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Investments Chapter 12 & 13

Terms in this set (67)

Chapter 12:
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Mutual Fund
an investment company that invests its shareholders money in a diversified portfolio of securities
-investors own a share of the fund proportionate tot he amount of investment
-more of these today than stocks listed on NYSE & AMEX combined
-45% of all US households own one of these
portfolio diversification
owning numerous securities reduces risk, ability to invest small amounts, and professional management
service
automatic reinvestment of dividends, withdrawal plans, exchange priveleges
convenience
easy to buy and sell, high liquidity, funds handle record keeping, easy to track prices
substantial transaction costs
draw back to mutual fund: management fees, commission fees on load funds
lower than market performance
consistently beating the market is difficult , many mutual funds just keep even with overall stock market index
mutual funds organized
management company runs the funds' daily operations, investment advisor buys and sells stocks or bonds....
open-end investment companies
investors buy and sell shares directly with the mutual fund company without a secondary market, fund can issue an unlimited number of shares as investors contribute new money to the fund
Net Asset Value (NAV)
purchase and selling price is determined by the ____ __________ _______ of the fund: NAV= value of all securities / total shares outstanding
-all purchases and sales are completed at the end of the day after the stock markets have closed
Exchange Traded Funds (ETF)
a basket of securities, often designed to track a specific market index, similar to index mutual funds, trade like individual stocks on stock exchanges
Load Fund
a mutual fund that charges a commission when shares are bought
-typical sold through broker
No-load Fund
a mutual fund that does not charge a commission when shares are bought
-typically sold to investor by mutual fund
low-load fund
a mutual fund that charges a small commission (2-3%) when shares are bought
back-end load
a commission charged on sale of shares in mutual fund
12(b)-1 fee
fee charged by some mutual funds to cover management and other operating costs; amounts to as much as 1% of the average net assets
Unit Investment Trusts (UIT)
-fixed pool of securities, normally bonds
-not actively managed, securities in portfolio remain static
-have shares that represent a proportionate share of the trust
Real Estate Investment Trusts (REIT)
-closed end investment company that invests in -mortgages and various types of real estate investments
provide high dividends along with capital appreciation potential
-property/equity REIT's invest in shopping centers, hotels, apartments, office buildings and other real estate
-mortgage REIT's invest in mortgages
-hybrid REIT's invest in both properties and mortgages
hedge funds
not really mutual funds, they are private limited partnerships
not regulated by mutual fund regulations
general partner runs fund and takes 10-20% of profits and limited partners are investors
only sold to accredited investors-net worth greater than 1,000,000 and or annual income over 200,000
use arbitrage strategies, options, short sales and other complex strategies
growth fund
primary goals are capital gains and long term growth
-invest in large, well established companies with above average growth potential
-little or no dividend income
-moderately risk investments for more aggressive investors
aggressive growth fund
highly speculative mutual fund that seeks large profits from capital gains
-invest in small, unseasoned companies with high
value fund
seeks stocks that are undervalued in market
-focus is on intrinsic value of stocks and requires extensive fundamental analysis
-invest in stocks with low PE ratios, high dividend yields and promising futures
-looks for undiscovered companies with potential for future growth
equity income fund
emphasizes current income and capital preservation
-focus is on high current income with some long term capital appreciation
-invest in blue chip stocks and other high grade securities
-less price volatility
balanced fund
generates a balanced return of both current income and long term capital gains
-invest in blend
growth and income fund
seeks both long term growth and current income with primary emphasis on capital gains
bond funds
invests in various kinds and grades of bonds, with income as primary objective
-more liquid, offer high diversification, automatically reinvest interest
-lower risk investments for investors who are looking for steady income
government bond funds
invest in US treasury and agency securities
mortgage-backed bond funds
invest in mortgage backed securities
municipal bond funds
invest in tax exempt securities issued by states and political investments
money market funds
invest in short term securities with maturities of less than 90 days
-interest rates move up and down with market rates
-trade at a constant net asset value of $1 per share
-considered a safe, convenient investment to accumulate capital and temporarily store idle funds
general purpose money market fund
invests in all types of money market investments
government securities money market funds
invest only in US treasury bills and other short term government securities
tax exempt money market fund
invest in very short term tax exempt municipal securities
index funds
buys and holds a portfolio of stocks (or bonds) equivalent to those in a specific market index
-match the index
-don't beat
-low operating costs due to low turnover in investment portfolio
sector funds
investments are restricted to a particular segment of the market
-investments are concentrated in one specific industry sector
-objective is to produce capital gains
-considered speculative because limited diversification can increase investment risks
socially responsible funds
funds that actively and directly incorporate ethics and morality into the investment decision
asset allocation funds
funds that spread investors money across stocks, bonds, and money market securities
-provides built-in asset allocation by professional investment manager
-as market conditions change over time, the asset allocation mix changes as well
-provides convenience of one stop shopping without having to own several mutual funds
international funds
funds that do all or most of their investing in foreign securities
-objective is to benefit form changes in: international market conditions and valuation of US dollar
-funds can specialize in international stocks, bonds or money market securities
Mutual Fund investor services
1) automatic investment plans: regular investment from checking or savings account or paycheck, monthly amounts as small as 25, excellent way to build up investment over time
2) automatic reinvestment of interest, dividends, and capital gains
3) systematic withdrawal plans
4) conversion (exchange) privileges
premium/discount=
(share price-NAV)/NAV
sources of return from mutual funds
dividend income, capital gains distributions, change in price/NAV
unrealized capital gains (paper profits)
capital gain that has not been realized since funds holdings have not been sold
Chapter 13:
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capital growth objective
-higher risk
-emphasis on more speculative investments
-higher beta securities
current income/capital preservation objective
-low risk, conservative investment strategy
-emphasis on current income and capital preservation
-low beta securities
tax efficient objective
-emphasis on capital gains and longer holding periods to defer income taxes
asset allocation
process of dividing an investment portfolio into various asset classes to preserve capital by protecting against negative developments while taking advantage of positive ones
-don't pull all of your eggs in one basket and choose your baskets carefully
using asset allocation
asset allocation scheme must be developed before buying any investment vehicles
-focus is on investment in various asset classes rather than emphasis on selecting specific securites
fixed weightings approach
asset allocation plan in which a fixed percentage of portfolio is allocated to each asset category
flexible weightings approach
asset allocation plan in which weights for each asset category are adjusted periodically based on market analysis
tactical approach
asset allocation plan that uses stock-index features and bond futures to change a portfolios asset allocation based on market behavior
applying asset allocation
-consider impact of economic and other factors on your investment objective
-design your asset allocation plan for long haul (7-10 years)
-stress capital preservation
-provide for periodic reviews to maintain consistency with changing investments goals
-consider using mutual funds, especially for portfolios under 100,000
evaluating performance of individual investments
Steps:
1-obtain needed data
2-compare returns with broad based market measures
3-compare performance to investment goals
4-determine appropriate action on each investment
holding period return
-returns include current income and capital gains/losses
-return for specific holding period
=(current income during period + capital gain or loss during period) / beginning investment value
sharpes measure
compares the risk premium on a portfolio to the portfolio's standard deviation of return
in general, the higher the sharpes measure, the better
=(total portfolio return-risk free rate)/portfolio standard deviation of return
treynors measure
uses the portfolio beto to measure the portfolios risk
in general, the higher the treynors measure, the better
=total portfolio return-risk free rate / portfolio beta
jensens measure
uses the capital asset pricing model (CAPM) to calculate the portfolio's excess return (actual return compared to required return)
positive returns are preferred; negative returns indicate required return was not earned
=(total portfolio return-risk free rate) - (portfolio beta x (market return - risk free rate))
portfolio revision
the process of selling certain issues in a portfolio and purchasing new ones to replace them
periodic reallocation and rebalancing are necessary
reasons to revise:
-changes in economic conditions
-major life event
-proportion of one asset class increases or decreases substantially
-expect to reach specific goal within 2 years
dollar cost averaging
fixed collar amount is invested at fixed intervals
discipline to invest on regular basis is vital
purchase more shares when prices are low and fewer shares when prices are high
constant dollar plan
speculative portion seeks capital gains, conservative portion seeks low risk, when speculative portion increases to a predetermined dollar amount, profits are transferred to conservative portion, if speculative portion decreases, funds are added from conservative portion
constant ratio plan
similar to constant dollar plan, only the ratio between the speculative and conservative portions is fixed
variable ratio plan
similar to constant ratio plan, only the ratio between the speculative and conservative portions is allowed to fluctuate to predetermined levels, moderately aggressive strategy which tries to buy low and sell high
limit orders
may be used to purchase additional securities only at desired purchase price or below
stop loss orders
used to limit downside loss or protect a profit by selling security when price falls below predetermined price
warehousing liquidity
keep portion of portfolio in low risk, highly liquid investments to protect against loss or to wait for future investment opportunities
tax consequences
use long term capital gains when possible, use capital losses to offset capital gains
achieving investment goals
when an investment becomes more or less risky, or it does not meet its return objective, sell it
don't hold out for top price;take you profits and reinvest in more suitable investment
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