Protective Put
- asset combined with put option
- to guarantee minimum proceeds equal to put’s exercise price
- also called portfolio insurance
- used to prevent significant loss
Covered call
- writing a call on asset together with buying asset
- if the stock price stays flat or falls you get benefits from call premiums
Long Straddle
- combination of call and put
- use when expecting volatility
Short Straddle
- income strategy through premium
- expecting stable price
- generate extra income
Futures Contract
-arrangement calling for future delivery of asset at agreed-upon price
When to use future contract
-best to be used when an individual needs more diversification in their portfolio
Bull market strategy
- short term: Put
- long: call, stock, future
Bear Market strategy
Short: Call, Stock, Future
Long: Put
Real Estate Valuation
- compare different properties
- use income approach
9 step investment process
- understand the clients goals
- identify a target rate of return
- Agree on the time horizon
- Understand the client’s tolerance and capacity for risk
- Define the asset classes to use
- Determine an appropriate asset allocation
- Create the Investment Policy Statement
- Select the investments
- Monitor and rebalance
Strategic asset allocation
- top down approach
- used to determine portfolio’s overall level of risk
- based on long-term capital market expectations
Core strategy
-Low fee, low tax cost; Capture beta
Satellite Strategy
- active management
- behavioral consideration
three steps to portfolio evaluation
- portfolio return
- selection of market index
- selection of comparison method
Sharpe Ratio
-used when choosing among competing portfolios that will not be mixed
Treynor Measure
-used to evaluate portfolio that is part of larger portfolio with different managers
Information Ratio
-used to evaluate the consistency of a portfolio manager
Jensen’s Measure (Alpha)
- helps determine if the average return is worth the level of risk
- if the value is positive, then the portfolio is earning excess returns.
- A positive value for Jensen’s alpha means a fund manager has “beat the market” with his/her stock picking skills
average tax rate
- total amount of income tax paid divided by total income
- person’s average tax rate always lower than or equal to his or her marginal tax rate
marginal tax rate
- rate at which incremental income is taxed
- only relevant rate for investment decision making purposes
Tax treatment for LTCG & STCG
- STCG- ordinary income
- LTCG- if MTR is 10% or 15%, then taxed at 0%
- if MTR is 25%,28%,33%,or 35%, then taxed at 15% rate
- if MTR is 39.6, then taxed at 20%
Qualified Dividend Taxation
- if MTR is 10% or 15%, then taxed at 0%
- if MTR is 25%, 33%, or 35%, then taxed at 15% rate
- if MTR is 39.6%, then taxed at 20% rate
- minimum 60 day holding period
Ordinary Dividend taxation
-Taxed as ordinary income
Bond interest tax treatments
- municipal normally exempt from both
- treasury bonds & federal agency bonds exempt from state & local taxation, not federal taxation
- bonds of gov’t sponsored corporations not exempt from state & local taxation
- some states tax only income from dividends and interest
