1
Q
strategic asset allocation
A
- proportion of various types of investments composing a long term investment portfolio
- passive strategy
- portfolios get rebalanced to bring the asset mix back to target allocations
- unsuitable for fee based acct
2
Q
tactical asset allocation
A
- short term portfolio adjustments that adjusts the portfolio mix between asset classes in consideration of current market conditions
- active strategy
- candidate for fee based account
3
Q
modern portfolio theory
A
- min risk by combining volatile and price stable investments in a single portfolio
- relationship among assets in the portfolio - looks to diversify
- diversification only reduces risks when assets move inversely or at different times, in relation to one another when combined
- wants negative correlation
4
Q
capital asset pricing model (CAPM)
A
- used to calculate the return that an investment should achieve based on the risk taken
- calculated based on beta coefficient (risk multiplier)
5
Q
beta/beta coefficient
A
- a stock or portfolio’s measure of its volatility in relation to the overall market (systematic risk)
- overall market is typically S&P500
- beta of 1 moves in line with market
- beta of more than 1 is volatile than the overall market
- beta of less than 1 is less volatile than the overall market (investment will move in opposite direction of the overall market)
- beta of 0 does not move in relation to market
6
Q
alpha
A
- extent to which an asset or portfolio’s return exceeds or falls short of its expected return
- positive alpha indicates a buy reconnedatiwon
7
Q
fundamental analysis
A
- study of business prospects of an individual company within the context of its industry and overall economy
- examine financial statements and company management
8
Q
financial statements
A
- info needed to assess that corporation’s profitability, liquidity, financial strength (ability of cash flows to meet debt payments), operating efficiency
- issued quarterly and annual to the SEC
9
Q
balance sheet
A
- snapshot of company’s financial position at a point in time
- IDs assets and liabilities
- difference between assets and liabilities is the corporation’s owners’ equity (net worth)
assets - liabilities = owners’ equity or
assets = liabilities + owners’ equity
10
Q
assets on balance sheet
A
- appear in order of liquidity
- three types of assets: current assets, fixed assets, other assets
11
Q
current assets on balance sheet
A
- cash and assets easily converted into cash within next 12 months
- includes: cash and equivalents, accounts receivables, inventory, prepaid expenses
12
Q
fixed assets on a balance sheet
A
- physical assets - property, plant, equipment
- cost depreciates over time and deducted from taxable income
13
Q
other assets on balance sheet
A
- intangible assets that are only of value to the corporation that owns them
- includes: formulas, brand names, contract rights, trademarks, goodwill
14
Q
liabilities
A
- represent all financial claims by creditors against the corporation’s assets
- 2 types: current and long term
15
Q
current liabilities on balance sheet
A
- corporate debt obligations that are due for payment in the next 12 months
- includes: accounts payable, accrued wages payable, current long term debt (portion due within 12 months), notes payable, accrued taxes
16
Q
long term liabilities on balance sheet
A
- financial obligations that are due for payment after 12 months, like bonds and mortgages
17
Q
income statement
A
- P&L statement
- summarizes a company’s revenues (sales) and expenses for a fiscal period (qtly, yr to date, full yr)
- compares revenue against costs and expenses during the period
- used to judge efficiency and profitability
- 3 primary components: revenue (sales), COGS, pretax income
18
Q
revenue
A
- firm’s total sales during the period (money that came in)
19
Q
cost of goods sold (COGS)
A
- cost of labor, materials and production (including depreciation of assets) used to create finished goods
operating profit = revenues - COGS
- first in first out (FIFO) or last in first out (LIFO) accounting methods
20
Q
pretax margin
A
net operating profit (pretax margin/ EBIT) = revenues - COGS - other operating costs (rent, utilities)
21
Q
pretax income
A
amount of taxable income
pretax income = operating income - interest payment expenses
22
Q
shareholder equity
A
- net worth or owner’s equity
- the stockholder claims on a company’s assets after all its creditors have been paid
shareholder equity = total assets - total liabilities
- three types: capital stock at par, capital in excess of par, retained earnings
23
Q
capital stock at par
A
- includes preferred and common stock, listed at par value
- par value is the total dollar assigned to stock certificates when a corp owners first contribute capital
- par value of common stock is arbitrary
24
Q
capital in excess of par
A
- additional paid in capital or paid in surplus
- amount of money over par value that a company received for issuing the stock in a primary offering
- par value is arbitrary amount selected when company is formed
25
retained earnings
- earned surplus or accumulated earnings
- profits that have not been paid out in dividends
- rep total earnings since corp was formed minus dividends
- operating losses reduce retained earnings
26
capitalization
- combined sum of a company's long term debt and equity securities
27
capital structure
- relative amounts of debt and equity that compose a company's capitalization
- 4 elements
- long term debt (bond, debentures)
- capital stock (common and preferred)
- capital in excess of par (paid in or capital surplus
- retained earnings (earned surplus)
- how the firm has financed the assets
28
working capital
- amount of capital or cash a company has available
- measure of firm's liquidity (liquidity measures a company's ability to pay the expenses associated with running the business)
working capital = current assets - current liabilities
- factors that affect it:
- increase to working cap from profits, sales of securities (long term debt or equity) and sale of non-current assets
- decrease to working cap from dividends, paying off long term debt, net loss
29
current ratio
current ratio = current assets / current liabilities
The current ratio is a measure of liquidity. It is the current assets divided by the current liabilities. The higher the ratio, the more liquid the company.
30
quick asset ratio (acid test ratio)
- quick assets a current assets minus inventory
quick ratio = quick assets / current liabilities
31
financial leverage
- a company's ability to use long term debt to increase its return on equity
- industrial company's with debt to equity ratios of 50% + are highly levered
- utilities with stable earnings and cash does can be more highly levered without undue risk
- if a company is highly levered it is affected more by changes to interest rates
32
debt to equity ratio
- debt to total capitalization ratio
- way to measure the amount of financial leverage being employed by a company
33
book value per share
- similar to NAV
- liquidation value of the enterprise
- subtract intangible assets from total assets to only include tangible assets
book value per share = (tangible assets - liabilities - par value of preferred) / shares of common stock outstanding
34
depreciating assets
- fixed assets wear out over time
- tax bills are reduced each year the company depreciates fixed assets
- accumulated depreciation reduces the value of fixed assets on the balance sheet
- annual depreciation reduction reduces taxable income on the income statement
- straight line depreciation - depreciate fixed assets by equal amounts of the asset's life
-accelerated depreciation - depreciate fixed assets during early years and diminishes over time
35
footnotes
- found in FS
- identify significant financial and management issues that may affect the company's overall performance
36
balance sheet
- what assets a company owns and how it has funded them
37
earnings per share
- measures the value of a company's earnings for each common share
EPS = earnings available to common / number of shares outstanding
- relates to common stock only
38
EPS after dilution
- assumes all convertible securities (warrants, convertible bonds, preferred stocks) have been converted to common
39
current yield (divided yield)
- expresses the annual income payout (dividends) as a percentage of the current stock price
CY = annual dividends per common share / market value per common share
40
dividend payout ratio
- measures the proportion of earnings paid to stockholders as dividends
dividend payout ratio = annual dividends per common share /EPS
- older companies pay out larger percent of earnings as dividends
- growth companies normally have lowest ratio bc they reinvest in the business
41
statement of cash flow
- reports a business sources and uses of cash and the beginning and ending values for cash and cash equivalents each year
- 3 components are:
- operating activities
- investing activities
- financing activities
42
earnings before interest and taxes (EBIT)
- helps fundamental analysts evaluate a company's performance without incorporating interest expenses or income tax rates
- focus on operating profitability as a single measure of success
- important for comparing companies in an industry
- calculated from info found on the income statement
43
earnings before tax (EBT)
- analyst removes tax structure when evaluating a company in an industry
- easier to compare companies in an industry
44
price to earnings ratio
- provide investors a rough idea of the relationship between the prices of different common stocks compared with the earnings the accrue to one share of stocks
P/E ratio = current market price of a common share / EPS
- growth companies tend to have high P/E ratios
- companies subject to cyclical fluctuations tend to have lower P/E rations
- declining industries even lower P/Es
- investor should watch out for extremely high or low P/E ratios (speculative stocks tend to be at the extremes)
EPS = current market price of a common share / P/E ratio
45
growth
- focus on stocks of companies whose earnings are growing faster than most other stocks and are expected to continue to do so
- growth investors are likely to buy stocks that are at the high end of their 52 week price range
- high P/E ratios or highprice to work ratio and little to no dividends
46
value
- focus on undervalued or out of favor securities whose price is low relative to the company's earnings or book value and whose earnings prospects are believed to be unattractive by investors and analysts
- primary source of info are FS
- value investors are likely to buy stocks that are at the low end of their 52 week price range
- low P/E ratios or low price to work ratio and dividends offering a reasonable yield
47
fundamental analysis
- focus on broad based economic trends, current business conditions within an industry, quality if a particular corporation's business, finances and management
48
technical analysis
- attempts to predict the direction of prices on the basis of historic price and trading volume patterns
49
trading volume
- changes in the trading volume of a stock can be a predictor of future price movements
- significant move up/downs lets technician know a trend might be starting
50
support and resistance levels
- support level: bottom of trading range
- resistance level: top of trading range
- when stock declines to support level, the low price attracts buyers, their buying supports the price and keeps it from declining further
- when stock rises to its resistance level, the high price attracts sellers, whose selling hinders further price rise
- bearish breakout: decline through the support level
- bullish breakout: rise through the resistance level
- breakouts signal the beginning of a new trend
51
advances/declines
-market breadth: # of issues closing up or down on a specific day. can be an indication of market strength
- bearish when decline outnumber advances by a large amount
- bullish when advances outnumber declines by a large amount
- technical analysts plot daily on a advance/decline lines
52
charting stocks
- attempts to identify patterns
53
trendline
- ID patterns through trend lines of individual stocks
- upward trend is bullish
- downward trend is bearish
54
consolidations
- when stock's price stays within a narrow range
55
reversals
- indicates that the current trend line has stopped and the stock's price is moving in the opposite direction
- difficult to recognize
56
saucer pattern
- reversal of downward trend
57
inverted saucer pattern
- reversal of an upward trend
58
head and shoulders top
- indicates the beginning of a bearish trend
- rises, reaches plateau, second advance pushes it higher, but then falls, rises again then falls
59
head an shoulders bottom/ inverted head and shoulders
- bullish reversal
- opposite of head and shoulders top
60
oversold
- market indices are declining, but the # of declining stocks relative to the # of advancing stock is falling (few stocks declining), market is oversold and likely to reverse
- bullish
61
overbought
- market indices are rising, but # of declining stocks relative to the # of advancing stocks is rising (few stocks rising), market is overbought and reversal is likely
- bearish
62
Dow theory
- confirm the end of a major market trend
- primary trend: one year or more
- secondary trend: 3-12 weeks
- short term fluctuations: hours or days
- primary trend in bull market is series of higher highs and higher lows
- primary trend in bear market is series of lower highs and lower lows
- change is considered deceptive unless the down jones industrial and transportation averages reflect the change
- lacks precision and is slow to confirm changes
63
odd lot theory
- small investor tend to engage in odd lot trading and buy/sell at the wrong time
- when odd lot traders buy, odd lot analysts are bearish
- when odd lot traders sell, odd lot analysts are bullish
64
round lot
- 100 shares
65
odd lot
- something less than 100 shares
66
short interest theory
- # of shares that have been sold short
- short interest reflects mandatory demand, which creates support level for stock prices
- high short interest is a bullish indicator
- low short interest is a bearish indicator
67
bond buyer
- published every BD
- source for new issues
- serves as an authoritative source of info on primary market muni bonds
- 30 day visible supply: total dollar volume of muni offerings - not including short term notes - expected to reach the market in the next 30 days
- if high, interest rates are likely to rise to attract invests
- if low, interest rates are likely to fall
- placement/acceptance or rato indexes: % of the total dollar value of new issues sold vs the total dollar value of new issues offered for sale in the prior week (success ratio)
- if high, the market for muni bonds is strong
- if low, the market for muni bonds os weak
- also compiles the 40 bond index (daily, 40 GO and RO bonds with ave maturity of 20 yrs. Rise indicates bond prices are rising and yields are falling), 20 bond index (weekly if 20 GO with 20 yrs to maturity, A or better), 11 bond index (weekly of 11 of the bonds from the 20 index, rate AA or better) and Revdex 25 (weekly of 25 RO bonds with 30 yrs to maturity, A or higher)
68
Thomson muni market monitor (munifacts)
- current news on secondary muni market
- throughout the day
- current muni offerings
- source for bonds already trading in the muni secondary market
69
mortality expense
- charge collected by the insurance companies as a form of insurance protecting them against mortality risk
- covers the risk that the insurance may live shorter (life insurance) or longer (annuity) than assumed
70
expense fee
- covers the risk that the cost of administering and issuing the policy might be greater than the risk assumed
71
death benefit fee
- estate is assured of getting back at least the original investment
- cost for this benefit is sold as a rider to the policy
- designation of beneficiary
- probate is avoided
72
waiver of premium
- if the insured becomes disabled or unable to work, the premium is waived
73
5% markup policy (FINRA rule 2121)
- pay reasonable fee for brokerage services
- guideline not set rule
- might pay more/less depending on what is fair and equitable
- applies to markups, markdowns and commissions
- does NOT apply to mutual funds, variable annuity contracts or securities sold through public offerings (these are sold by prospectus), and muni securities
- markup is always based on the inside quote
74
dealer's inventory costs
- if customer buys from Broker Dealer inventory, the net price to the customer is based on the prevailing inside market (highest bid and lowest ask)
- price at which the broker dealer acquired the stock has no bearing on the net price to the customer
- price to customer must be reasonably related to the current market
75
riskless and simultaneous transactions
- order to buy or sell stock in which the firm receiving the order is not a market maker
76
markup considerations
- type of security (more risk a Broker dealer assumes, the higher the markup)
- inactively traded stocks (thin market)
- selling price of security (commission and markup decrease as a stock's price increases)
- dollar amount of transaction (small dollar amounts tend to have higher % markups)
- nature of BD's business (full service - has higher operating costs - vs discount brokers)
77
pattern of markups
- regulators are considered with patterns of excessive markups, but one incident can still be considered unfair
78
net transactions
- hidden fee
- no commission but there is a markup or markdown
79
wash sales
- IRS rule
- applies to investors who take a loss on the sale of a security and repurchase that same security (or substantially identical) within 30 days before and after the trade date (total of 61 days)
- disallowes tax benefit
- only applies to realized losses
80
substantially identical
- an over security with the same investment performance profile
- same maturity, coupon, issuer
81
tax swapping
- sale of a bond and the simultaneous purchase of a different bond in a like amount
- used to control tax liability, extend maturity or update investment objectives
-if maturity, coupon, issuer are different, this doesn't violate the wash sale rules
82
share identification
- investors keep track of the cost of each share purchased and uses this information to liquidate the state that would provide the lowest capital gains
- might result in more advantageous tax treatment, but not as convenient
- used most commonly with stock sales
83
average cost basis
- can be used when redeeming mutual fund shares
- calculate average basis by diving the total cost of all the share pwned by the total number of shares
84
cost basis of inherited property
- either stepped up or down to its fair market value at the date of the decedent's death
- shares that are inherited are long term holdings for tax purposes (even if they haven't been held long term by the beneficiary)
- donor's cost basis becomes the donee's cost basis
- step up provision doesn't apply when inheriting an annuity
85
donor taxes
- tax is payable by the estate, not heirs
- like gifts, gift giver pays taxes, not the recipient
- progressive tax for both estate and gift
86
annual gift tax exclusion
- give up to $16,000 per year to any number of individuals without incurring tax
- gifts between spouses are never taxed
87
unified credit
- gift taxes are due April 15th
- estate taxes are due 9 months after death
88
Series 7
flashcards
Decks in class (19)
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