Notes week 3/30
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This 4 page Class Notes was uploaded by Shayna Davis on Thursday April 2, 2015. The Class Notes belongs to CSR 342 at a university taught by Plouviez in Fall. Since its upload, it has received 222 views.
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Date Created: 04/02/15
Voting Rights Shareholders have voting rights Class A shares Vs Class B shares 0 Class B Shares are much more affordable but they grant different voting rights Initial Public Offerings IPOs The company that is issuing stock gets to make money 0 One time only 0 The first time that the company sells its stock is at the IPO 0 This is known as a Primary Market transaction 0 The rest of the time stocks are bought and sold between investors This happens in the Secondary Market 0 The company does not make money directly in these transactions Research on IPOs IPOs are typically underpriced Stock prices usually go up significantly after hitting the secondary 0 market The underwriting bank often reaps profits from this Why Care After the IPO Why do companies care about their stock prices after they hit the secondary market 0 Retained shares 0 Public Opinion 0 Bankers What To Look For In Some Stocks Growth Stocks 0 These usually pay no dividends They put profits back into the company to finance new growth Investors buy them for their price appreciation o The market frequently punishes growth stocks that don t grow Value Stocks 0 These are stocks that tend to trade at a lower price relative to their fundamentals They are considered to be undervalued by investors Some common characteristics High dividend yield Low pricetobook ratio Performance MFs vs IFs MFs with leading performance records are just as likely to under perform in Guaranteed average market returns with an IF in Active vs Passive funds 396 Actively managed mutual funds have greater expenses and consequently higher annual management fees in The greater the active management the greater the fees in The loads are the percentages charged levied on purchase or sale of shares in Beware of high load Market Efficiency 396 If markets are so efficient why have some funds outperformed the SampP 500 over long periods of time 396 Some MFs have outperformed indices over time but the number of outperforming funds is no different than what we d expect from chance 396 Doesn t prove that MF performance is random but it does mean we can t disprove that relative performance is based on luck in The seemingly random pattern to MF returns indicates that there is no consistent means of selecting MFs that will outperform in the future Hedge Funds in The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions 396 Hedge Funds provide absolute returns rather than returns relative to standard passive benchmarks Features of Hedge Funds Start from here in Actively managed 3932quot Flexible investment policies in Legal structures which minimize or eliminate scrutiny in Making the fund activity opaque and sometimes registered offshore 396 Fixed dates for investmentdisinvestment 396 Extremely illiquid as compared with traditional managed funds in Charge performancerelated fees in Management fees based on assets under management Measuring Fund Performance Beta 3932quot Beta is a measure of the volatility systematic risk of a security or portfolio in comparison to the market as a whole in What does beta lt1 mean in A beta of 098 tells us that the fund has performed 2 worse than the SampP 500 index beta 100 in up markets and 2 better in down markets in What does beta gt1 mean b A beta of 102 tells us that the fund has performed 2 better than the SampP 500 index beta 100 in up markets and 2 worse in down markets Measuring Fund Performance Alpha 396 Alpha is the excess return of a fund relative to the return of the benchmark index 398 Alpha gt0 396 An alpha of 10 means the fund has outperformed its benchmark index by 1 398 Alpha lt0 396 An alpha of 10 indicates an under performance of 1 Pricing Rational Expectations 0 Under the Rational Expectations assumption The current stock price is the present value of all future cash flows associated with the underlying company discounted by the appropriate rate Problems with the Dividend Growth Model 0 Future cash flows for stocks are difficult to predict o It provides a bottom line value of stock price under very strong assumptions Higher Order Belief This is a phenomenon where a stock s price is decided not by what you think it s worth but by your estimate of what others think it s worth 0 Much like a beauty contest PriceEarnings PE is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share 0 PE HCurrent Stock PriceL e HEarnings per ShareL A higher PE ratio means that stock is more expensive Application of PE 0 Earnings disappointments lead to a drop in stock price PE of a company is compared to the competitors and the industry average 0 Low PE might imply undervalued stock 0 High PE may imply overvalued stock Dividend Yield 0 This shows the percentage of company income that s returned on your investment o Dividend Yield HDividend per ShareL e HCurrent Stock PriceL The dividend yield of a company is compared to its competitors and to the industry average 0 Below industry average overvalued Above industry average undervalued PriceBook Value 0 This metric compares a company s book value to its current market price PB HStock priceL e HAssets LiabilitiesL PB value is compared to competitors and the industry A lower PB ratio might imply Undervalued stock 0 Something fundamentally wrong with the firm
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