Rpa 2-Chapter 1 Investment Management

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Blue Chips Stocks

Back 1

stocks issued by major companies with long and unbroken records of earning and dividends payments. They should appeal primarily to pension plans seeking safety and stability

Front 2

Growth Stocks

Back 2

These are stocks issued by companies whose sales, earnings and share of the market average. They represent a higher risk, but the prospects for capital appreciation should produce a correspondingly higher average. Not attractive to pension with cash flow needs.

Front 3

Income Stocks

Back 3

stocks that pay higher than average dividend returns. they have been attractive to pension plans that brought stock for current income.

Front 4

Cyclical Stocks

Back 4

these are stocks issued by companies whose earning fluctuate with the business cycle and are accentuated by it.

Front 5

Defensive stocks

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stocks issued by recession-resistant companies. may be important for pension plans that can not afford major capital losses.

Front 6

Interest sensitive stocks

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these stocks whose prices tend to drop when interest rates rise, and vice versa.

Front 7

Purchasing power risk

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risk reflects the relationship between the nominal rate of return on an investment and the increase in the rate of inflation

Front 8

Business risk

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the prospect of the corporation issuing the security suffering a decline in earnings power that would adversely affect it's ability to pay interest, principal or dividends.

Front 9

Interest risk

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well known inverse relationship between interest rates and (long-term) bond prices. when interests rates increase, the value of long-term bond fails.

Front 10

market risk

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individual stock's reaction to a change in the market

Front 11

Specific risk

Back 11

intrinsic to a particular firm

Front 12

US Treasury Bills and notes

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maturities at issue ranging from 91 to 360 days, while Treasury notes have initial maturities ranging from one to five years. There is almost no default risk. however the possibility either the interest or principal will be skipped is zero

Front 13

Federal agency issues

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other agencies issue short term obligations that range in maturity from one month to over 10 years. These instruments typically will yield slightly more than Treasury obligations with a similar maturity.

Front 14

Certificate of deposit

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issued by commercial banks and have a fixed maturity, generally in a range of 90 days to one year. the default risk depends on the issue bank but it is usually quite small.

Front 15

Commercial paper

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unsecured short term note of large corporation. investment offers maturities that range up to 270 days. marketability is limited if early sale required. the default risk depends on the credit standing of the issuer, but commensurately higher yield is available.

Front 16

Money market mutual funds

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investors achieve a yield almost as high as that paid by the direct investment themselves

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Performance measurement- Definition

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Establishment of investment objectives and, to the extent practical, a clearly formulated portfolio strategy.

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Performance measurement- Input

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Availability of reliable and timely data. Incorrect and tardy data will render the most sophisticated system ineffective.

Front 19

Performance measurement-Processing

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Use of appropriate statistical methods to produce relevant measurements. .The complex interaction of objectives, strategies and managers tactics cannot be understood if inappropriate statistical methods are used.

Front 20

Performance measurement-output

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Analysis of the process and results presented in a useful format. Presentation should be available to understand and analyze the process.

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Four Caveats to Performance measurement

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Hastily chosen system, poor related to real needs can rapidly degenerate into mechanistic

System should fit the investment objective

Measuring the process may alter it

To save time and cost, it is important that over measurement be avoided.

Front 22

Internal Rate of Return (dollar weighted of return)

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It is valuable in that it allows the sponsor to determine whether the investment is achieving the results for assume actuarial calculation.

Ineffective for evaluating investment managers due to timing of investment and withdrawals

Front 23

Time weighted Value

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computed by dividing the time interval under study into sub-interval who boundaries are the dates of cash flow into/out of the fund.

Front 24

Capital asset pricing model-Alpha Value

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the amount of return produced by the portfolio, on average, independent of the return of the market.

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Capital asset pricing model-Beta Value

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slope of the line measured as the change in vertical movement per unit of change in the horizontal movement

Front 26

Bonds

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1. desire to purchase assets that can use as a cash-flow to pay benefits. (called dedication/immunization)

2. purchase assets with longer maturity then money markets. Then the interest rate will be higher.

Front 27

Mutual Funds used in pension plans

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-Greater liquidity through ease of entry & exit

-Greater diversification

-Easier mean portfolio specialization

-Daily update on holdings via internet listing

-Ease of meeting asset allocation and marketing timing goals

-Ease of checking past performance through published studies.

Front 28

Passive Investing

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Index Fund

Dedication/Immunization (bond market)

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Index Fund

Back 29

Ultimate form of passive investing. ex: equity index mirrors the S&P 500