02-28-2011 PowerPoints

02-28-2011 PowerPoints - Important Course Activities Bonds...

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Unformatted text preview: Important Course Activities Bonds Complete Personal Finance Guidebook (pages 102-114) pages 102WSJ: Understanding Money and Investing (pages 82-103) 82Final Draft of Spending Plan March 14, 2011 Midterm: March 21, 2011 Team Investments Team 1: (0.74%) / $9,926 Team 2: 4.48% / $10,448 Team 3: 0.93% / $10,093 Team 4: 2.76% / $10,276 Team 5: 5.86% / $10,586 S&P 500 Average Return = 13.0% Standard Deviation = 20.0% 68% of the time your return will be between -7.0% and 33.0% (Yellow shade) 95% of the time your return will be between -27.0% and 53.0% (Yellow and green shade) 99.7% of the time your return will be between -47.0% and 73.0% (Yellow, green and blue shade) 1 “The four most dangerous words in investing are ‘This time it's different.’” Team Exercise Sir John Templeton • What ETF did you choose? • Give a brief description of your ETF. • What companies are in your ETF? • Number of stocks in your ETF? • What was the 1 year and 5 year return? • What is the ticker symbol? • What is the ETF price? Team Exercise ETFs VERY short History • What happens when you cross a stock with a mutual fund? • ETFs proliferated in 2006 from under one hundred to almost four hundred by the end of the year. • You get an ETF! “Exchange Traded Fund” • The trend has been away from simpler indexindex-tracking funds to proprietary groupings of stocks. • Now there is close to 1,000 ETFs! 2 Mutual Fund Stocks • Open-End Fund: Open- does not have restrictions on the amount amount of shares the fund will issue - will buy back shares from investors who wish to sell - once a day pricing • Would stocks be considered an openopen-end fund or a closed-end closedfund? fund? ClosedClosed-end Are stocks continually quoted? Class Exercise ETFs ETFs • • • • • • • • New innovation Ability to both invest and trade Are open-end mutual funds openCan be traded at any time throughout the Can be traded at any time throughout the course course of the day Ability to trade a large basket of stocks Asset allocation Instant diversification Trades just like a stock on an exchange • Would an ETF be considered an openopen-end fund or a closed-end fund? closedOpenOpen-end Are ETFs continually quoted? Class Exercise 3 ETFs - Cont’d • • • • Replicate a stock market index such as the S&P 500 “Index trackers” Replicate market sector such as energy or Replicate a market sector such as energy or technology, technology, or a commodity such as gold or petroleum Lower fees ETFs • They can trade at a 'premium' or 'discount' to the underlying assets value value. ETFs are built like mutual funds but trade like stocks. Types of ETFs • • • • • • • • Equity ETFs US Index ETFs Bond ETFs Inverse ETFs Commodity ETFs Foreign Currency ETFs Asset Size ETFs Sector ETFs ETFs vs. Mutual Funds Why ETFs are Better! Class Exercise • • • • • • • • Simple Trade like stocks Liquidity Cheaper than mutual funds No minimum investment Intraday pricing ShortShort-term market movements Not actively managed Team Exercise 4 On January 1, 2010, you purchased 100 shares of a Vanguard Energy ETF (VDE) paying $80 per share. On December 31, 2010, you sold those 100 shares for $91 per share. How much did you make and what was your ROI? On January 1, 2009, you purchased 100 shares of a Vanguard Energy ETF (VDE) paying $80 per share. On December 31, 2009, you sold those 100 shares for $91 per share. How much did you make and what was your ROI? = ((91*100) – (80*100)) $1,100 Class Exercise = (($9,100 – $8,000) / 8,000) * 100% Class Exercise 13.75% On January 1, 2010, you sold 100 shares of a Vanguard Energy ETF (VDE) at $36 per share. On December 31, 2010, you purchase those 100 shares back for $33 per share. How much did you make/lose? Building Your Investment Portfolio • • • • • • Have to know your financial and personal goals Have to decide on your investment objectives Have to understand your attitude toward investment risk Have to decide on how much to invest Have to decide what to invest in Have to rebalance / reevaluate your portfolio = ((36*100) – (33*100)) $300 Class Exercise 5 Why Does Walmart Sell So Many Different Products? Umbrellas and Sunglasses? Risk Reduction Or Diversification Asset Allocation • • Class Exercise What is important about asset asset allocation? Asset allocation does what? Asset Allocation “Don’t Put all your eggs in one basket” • Complicated task • Involves dividing an iinvestment portfolio dividing an nvestment portfolio among different asset categories - stocks, bonds and cash Correlation • Relationship between two variables or two investments • Will different investments move at the same time for the same reason and in the same time for the same reason and in the same direction? • Depends largely on your time horizon • Your ability to tolerate risk • Always between -1 and 1 • -1: variables move in opposite directions • 1: variables move in same direction 6 Portfolio Standard Deviation Computation 2 Asset Portfolio Amount of Stock A is 70% Amount of Stock B is 30% Standard deviation of Stock A is 20% Standard deviation of Stock B is 10% Correlation Coefficient is -1.0 Portfolio Standard Deviation 2 Asset Portfolio Portfolio Std.Dev. = Where – (w S ) + (w S ) 2 a a b b 2 + 2 ( w aSa )( w bSb ) Corrab Wa = 0.70 Wb = 0.30 Sa = 20 Sb= 10 Corrab = -1 Individual Exercise What do you think the Portfolio Standard Deviation will be? Individual Exercise Portfolio Standard Deviation 2 Asset Portfolio SP = (0.7* 20)2 + (0.3*10)2 + 2(0.7* 20)(0.3*10)(−1) SP = (14)2 + (3)2 + 2(14)(3)(−1) Team Exercise Asset Allocation is COMPLETELY represented in these slides Portfolio Asset A Portfolio Asset A Asset A Portfolio Asset B Value SP = (196) + (9) + (84)(−1) SP = 205 − 84 = 121 = 11 Value Value Asset B Asset B Time 1 Time 2 Time 3 7 ...
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This note was uploaded on 04/19/2011 for the course EE 0822 taught by Professor Lengkeek during the Spring '11 term at Temple.

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