| Terms |
Definitions |
|
Zero-Growth Model (PE Valuation)
|
Assumes 0 growth and payout ratio is always 100%
|
|
Duration (Formula)
|
(PV of all time-weighted cash flows at discounted YTM)/current market price
|
|
Barbell Approach to Maturity Selection
|
Holding only short & long term bonds so one portion will benefit from higher rates.
|
|
What is Duration?
|
used to predict expected changes in price of a fixed-income security relative to an interest rate change
|
|
Hedging Strategies
|
1.Selling Short
2.Options
3.Arbitage
4.Event Specific
|
|
Calculate Purchase price of T-Bill
|
**need to have quoted rate
Face Value/(1+[(quoted yield x (Days to Maturity)/365])
|
|
2 Types of Style-Based Investing
|
1.Value
2. Growth
|
|
US Treasury Bills
|
**always use a base of 360 instead of 365. Therefore CDN TBills will have slightly higher yield
|
|
Current Yield/Rate of Return on a Bond (formula)
|
(Annual Interest payments)/(Current Market price)x100
|
|
Active Investing
|
Buying and selling stock to capitalize gains
|
|
Relative Strength Index (RSI)
|
100-(100/1+RSI)
where RSI=(Avg of n-day of up close)/(Avg of n-day down close)
Compares days price closed high and days it closed low
|
|
Yield-to-Maturity
|
Total return on a bond over its lifetime.
Equal to coupon rate if bond held to maturity
|
|
Tools used for Technical Analysis
|
1. Moving Averages
2. Relative Strength Index
|
|
Dividend Discount Model DDM
|
Based on the premise that the price investors will pay is driven by future cash flow
|
|
Top-up Approach
|
begin a economic level, then industry level then company
|
|
Fundamental Analysis
|
Studies Economy, Industry and company
|
|
Investment Objectives
|
1.Income
2.Security of Principle
3.Liquidity
4.Growth
|
|
Market Price (Preferred Share)
|
(Dividend Payment)/(Prevailing Market Rate)
|
|
T-Bills
Quoted Yield
|
[(Face Value - Purchase Price)/Purchase Price] x (365/days to maturity) x 100
|
|
Zero-Growth Model (DDM)
|
P = D/r
where:
P = intrinsic value
D- constant Dividend amount
r = discount rate for cash flows with similar investment risk.
|
|
Tatical Allocation
|
Deals with short term forecasts. Uses leading economic indicators.
|
|
7 Types of Diversification
|
1.Asset Classes
2. Company Size
3.Industry
4. Geographic
5. Management Style
6. Fixed-Income Maturity dates
7. Credit Risk
|
|
Growth Stocks
|
P/E ratio is above average
2 styles
1.Consistant Growth Mgr - high quality corp with consistant growth
2.Earnings momentum growth mgr
|
|
Taxation of a leveraged Loan
|
Is tax deductable if borrowed for the purpose of earning income
|
|
Moving Averages
|
Average price over a specific time period ie:20 days.
Each day as new price is added the oldest price is dropped.
|
|
Active Investing
|
Buying and selling stock to capitalize gains
|
|
Duration
|
Price of fixed-income security will change x% give a 1% change in interest rate....where x = duration
|
|
Support
|
Stocks price is falling but stalls a certain price level
|
|
Bottom-up approach
|
Begin at corporate level, then industry and then the economy
|
|
Price Earnings based Valuations
|
Relationship between earnings of a company and price of their stock
|
|
Magnification
|
Returns can be much greater when using leveraged loans to invest.
|
|
Finite Holding Period Model
|
Investors do not hold stocks forever
|
|
Holding Period Return
|
[(Closing Value - Opening Value)/Opening Value] x 100
|
|
Passive Investing
|
Construct portfolio to mirrior an index.
Advantages
1.returns seldom deviate from benchmark
2.fully invested at all times
3.lower fees
|
|
Price-Earnings Valuations - A stock is underpriced if...
|
Expected PE ratio > actual PE ratio
|
|
2 forms of Security Analysis
|
1. Technical
2. Fundamental
|
|
Constant Growth Model (DDM)
Formula
|
P = Do x (1.0+g)/(r-g)
where:
Do = dividend in first year
g = growth
r = discount rate for cash flows with similar risk
|
|
Technical Analysis
|
Deals with Mass psychology of investors
no interest in performance of the company
|
|
7 Types of Diversification
|
1.Asset Classes
2. Company Size
3.Industry
4. Geographic
5. Management Style
6. Fixed-Income Maturity dates
7. Credit Risk
|
|
Immunization
|
Matching duration of a bond to investors cash-flow requirements.
Shield investor from interest rate risk.
|
|
Asset Allocation
|
Segmenting funds into investments that are independent/different
|
|
Portfolio Insurance
|
Identifies a portion of assets for riskier investment
Constant multiple x an amt in ecess to floor amount
|
|
Resistance
|
Stock rises in price but has trouble reaching or staying at a specific price
|
|
Asset Allocation
|
Segmenting funds into investments that are independent/different
|
|
Zero-Growth Model (PE Valuation)
Formula
|
Expected PE ratio = 1/r
where r = discount rate
Actual PE ration = CMV/Net Earnings per share
|
|
Mutual Fund Invstment Returns
|
[(Closing value -Opening value)/opening value]x100
|
|
Three Stage DDM
|
Corresponds to the three stages that companies experience.
1.Growth
2.Transition
3.Maturity
|
|
Current Yield - Preferred Shares
|
[Annual Dividend Payment/Current Market Price] x 100
|
|
Price-Earnings Valuations - A stock is overpriced if...
|
Expected PE ratio < actual PE ratio
|
|
Formula Investing
|
Based on a Set of rules. No investor emotions
1.DRIP
2.Dollar Cost Averaging
|
|
Value Stocks
|
Priced below avg. levels relative to historical pricing.
3 Types
1.low P/E ratio
2.Contrarian mgr. (bookvalue)
3.Conservative yield - above avg. yields
|
|
Zero-Growth Model (DDM) Assumption
|
Assumes dividend is received forever and remains the same.
|
|
Passive Investing
|
Construct portfolio to mirrior an index.
Advantages
1.returns seldom deviate from benchmark
2.fully invested at all times
3.lower fees
|
|
Stock Valuations
|
Method used to compare actual price of stock to its intrinsic value
|
|
Terminal Price
|
Expected sale price of a stock
|
|
Investing in Business Cyles
|
Expansion-own stocks instead of bonds
Peak - hold stock and shift to bonds
Recession - Int. rate decreases making bonds more attractive
Trough - move from bonds to stocks
|
|
Calculate Yield to Maturity on a bond
|
P/YR
xP/YR
PMT
FV
PV
Mode END
SOLVE FOR I/YR
|
|
Constant Growth Model (DDM)Assumption
|
Assumes dividends grow at a constant rate
|
|
Assumptions made when calculating hoding period return
|
1. Selection of specific time period
2. All income flows are used to buy additional units
|
|
Tatical Allocation
|
Deals with short term forecasts. Uses leading economic indicators.
|
|
Yield to Call
|
Yield to maturity of a callable bond (assumes bond is called at the earliest call date)
|
|
Why calculate Current Yield/Rate of Return on a Bond?
|
To assess current annual income from specific investment
|
|
Holding Period Return
|
Total return on an investment - Income + Capital appreciation during specific holding period
|
