Ch.10 Part 2

Front 1

Blue Chip

Back 1

Highest quality companies with proven earnings and dividend records. Mainly NYSE listed issues.

Front 2

Growth

Back 2

Companies in a period of above-average growth due to Rapid Market expansion or unique products. Usually do not have a proven track record and have very low dividend payout ratios. Tend to sell at higher PE multiples than mature companies because of their exceptional potential.

Front 3

Emerging Growth

Back 3

Brand new ventures of high-risk but also high potential reward. Have no track record and can't afford to pay dividends.

Front 4

Income

Back 4

Mature companies with high dividend payout ratios. I.e. utilities.

Front 5

Cyclical

Back 5

Companies whose fortunes track business cycle closely. An example of a cyclical stock is a durable goods manufacturer. When business cycle turns down people feel poor and can't afford to buy cars and washing machines.

Front 6

Counter-Cyclical

Back 6

Companies whose fortunes operate in reverse of business cycle. An example is a basic food producer. When people feel poor, they don't eat out as much, so in home cooking increases.

Front 7

Defensive

Back 7

A company which remains unaffected during business cycle downturns. I.e. drug companies, Public Utilities, Etc.

Front 8

Speculative

Back 8

Companies that fly high during business cycle up turns. I.e. toy company's and airplane manufacturers go through feast and famine periods that mirror business cycle.

Front 9

Special Situation

Back 9

Company going through a takeover, restructuring, bankruptcy, or management change that will greatly change nature of its operations and hence its earnings potential.

Front 10

Two components of investment's return:

Back 10

1 dividends and interest

2 capital gains and capital losses.

Front 11

Total Return=

Back 11

Income (dividends for equities interest for debt) + growth (or - loss)

Front 12

Mature Companies

Back 12

Have high dividend rates and low growth rates. If a mature company, paying a 4% dividend, is expected to grow at the rate of 4%, the total return is 8%.

Front 13

Growth companies

Back 13

Have low dividend rates and high growth rates. If a Growth Company, paying 1% dividend, is expected to grow at the rate of 7%, the total return is 8%.

Front 14

Standard Deviation

Back 14

See on pages 328-329 in small book

Front 15

Risk premium =

Back 15

Total return - risk free rate of return

( see page 329 in small purple book)

Front 16

Expected Return=

Back 16

Probability of occurrence X projected return

( see page 330 small book)

Front 17

Active Assets Selection

Back 17

Based on the belief that the market is in efficient in pricing Securities, therefore, selecting specific Securities is beneficial. This is an expensive process (research, analyst, Etc). The incremental return achieved here should exceed the extra cost associated with this strategy.

Front 18

Investment Policy Statement

Back 18

Once a profolio composition is selected, this is documented in a statement of investment policy. Once selected, the relative percentage is assigned to each asset class can shift due to the differing performance of each asset class. I.E in a bull market, equities outperform the other asset classes, and the equity portion becomes larger than the target allocation. As this happens, some equities must be sold to rebalance the profolio with the proceeds invested in the underperforming assets (Bonds, in this case).

Front 19

Passive profolio rebalancing

Back 19

Funds are continually reallocated from over-performing to underperforming asset classes to maintain the strategically chosen asset allocation percentages.

Front 20

Active profolio rebalancing

Back 20

Funds are reallocated from underperforming or Market performing asset classes to those the manager believes Will outperform the Market over the coming time frame (in essence, tactical asset management).

Front 21

Growth investing

Back 21

Selecting Equity Investments based solely on earnings growth or stock prices growth over time, ignoring fundamental and Technical factors.

Front 22

Value investing

Back 22

Selecting Equity Investments based on finding fundamentally undervalued companies, looking at P/E ratios or Price/ Book value ratios, Etc.

Front 23

Personal customer portfolio construction Some information that should be gathered include, among other things, the client's :

Back 23

Financial Status

Family composition

tax situation

employment information

financial goals

investment objective

investment knowledge

investment time Horizon

risk tolerance

( see page 335 - 336 of small book)

Front 24

Systematic risk

Back 24

Risk of General market decline affecting profolio. Also called Market risk and cannot be Diversified away.

Front 25

Non-systematic risk

Back 25

Risk of a single investment going sour. Also called selection risk. By diversifying profolio, this risk is minimized.

Front 26

Capital risk

Back 26

Risk that amount invested may not be fully recovered.

Front 27

Timing risk

Back 27

Risk that buying and selling occur at disadvantageous price levels due to poor Market timing.

Front 28

Business risk

Back 28

Risk that an issuer's business declines, often due to technological changes, Bad Business decision making, and Law changes. In turn, the value of the issuer's Securities declines.

Front 29

Consolidating Market

Back 29

Occurs after a sustained rise or fall and people try to digest new price of stock and determine its real value.

Sideways movement.