Investments Test #2

Front 1

Traditional Portfolio Management

Back 1

an approach to portfolio management that emphasizes "balancing" the portfolio by assembling a wide variety of stocks and/or bonds of companies from a broad range of industries.

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Modern Portfolio Theory

Back 2

an approach to portfolio management that uses several basic statistical measure to develop a portfolio plan

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efficient frontier

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the leftmost boundary of the feasible set of portfolios that includes all efficient portfolios - those providing the best attainable tradeoff between risk (measured by the standard deviation) and return

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relevant risk

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risk that is nondiversifiable

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portfolio beta, b

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the beta of a portfolio; calculated as the weighted average of the betas of the individual assets it includes.

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risk - return tradeoff

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the positive relationship between the risk associated with a given investment and its expected return

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risk-free rate, Rf

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the return an investor can ear on a risk-free investment such as a u.s. treasury bill or an insured money market deposit account

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residual owners

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owners/stockholders of a firm, who are entitled to dividend income and a prorated share of the firm's earnings only after all other obligations have been met.

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equity capital

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evidence of ownership position in a firm, in the form of shares of common stock

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publicly traded issues

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shares of stock that are redily available to the general public and are bought and sold in the open market

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public offering

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an offering to sell to the investing public a set number of shares of a firm's stock at a specified price

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rights offering

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an offering of a new issue of stock to existing stockholders who may purchase new share in proportion to their current ownership position

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stock spin-off

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conversion of one of a firm's subsidiaries to a stand-alone company by distribution of stock in that new company to existing shareholders

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stock split

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a maneuver in which a company increases the number of shares outstanding by exchanging a specified number of new shares of stock for each outstanding share

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treasury stock

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shares of stock that have been sold and subsequently repurchased by the issuing firm

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classified common stock

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common stock issued by a company in different classes, each of which offers privileges and benefits to its holders

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par value

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the stated, or face, value of a stock

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book value

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the amount of stockholders' equity in a firm; equals the amount of the firm's assets minus the firm's liabilities and preferred stock

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market value

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the prevailing market price of a security

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investment value

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the amount that investors believe a security should be trading for, or what they think its worth

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earnings per share

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the amount of annual earnings available to common stockholders, as stated on a per-share basis

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date of record

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the date on which an investor must be a registered shareholder to be entitled to receive a dividend

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payment date

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the actual date on which the company will mail dividend checks to shareholders (aka the payable date)

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ex-dividend date

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three business days up to the date of record; determines whether one is an official shareholder and thus eligible to receive a declared dividend

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cash dividend

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payment of a dividend in the form of cash

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stock dividend

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payment of a dividend in the form of additional stock

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dividend yield

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a measure that relates dividends to share price and puts common stock dividends on a relative rather than absolute basis.

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dividend payout ratio

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the portion of earnings per share that a firm pays out as dividends

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dividend reinvestment plans (DRIPs)

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plan in which shareholders have cash dividends automatically reinvested into additional shares of the firm's common stock

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blue-chip stocks

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financially strong, high quality stocks with long and stable records of earnings and dividends

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income stocks

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stocks with long and sustained records of paying higher than average dividends

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growth stocks

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stocks that experience high rates of growth in operations and earnings

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tech stocks

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stocks that represent the technology sector of the market

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speculative stocks

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stocks that offer the potential for substantial price appreciation, usually because of some special situation, such as new management or the introduction of a promising new product

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cyclical stocks

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stocks whose earnings and overall market performance are closely linked to the general state of the economy

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defensive stocks

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stocks that tend to hold their own, and even do well, when the economy starts to falter

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mid-cap stocks

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medium sized stocks, generally with market values of less than 4 or 5 billion but more tha 1 billion.

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small-cap stocks

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stocks that generally have market values of less than 1 billion but can offer above average returns

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security analysis

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the process of gathering and organizing information and then using it to determine the intrinsic value of a share of common stock

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intrinsic value

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the underlying or inherent value of a stock, as determined through fundamental analysis

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economic analysis

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a study of general economic conditions that is used in the valuation of common stock

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business cycle

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an indication of the current state of the economy, reflecting changes in total economic activity over time

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industry analysis

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study of industry groupings that looks at the competitive position of a particular industry in relation to others and identifies companies that show particular promise within an industry

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growth cycle

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a reflection of the amount of business vitality that occurs within an industry (or company) over time.

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fundamental analysis

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the in-depth study of the financial condition and operating results of a firm

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balance sheet

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a financial summary of a firm's assets, liabilities, and shareholders' equity at a single point in time.

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income statement

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a financial summary of the operating results of a firm covering a specified period of time, usually a year

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statement of cash flows

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a financial summary of a firms cash flow and other events that caused changes in the company's cash position

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ration analysis

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the study of relationships between financial statement accounts

Front 50

liquidity measures

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financial ratios concerned with a firm's ability to meet its day to day operating expenses and satisfy its short term obligations as the come due

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activity ratios

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financial ratios that are used to measure how well a firm is managing its assets

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leverage measures

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financial ratios that measure the amount of debt being used to support operations and the ability of the firm to service its debt

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profitability measures

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financial ratios that measure a firms returns by relating profits to sales, assets, or equity

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common stock ratios

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financial ratios that convert key information about a firm to a per-share basis

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PEG Ratio

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a financial ratio that relates a stocks price/earnings multiple to the company's rate of growth earnings

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stock valuation

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the process by which the underlying value of a stock is established on the basis of is forecasted risk and return performance

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common size income statement

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a type of financial report that uses a common denominator (net sales) to convert all entries on a normal income statement from dollars to percentages

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relative P/E multiple

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a measure of how a stock's P/E behaves relative to the average market multiple

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valuation

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process by which an investor uses risk and return concepts to determine the value of a security

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required rate of return

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the return necessary to compensate an investor for the risk involved in an investment

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dividend valuation model (DVM)

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a model that values a share of stock on the basis of the future dividend stream it is expected to produce; its three versions are zero-growth, constant-growth, and variable-growth

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dividends and earnings (D & E) approach

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stock valuation approach that uses projected dividends, EPS, and P/E multiples to value a share of stocks; aka DCF approach

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price/earnings (P/E) approach

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stock valuation approach that tries to find the P/E ration that's most appropriate for the stock; this ratio, along with estimated EPS, is then used to determine a reasonable stock price.