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Level 83

Investment Management

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Present Value of a stock
Present Value = Future Value / (1+r)^n
Prime rate
interest rate banks charge their best and most reliable customers
bellwether rate
Interest rate that serves as a leader or as a leading indicator of future trends, e.g. inflation.
call money rate
The interest rate brokerage firms pay for call money loans from banks. This rate is used as the basis for customer rates on margin loans.
Pure discount security
An interest bearing asset that makes a single payment of face value at maturity with no payments before maturity.
Money Market Prices
Current Price= Face value (1-Days to maturity/360* Discount Yield)
Bond equivalent yield
BEY = (365 * Discount Yield)/(360 - Days to maturity * Discount yield)
Annual Percentage Rate (APR)
1 + Effective Annual Rate = (1+ (APR/n))^n
Modern Term Structure
Nominal interest = Real Interest + Inflation Premium + Interest rate risk premium
Fundamental Analysis
based on public info such as earnings, dividends, and various accounting ratios and estimates. The semi-strong form of market efficiency suggests that all public information is already reflected in stock prices. As a result, inves…
Price = (D1/(1+k))+(D2/((1+k)^2))+...(Dt/((1/k)^t))
Perpetual Growth Model
Price = D1*(1+k)/(k-g)
Growth equation
G = (Dt/D1)^1/t
Sustainable Growth Rate
SGR = ROE x Retention ratio or ROE x (1-Payout ratio
Return on Equity ROE
ROE = Net income / Equity
Earnings per share
EPS = Net Income - Dividends on Preferred Stock / Average Price
Price to earnings
P/E = Market price / Earnings per share
Price = (D1*(1+g1))/(k-g1)*(1+(((1+g1)/(1+k))^t))+(((1+g1)/(1+k))^t)*((D1*(1+g2))/(k-g2))
Two Stage Div growth
Non constant growth model
Pt= Dt * (1+g)/ (k-g)
Discount rate
interest rate that the Fed charges for loans to member banks
Residual income
RI = EPS - Required Earnings Per Share
Residual income Model
Price = (EPS-Book value*g)/(K-g)
Free cash flow
FCF = NI + Dep - Cap expend
Expected price
EP = Historical P/E * Current EPS * (1+Projected EPS Growth rate)
Weak-form Efficient Market
The information reflected in past prices and volume figures is of now value in beating the market. Technical analysis is of no use.
Semistrong-form Efficient Market
Publicly available information of any and all kinds is of no use in beating the market. Fundamental analysis technique is of no use.
Strong-form Efficient Market
No information of any kind is useful in beating the market.
Random Walk
No discernible pattern to the path that a stock price follows through time. This is related to weak-form market efficiency.
Informed trader
An investor who makes a buy or sell decision based on public information and analysis.
Frame dependence
The theory that simply how a problem is described matters to people.
Loss Aversion
Refers to the tendency for investors to be more risk averse when faced with potential losses and less risk averse when faced with potential gains.
tendency to use inappropriate or irrelevant factors in decision making
Mental Accounting
considering different investments' performance separately instead of viewing them as a portfolio
Representativeness Heuristic
Concluding that causal factors are at work behind random sequences.
Clustering Illusion
Human belief that random events that occur in clusters are not really random.
Sentiment-based risk
A source of risk to investors above and beyond firm-specific risk adn overall market risk.
Technical Analysis
Seeks to earn positive risk adjusted returns by using historical price and volume data.
Market Sentiment Index
MSI = # Bearish / (# Bullish + # Bearish)
Dow Theory
A method for predicting market direction that relies on the Dow industrial and the Dow transportation averages.
Support Level
Price or level below which a stock or the market as a whole is unlikely to fall.
Resistance Level
Price or level above which a stock or the market as a whole is unlikely to rise.
Relative Strength
A measure of the performance of one investment relative to another.