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Securities Analysis
Final Review (Prof. Hamid)
| Term | Definition |
|---|---|
| Value Investing | Focus is on price, mainly P/E; buy stocks that have low P/E in hopes they will revert back to normal levels |
| Value Investing - Risks | Stocks may be permanently depressed or worth less than expected |
| Low P/E (sub-style of value investing) | Purchase cyclical; out of favor industries |
| Contrarian (sub-style of value investing) | Focuses on low P/BV; purchase temporarily depressed stocks that have high leverage and low quality |
| Yield (sub-style of value investing) | Conservative value style; focus is on firms with high earnings or dividend yield |
| Growth Investing | Focus is on earning growth; find stocks that will show increased EPS growth; invest in high P/E stocks; invest in high quality firms |
| Growth Investing (risks) | Future growth may not materialize |
| Consistent Growth (sub-style of growth investing) | Focus on high quality firms that have history of continuous growth; usually invest in consumer industry leaders, health, and technology stocks |
| Earnings Momentum (sub-style of growth investing) | Purchase stock in anticipation of acceleration in earnings; no particular industry favored |
| Style Rotation | Movement from one style of investing to another because other styles are favored |
| Style Rotation (timeline) | 1987 to 1989 - value strategy favored; 1989 to 1993 - growth strategy favored; 1993 to late 1990's large cap favored |
| Value vs. Growth Investing | In the long run, value investing > growth investiing |
| Economic Analysis (importance) | 1/3 of the movement in stock prices is explained by macroeconomic variables; an understanding of the economy and its impact on securities is vital for securities analysis |
| Business Cycles (four phases) | (1)expansion (2)peak (3)contraction (4)bottom |
| Recession | When real GDP declines for 2 or more consecutive quarters |
| Cyclical Industries | Demand for their products, and sales, move with the business cycle; very sensitive to the economy; usually outperform other industries during expansion |
| Defensive Industries | Have low sensitivity to the business cycle; tend to outperform others when the economy is in recession |
| Anticipatory Surveys (economic forecasting method) | Consumer and business surveys |
| Indicators (economic forecasting method) | Leading, coincident, and lagging indicators are good for predicting turning points; leading indicators turn before the economy turns |
| Excess Liquidity (economic forecasting method) | Equal to growth in money supply (-) growth in GDP; the excess is invested in stocks; high EL results in ^ future demand for securities, resulting in higher stock prices |
| Technical Analysis | Develops technical trading rules from historical data on price and volume; believes the market is its own best predictor |
| Technical Analysis (basic assumption) | Price trends and changes in them are the product of fundamental variables such as earnings, discount rates, and risk. |
| Technical Analysis (main problem) | The ability to distinguish cyclical fluctuations from trends |
| The Dow Theory | Around 1890's Charles Dow suggested that stock price movement is like the movement of water, suggesting forecasting market trends may be more reliable than forecasting individual stocks |
| Cyclical Trends | Determine the direction of price change |
| Primary (cyclical trend) | Long range cycle that moves the whole market up or down |
| Secondary (cyclical trend) | Act as a restraining force on the primary trend and corrects deviations from it |
| Minor (cyclical trend) | Day to day fluctuations in the market that have little analytical value |
| Bull Market | Occurs when successive highs are reached after secondary correction; each peak is higher than the previous; the upswing correction is of longer duration than the downswing |
| Bear Market | Occurs when successive lows are reached after secondary correction; each bottom is lower than the previous; the upswing correction is of shorter duration than the downswing |
| Breadth of Market Index | Looks at the number of advances vs. declines in the stocks; the net difference between the adv. & declining stocks in NYSE is calculated, then added to the previous day difference to form the index |
| Most Active List index | The 20 most traded stocks in NYSE usually make up 1% of the number but 15% of the volume |
| CBOE Put/Call Ratio | Investors buy call options when they expect prices to rise, and buy put options when expecting prices to decline; the rule is to sell when ratio > 90% and buy when < 70% |
| Simple MA | ∑(Pi) / n ; buy signal if the 1-day MA rises above the 200-day MA (price is > MA) and sell signal if the 1-day MA falls below the 200-day MA (price is < MA) |
| Weighted MA | ∑(Wi*Pi) / ∑Wi ; past prices receive weight based on age, the more recent the greater the weight; oldest price is given a weight of 1, next oldest 2, etc. |
| Exponential MA | expM(t-1) + (2/n)*(Pc(t)-expM(t-1)) ; gives decreasing weight to older data, but older data is not dropped as new data is added. |
| Blowoffs (volume signal) | In a rising price trend: a sharp increase in price with a large increase in volume means a peak has been reached and reversal is likely (bullish) |
| Selling Climaxes (volume signal) | In a declining price trend: sharp decline in price with a sharp increase in volume means the bottom has been reached and reversal is likely (bearish) |
| Rally Day | When the intra-day high price is higher than the previous day high, and low is same or higher than previous low |
| Reaction Day | When the intra-day high price is lower than previous day, and low is same or lower than previous day |
| Stochastics | K = 100 * [(C-L) / (H-L)] |
| Weak Market Efficiency | Current security prices reflect all historical information |
| Semi-Strong Market Efficiency | Security prices reflect all available past and current public information |
| Strong Market Efficiency | Security prices reflect all public and private information |
| Random Walk | Change is stock price is random; probability of small change > large change; greatest probability is no change in price |
| Size Effect (market anomalies) | Small firms stocks produce higher returns than large firms even after adjusting for risk |
| January Effect (market anomalies) | Stock returns are systematically higher in January than other months |
| Weekend Effect (market anomalies) | Return for Mondays is lower than other days |
| Time of Month Effect (market anomalies) | First half of month produces higher returns than last half of month |
| Overreaction (market anomalies) | Market seems to overreact to good and bad news |
| Mean Reversion (market anomalies) | Stocks that under-perform in a period are more likely to out-perform the next period (and vice-versa) |
| Forward Contract | Agreement between buyer and seller to exchange the asset at a future date at a price set today |
| Futures Contract | A standardized forward contract with an exchange or clearing house as the counter party |
| Long Position (futures) | Buy futures if you expect spot price at future time of exchange to rise above current futures price |
| Short Position (futures) | Sell futures if you expect spot price at future time of exchange to fall below current futures price |
| No. of Contracts - Stock Index Futures | (Bp*Vp) / (Vf) ...where Vf = 250(x)futures price |
| No. of Contracts - T-bond Futures | (Dp*Vp) / (Df*Vf)... where Df = duration of t-bond(+)time to maturity for futures... and Vf = 100,000(x)futures price |
| Call Option | Gives buyer the right to buy stock for the exercise price at or before maturity |
| Put Option | Gives buyer the right to sell stock for the exercise price at or before maturity |
| For call option buyer: | Max loss is cost of option. Max gain is unlimited. |
| For call option seller: | Max loss is unlimited. Max gain is cost of option. |
| For put option buyer: | Max loss is cost of option. Max gain is exercise price minus cost of put option (E - P) |
| For put option seller: | Max loss is exercise price minus cost of put option (E - P). Max gain is cost of option. |
| Lower Bound on option price | The lower bound is zero (0) for call and put options |
| Upper Bound on option price | For call option - upper bound is price of stock (S); For put option - upper bound is the exercise price (E) |
Created by:
mgonz06
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