three types of asset classes
stock with subclasses based on market cap, value vs growth, and foreign equitybonds, with subclasses based on maturity (immediate vs long term), and issuer (Treasury vs corporate vs non US issuers)Cash, focusing on preservation of capital, income, capital growth, or a combo
proportion of various types of instruments composing a long term investment portfolio. This is a passive strategy
strategic asset allocation
In strategic asset allocation, the portfolio is ___ to bring the asset mix back to the target allocations.
rebalanced
refers to short term portfolio adjustments that adjust the portfolio mix between asset classes in consideration of current market conditions. This is an active strategy. "Time the market
Tactical asset allocation
a fee based account would be suitable for what type of allocation
tactical asset allocation
employs a scientific approach to measuring risk and by extension to choosing investments. It involves calculating projected returns of various portfolio combos to identify those that are likely to provide best returns at different levels of risks. Concept of minimizing risk by combining volatile and price stable investments in a single portfolio
Modern Portfolio Theory (MPT)
Founder of MPTSaid that portfolio with lower volatility will do better than a portfolio with higher volatility
Harry Markowitz
seeks to reduce the risk in a portfolio while simultaneously increasing expected returns
MPT
MPT wants securities to move in a ___ correlation
negative
Perfect negative correlation is __
-1.0
Analysis tools that are used in MPT
CAPM BetaAlpha
used to calculate the return that an investment should acheive based on the risk that is taken
CAPM
risk multiplier for CAPM
beta
volatility in relation to the overall market (systematic risk)
beta
overall market is typically based on the
S&P 500
A security or portfolio with a beta great than __ is generally going to be more volatile than the overall market
volatile
what security would have a beta close to zero
money market securitymoney market mutual fund
method used to determine when to buy,sell,hold securities
CAPM
the extent to which an asset's or portfolio's return exceeds or falls short of its expected return
alpha
a positive alpha would indicate a __ recommendation
buy
When looking at the alpha of a particular investment, you notice it is a negative number, this indicates
the investor took on too much risk then the return received
study of the business prospects of an individual company within the context of its industry and the overall economy
fundamental analysis
involves looking at company financial statements and company management
fundamental analysis
provide analyst with the information needed to asses that corporation's profitability, liquidity, financial strength, and operating efficiency
financial statements
how often do companies issue financial reports to the sEC?
quarterly and annually
provides a snapshot of a company's financial position at a specific point in time. Identifies the value of the company's assets (what it owns) and its liabilities (what it owes) assets-liabilities=SEliabilities + SE= assets
balance sheet
assets on the balance sheet appear in order of ___
liquidity
-money market instruments & marketable securities-accounts receivable include amounts due from customers for goods delivered or services rendered, reduced by the allowance for bad debts-inventory (cost of raw materials, work in process, and finished goods ready for sale)-prepaid expenses (already paid for but not benefitted from, prepaid advertising, rents, insurance, and operating supplies)
current assets
property, plant, and equipment. they are not easily converted to cash. have limited useful lives bc wear and tear eventually reduce their value. their cost can be depreciated over time from taxable income in annual installments to compensate for loss in value
fixed assets
nonphysical properties, such as formulas, brand names, contract rights, and trademarks.Goodwill, reflects corporation's reputation and relationship with its clients
other assets
represent all financial claims by creditors against the corporation's assets.
Liabilities
Types of current liabilities
Accounts payableAccrued wages payablecurrent long term debtnotes payable accrued taxes
amounts owed to suppliers of materials and other business costs
accounts payable
unpaid wages, salaries, commissions, and interests
accrued wages payable
any portion of long term debt due within 12 months
current long term debt
balance due on equipment purchased on credit or cash borrowed
notes payable
unpaid federal, state, and local taxes
accrued taxes
bonds and mortgages
long term liabilities
sometimes called the profit and loss or P&L statement, summarizes a company's revenues (sales) and expenses for a fiscal period, usually quarterly, year to date, or the full year. Compares revenue against costs and expenses during the period
income statement
use this to judge the efficiency and profitability of a company's operation
income statement
indicate the firms total sales during the period
revenues
costs of labor, material, and production (including depreciation on assets employed in production) used to create finished goods
COGS
Revenue-COGS=
gross operating profit
COGS employs which accounting methods
LIFO (higher reported production costs, reported income reduced)FIFO
Three primary components on an income statement
RevenueCOGSPretax Income
Total Sales-COGS-Other operating expenses
EBIT
dividends are paid to stockholders ___
after tax
interest payments are taxed once, while dividends are taxed __
twice
net worth or owners equity claims on a company's assets after all its creditors have been paid
shareholder equity
three types of SE
capital stock at parcapital in excess of parretained earnings
includes preferred and common stock, listed at par value.
capital stock at par
often called additional paid in capital or paid in surplusthe amount of money over par values that a company received for issuing the stock in a primary offering
capital in excess of par
sometimes called earned surplus or accumulated earnings, profits that have not been paid out in dividends.
retained earnings
combined sum of its long term debt and equity securities.
capitilization
the relative amounts of debt and equity that compose a company's capitalization. some companies finance their business w a large proportion of borrowed funds; others finance w retained earnings
capital structure
capital structure is built through
long term debt capital stockcapital in excess of parretained earnings
amount of capital or cash a company has available. measure of a firm's liquidity.
working capital
higher the current ratio, the more ___ a company is
liquid
company's ability to use long term debt to increase its return on equity
financial leverage
Depreciation affects the company in two ways
accumulated depreciation reduces the value of fixed assets on the balance sheetdepreciation reduces taxable income on the income statement
assumes thay all convertible securities such as warrents and convertible bonds and preffered stock have been converted into the common
EPS after dilution
reports a businesses sources and uses of cash and the beginning and ending values for cash and cash equivalents each year.
statement of cash flow
three components of cash flow
operating activities, investing activities, financing activities
father of value investing investing
Graham
focus on stocks of companies whose earnings are growing faster than most other stocks and are expected to do so. buy stocks that are at the high end of their 52 week price range. "overvalued stock'
growth style
concentrate on undervalued or out-of-favor securities whos price is low relative to the company's earnings or book value and whos earnings prospects are believed to be unattractive by investors and securities analysts
value style
expect to see high P/E ratios or high price to book ratio with little or no dividends
growth managers
expect to see a low P/E ratio or low price to book ratio and dividends offering a reasonable yield
value managers
concentrate on broad based economic trends, current business conditions within an industry; and the quality of a particular corporation's business, finances, and management
fundamental analysts
attempts to predict the direction of prices on the basis of historic prices and trading volume patterns when laid out graphically on charts
technical analysis
bottom of trading rangetop level of trading range
support levelresistance level
decline through the support level
bearish breakout
rise through the resistance level
bullish breakout
number of issues closing up or down on a specific day reflects
market breadth
Tools of technical analysis
trendlinesconsolidationsreversals overbought and oversold
if a stock price stays within a narrow range, it is said to be
consolidating
indicates that an upward or downward trend has halted, and the stock's price is moving in the opposite direction
reversal
market is decliningbullish
over sold
market index rising bearish
overbought
Technical Market Theories:
Dow TheoryOdd-Lot TheoryShort-Interest Theory
use this to confirm the end of a major market trend
Dow theory
three types of changes in stock prices
primary trends (1 year or more)secondary trends (3-12 weeks)short term fluctuations (hours or days)
small investors buy and sell at the wrong times. when odd lot traders buy, odd lot analysts are bearishwhen odd lot traders sell, odd lot analysts are bullish
odd lot trading
standard trading unit for equity securities is a ___
round lot
a round lot is ___ shares. an odd lot is ___ shares
100something less than 100 shares
If a trade is made for 550 shares of common stock, the trade was for ____ round lots and ____ odd lots
50050
refers to the number of shares that have been sold short. high short interest is a ___ indicatorlow short interest is a ___ indicator
short interest theorybullishbearish
Used ti analyze munis
The Bond BuyerThomson Muni Market Monitor Newspaper listings
published every business day and serves as an authoritative source of information on primary market municipal bonds. publishes 30 day visible supply, placement, or success ratio
Bond Buyer
If the visible supply is exceptionally large, than interest rates are likely to ___ to attract investors to the larger number of bonds available
rise
If the visible supply is exceptionally smaller, than interest rates are likely to ___
fall
Bond Buyer Compiled Indexes
40 Bond Index20 Bond Index11 Bond IndexRevdex 25
offers wire servicesinfo pertaining secondary markets appear in these wire services throughout the dayused for bonds trading in the secondary market
Thomson Muni Market Monitor
Tax exempt bonds are posted in the
Bond BuyerWall Street Journal
important consideration in determining the appropriate variable insurance product:
mortality and expense charges
covers the risk that insured may live for a period shorter than assumed.
mortality expense
covers the risk that the costs of administering and issuing the policy may be greater than assumed
expense risk fee
cost of management of the chose separate account subaccounts
investment management fee
if the insured becomes disabled or otherwise unable to work, what is waived
premium
5% markup policy does not apply to
mutual fundsvariable annuity contractssold in public offerings
an order to buy or sell on the customers behalf in which the firm receiving the order is not a market maker
riskless and simultaneous transaction
When a customer sells securities and uses the proceeds to purchase other securities in a proceeds transaction, the BD's combines commissions and markups must be consistent w ___
5% policy
hidden feewhen a BD sells to a client on a net basis, it means there is no commission charge. HOWEVER, there is a markup or a mark down.
net transactions
if an investor has net capital losses, up to $3000 of that loss can be taken as a deduction against ordinary incomeapplies to investors who take a loss on the sale of a security and repurchase that same securitiy within a specefic time frame
wash sale
examples of disallowing the loss or tax benefit from selling a security and repurchasing the same or one substantially identical:
securities convertible into the one being soldwarrant to purchase the securitiy being soldrights to purchase the securitiy being sold call options to purchase the security being sold
wash sale rule applies only to realized ___ not realized gains
realized losses
sale of a bond and the simulatenous purchase of a different bond in a like amount. used to control tax liability, extend maturity, or update investment objectives. when done properly, the loss is allowed
tax swapping
three qualities of debt in determining substaintially identical:
maturity coupon issuer
determining which shares to sell:
FIFO share identificationaverage cost basis
the investor keeps tracks of the cost of each share purchased and uses this information to liquidate the shares that would provide the lowest capital gain.
share identidication
shareholder may elect to use ___ when redeeming mutual fund shares (but not shares of specefic stocks)
average cost basis
step up provision does not apply to inheriting a
annuity
when a person dies, a donor gifting securities will have to pay a tax is due on the donor
tax
individuals may give gifts up to ____ per year on any number of individuals without incurring gift tax (annual gift tax exclusion)
15000
when are gift taxes due?
same time as the individual tax return (Apr 15)
when are estate taxes due?
9 months after death
A corporation in the 35% tax bracket reports operating income of $4 million for the year. The firm also received $200,000 in preferred dividends from domestic corporations. Assuming no other items of income or expense, what is the company's tax liability?A)$1,756,000B)$1,370,200C)$1,435,000D)$1,360,000
C4 million + 100,000 x 35%For tax purposes, corporations can exclude 50% of all dividends received from domestic common and preferred stocks.
A technical analyst is least concerned withA)trading volume.B)open short positions.C)new highs and lows.D)declaration of increased dividends.
D
Your customer wants to know what portion of earnings one of the companies held in her portfolio has available to pay interest expense on bonds the company currently has outstanding. You would be able to find this informationA)by contacting the IRS.B)on the firm's most recent balance sheet.C)on the firm's income statement indicated as earnings before interest and taxes (EBIT).D)on a firm's income statement by subtracting preferred dividends from EBIT.
C
A company reported annual earnings of $2.40 per share and paid annual dividends of $0.60. If the dividends were distributed quarterly, what was the amount and payout rate?A)$0.15 at 6.25%B)$0.60 at 10%C)$0.60 at 25%D)$0.15 at 25%
D
A corporation has $20 million net income after taxes, 7 million common shares outstanding, and $15 million of 6% preferred stock ($25 par). What is the corporation's earnings per share (EPS)?A)$2.54B)$2.86C)$2.83D)$2.73
D15 million x 6% = 900,00020 millon-900,000=19.1 common19.1/7
All of the following will affect the working capital of a corporation exceptA)a decrease in current liabilities.B)payment of a cash dividend.C)declaration of a cash dividend.D)an increase in current assets.
B
Based on yesterday's closing price of $60 per share, Blech Sheet Metal, Inc., has a current P/E ratio of 12:1. If the current quarterly dividend payment is $0.50 per share, the dividend payout ratio isA)40%.B)3.33%.C)16.66%.D)10%
60/12= 5 (EPS)2/5=40%
On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes?A)NoneB)$75C)$100D)$40
Bwash sale1000/40=25100-25=75
A fundamental analyst researching a stock is concerned with all of the following exceptA)the capitalization ratio.B)the volume of shares traded.C)management efficiency.D)the stock's market price as a multiple of the company's earnings.
B
Your client has purchased shares of VACL at several different times. A view of the client's account ledger indicates the following:100 shares @$50 on February 12100 shares @$52 on April 23200 shares @$49 on May 12100 shares @$55 on June 28The client decides to sell 200 shares of the VACL on November 14 of the same year when the price of the stock is $53 per share. Absent any instructions to the contrary, for tax purposes, the client will report a short-term capital
C)gain of $400.Unless the client gives specific instructions, the IRS will always use the FIFO method of determining the shares sold. In this case, it would be the 100 purchased in February at $50 and the 100 purchased in April at $52. That is a $300 profit on the February purchase and a $100 profit on the April one. That totals $400. Because all transactions are in the same year, any gain (or loss) is short term.
Which of the following balance sheet items is not a current liability?A)Accounts payableB)MortgagesC)Accrued taxesD)Long-term debt amount that is due within one year
B) MortgagesShort-term or current liabilities are those entries on a balance sheet that are due in one year or less. Accounts payable, accrued taxes, and that portion of long-term debt due within the year are all current liabilities. Mortgages are generally long-term liabilities, although that portion of a mortgage that is due within the year would be classified on the balance sheet as a current liability.
All the following would be considered current assets exceptA)inventory.B)cash.C)a warehouse.D)marketable securities.
C)a warehouse.Current assets are those that are either cash or expected to generate cash within the next year. Warehouses are fixed assets used for many years
An investor purchased 100 shares of a stock three years ago at $38 per share. Disappointed with the stock's performance, the investor sells it for $35 per share. Two weeks later, after the company announced higher-than-expected earnings, the investor purchased 100 shares at $44 per share. When this investor decides to sell the newly purchased shares, the cost basis will beA)$47 per share.B)$41 per share.C)$38 per share.D)$44 per share.
A)$47 per share.This is a wash sale situation. Selling a stock at a loss and repurchasing it within 30 days "washes" out the loss for current tax purposes. The loss, in this case $3 per share, is added to the cost of the repurchased stock. Thus, $44 plus $3 equals a new cost basis of $47 per share.
To reduce a client's exposure to systematic risk in his equity portfolio, you would look at which of the following factors?A)Credit ratingB)Earnings historyC)Investment return compared to the inflation rateD)Beta
D)BetaBeta is a measure of a portfolio's volatility compared to the volatility of the overall market. Because systematic risk is risk associated with investing in the market, lowering the client's volatility (beta) relative to that of the market should lower her exposure to market risk. Credit rating is used to measure default risk on debt securities, and earnings history would assist you in the measurement of business risk (unsystematic risk).
Which of the following are likely to have a low beta?A)Aerospace stocksB)Technology stocksC)Software stocksD)Public utility stocks
D)Public utility stocksPublic utility stocks tend to have low betas, as do other defensive stocks. Technology, aerospace, and software stocks tend to have high betas
A corporation buys back its stock on the open market for all of the following reasons exceptA)it increase earnings per share.B)to use it for future acquisitions.C)to use it for stock options.D)it reduce interest charges.
D)it reduce interest charges.The repurchase of common stock does not reduce interest payments; however, it does reduce total dividends paid.
A customer who owns TCB stock wants to continue holding the security. The stock has fallen from 26 when he bought it on February 2 to a 52-week low of 20.75. He sells the stock on December 1 at the low and repurchases it at 21 on December 15. What is the tax consequence of this investment?A)By repurchasing the investment at the same price, he keeps the original cost basis.B)The tax loss is not allowed.C)He has a capital loss.D)The holding period for the stock was wiped out.
B)The tax loss is not allowed.Because the security was repurchased in less than 30 days, the IRS will not allow the loss due to the wash sale rule. It would have been allowed had the customer bought back the security after 30 days.