of risk, or equivalently, the least risk for a given amount of expected return.

dollar cost averaging

A funding technique that will cause the average cost per share to be less than the average price per share.

Earnings momentum

A great indicator of the rate at which a company is growing.

Dividend Reinvestment Plan, DRIP

A plan that permits stockholders to have cash dividends reinvested in stock instead of received in cash.

Strategic Asset Allocation

A portfolio manager who is engaging in rebalancing the portfolio on a semiannual basis is most likely using what type of portfolio management style?

less

A stock is overvalued when its actual return is __________ than its expected return.

more

A stock is undervalued when its actual return is __________ than its expected return.

Constant dollar plan

A strategic asset allocation strategy in which the goal is to maintain a balance between equity and debt securities in the portfolio. This is done by selling equities when their price rises (the proportion has now changes) and buying equities when the price falls in order to get back to a constant dollar.

Constant Ratio Plan

A strategic asset allocation strategy in which transactions are made to rebalance the portfolio when the actual ratio of holdings differs from the desired ratio. This aims to smooth out investment returns over a longer time horizon by adjusting the portfolio counter-cyclically.

Laddering

A strategy used by bond investors to mitigate interest rate risk that involves buying bonds with short-term, intermediate term, and long-term maturities.

Modern Portfolio Theory

A theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.

Low

A value investor looks for a ________ P/E ratio.

Portfolio rebalancing

Adjusting the portfolio to maintain constant percentages in the amounts invested in various asset classes.

Dollar cost averaging

An investment plan where a fixed amount of money is invested on a regular basis. This automatically results in more shares being acquired when the market price is low, and fewer when the market price is high. The effect is that the average cost per share is always lower than the average price paid per transaction.

Passive

An investor that is investing to mirror the returns of a market benchmark, such as the S&P 500 index is said to be engaged in __________________ management.

Active

An investor that seeks to outperform a market index is said to be engaged in ___________________ management.

100

Call and put options are usually sold in round lots or ________ shares

high, low

Growth stocks are characterized by a ________ (high/low) P/E and a ________ (high/low) dividend yield.

Share price/EPS

How to calc P/E ratio

efficient market

In a(n) ______________, the price of stock will represent all information that is public (but not private).

Large-cap

Investment style of securities with market capitalization of $10 billion and higher

Mid-cap

Investment style of securities with market capitalization of $2 billion to $10 billion

Small-cap

Investment style of securities with market capitalization of $300 million to $2 billion

Micro-cap

Investment style of securities with market capitalization of$50 million to $300 million

Value

Janice is investing in stocks that are temporarily neglected by the market and often have high-dividend yields. What investment style might she be using?

Interest rate risk

Laddering helps mitigate what type of risk?

10

Large-cap has market capitalization of $___________ billion or more.

50, 300

Micro-cap has marekt capitaliztion of $_______million to $__________ million

2, 10

Mid-cap has market capitalization of $___________ billion to $____________ billion.

Technical (because it uses historical data)

None of the forms of EMH accept what analysis style?

A (We compare the expected return to the actual return to determine if the security outperformed (making it undervalued) or underperformed (making it overvalued). RJP's beta of 1.2 would have led to an expected return of 120% of that of the market. That would be 15% x 120% = 18%. With an actual return of 17.5%, the stock did not perform relative to the additional risk taken. The actual return for all of the others exceeded the expected return.)

Over the past year, the market, with a beta of 1.0, has returned 15%. Under CAPM, which of the following stocks would be considered overvalued? A) RJP, beta 1.2, return 17.5% B) LQR, beta 0.7, return 11% C) BED, beta 1.5, return 23.5% D) ACR, beta 0.9, return 13.6%

Indexing

Passive investment/management tactic in which you invest in market indices to replicate broad market returns rather than actively selecting individual stocks.

P/E ratio

Ratio used to determine ifa company's share price is overvalued or undervalued.

300, 2

Small-cap has market capitalization of $___________ million to $_________ billion.

r(f)-b(r(m)-r(f))

The CAPM formula

Strong form efficient market hypothesis

The belief that stock prices fully reflect all information from public and private sources.

Capital Market Theory

The following are assumptions of what? 1. All market participants borrow and lend at the same risk-free rate 2. There are no taxes or transaction costs 3. All investors want to achieve a maximum return for minimum risk 4. Market participants have the same expectations about the returns and standard deviations of all assets

Commodities

What is the "point" or top of the risk/return pyramid?

Weak

Which form of the EMH claims that fundamental analysis works?

Value

_________ investors look for stocks that appear to be underpriced by in the market.

Contrarian

an investor who deliberately decides to invest opposite the cycle.

Sector rotation

the practice of changing investment emphasis based on patterns in the business cycle. Specifically, allocating to different industries based on changes in the business cycle. (Note that this is a form of tactical management)

P/E

A value investor looks for a low ________ ratio.

Price-to-book

A value investor looks for a low ____________ ratio (other than the P/E ratio!)

Undervalued

A value investor might assume that a low P/E ratio means that the stock is ____________________.

Financial statements

A value manager's primary tool is looking at

Efficient Market Hypothesis (EMH)

The hypothesis that prices of securities fully reflect available information about securities

Price-to-book ratio

The market value of a share of the firm's stock divided by the book value per share of the firm's reported equity in the balance sheet. Indicates the market price placed on $1 of capital that was invested by shareholders.

Efficient frontier

The set of all efficient portfolios. Graph representing a set of portfolios that maximizes expected return at each level of portfolio risk.

Random Walk Hypothesis

The theory that stock price movements are unpredictable, so there's no way to know where prices are headed

Feasible set

This represents all portfolios that can be constructed from a given set of stocks.

Tactical asset allocation

This type of portfolio management style continually adjusts and changes the investment mix or asset allocation to take advantage of changing market conditions.

Strategic asset allocation

This type of portfolio management style focuses on the long-term goals of the client and tends to be passive in style.

Book value

Value managers frequently look for companies whose market price is less than their ___________________.

low, high

Value stocks are characterized by a _________ (high/low) P/E ratio and a _________ (high/low) dividend payout ratio.

no tax or transaction costs, all investors borrow and lend at the same risk free rate, all investors are well-diversified and unsystematic (specific) risk has been diversified away, all investors want to achieve a maximum return for minimum risk.

What are the 4 CAPM assumptions?

Indexing

What investing strategy is considered the MOST passive (even a tiny bit more passive than buy and hold)?

Buy call options (you only pay a premium for this "insurance")

What is the best way to hedge against a large short position?

Tactical

What type of investment approach intentionally deviates from the normal asset mix to take advantage of market opportunities?

Strategic Asset Allocation

What type of investment style would someone use if they believed that the market is perfectly efficient because stock prices reflect all available information?

Overbought

When something is overvalued due to excessive buying at unreasonably high prices.

Weak

__________ form price-efficient market theory is when securities fully reflect past share price and trading volume data. Furthermore, future prices move independently of this past data, so technical analysis (the use of past trading data and trends to predict future prices) is pointless.