Class Notes, Week ending 8/28
Class Notes, Week ending 8/28 FIN 3050
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This 10 page Class Notes was uploaded by Arianna Laurenza on Monday August 31, 2015. The Class Notes belongs to FIN 3050 at Clemson University taught by Kerri McMillan in Summer 2015. Since its upload, it has received 109 views. For similar materials see Investment Analysis in Finance at Clemson University.
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Date Created: 08/31/15
08242015 Cash is King When the going gets tough the tough have cash quotOver a period of a good many years I have known many people who at some time or another have suffered in various ways simply because they did not have ready cash I have known people who have had to sacrifice some of their holdings in order to have money that was necessary at that time Thus I feel that everyone should have a reservequot 0 Warren Buffet s Grandfather Ernest Buffet Asset Classes Asset Classes I Stocks I Cash I Real Estate I Bonds 0 Managing strategic liquid reserves is an important component of risk managemet o A cash reserve should be considered an asset class 0 Cash components achieve 0 Risk management a tool to manage downside capture and mitigate volatility in markets where valuations are unattractive o Opportunity management take advantage of investment prospects offeringsuperior risk adjusted returns 0 Liquidity management internal liquidity reallocation of assets within aportfolio o Extend liquidity spending distribution requirements such as monthly orperiodic distribution from the portfolio that would draw down all principal balance 0 Liquidation of assets during a falling market can exacerbate negative returns and createa realized investment loss that directly impacts the portfolio s rate of return 0 Holding cash in a rising market dampens potential positive returns It is not a realizedloss This is a just an opportunity lost Class Notes FIN 3050 Investment Analysis 08242015 o Investors have predispositions to loss avoidance studies suggest that investors prefer avoiding losses twice as much as experiencing gains 0 After making the decision to hold cash determine how much can to hold in reserve 0 How much cash will be generated within the portfolio through either dividends orincome for spending needs is not practical 0 Sound policy always maintain one year s worth of required cash in reserve 0 A higher risk environment warrants a higher level of allocation to liquid and safe investments 0 Eliminating principal risk outweighs the potential opportunity costs of holding cash 0 What is considered cash 0 Money held in checking accounts 0 Money held in savings and money markets 0 Fixed income with a maturity of less than one year 0 Short term TIPS 0 In ation risk is one of the risks of holding cash Try short duration TIPS 0 Primary purpose of cash management policy is to prevent a short fall in intermediate and near term spending 0 These strategies will alleviate some of the liquidity management concerns and provide principal protection of your portfolio 0 Immunizing nearterm spending requirements in a proper way allows investors to embrace a longterm approach to portfolio management Tierney of the mathematics of loss Investment Required to Break DecHne Even 10 11 20 25 33 50 2008 decline 375 60 50 100 Textbook Don t worry about Page 4 table Top of page 9 Page 12 CAPM Pages 13 14 Page 16 1718 CAPM Know page 15 Class Notes FIN 3050 Investment Analysis 08242015 Holding Period Return HPR total return over a specific period oftime IInvestment TTime frame HPR Total Return CapitalZins Yield Dividend Yield I I Capital gains yield currentyield Capital Gains Yield Current yield KORS Beginning Ian 1 2014 7791 End Dec 31 2014 6687 6687 7791 0 No d1Vidends 1417 7791 2014 8198 specialty retailer 198X more risky than other retailers DIS Beginnging 7490 End9238 115 is yearly dividends ifyou are given Div 115 quarterly multiply by 4 9238 7490 115 2014 0 9238 7490 7490 24370 8096 2324 153 2487 7490 4 less risky than the market Class Notes FIN 3050 Investment Analysis 08242015 Victoria paid 6000 for 100 shares of Bank of America Revenue dividends were 138 and itsold for 9100 after 1 year can do per share or total dollar amount 9100 6000 138539700 2014 6000 Class Notes FIN 3050 Investment Analysis 08242015 Chapter 1 Returns 08252015 0 Annualize o Calculating Average Returns 0 Arithmetic Mean AM o Geometric Mean GM How to annualize j investment t time period m number of periods per year 0 6 months ago bought bond at 1000 currently worth 1500 25 in interest 1050 1000 25 6 75 Annualized There are 2 six month peligdmn ayear 1 0752 1 1556 0 True or False On an annual basis a monthly return of 1 equals 12 Fase becasue 1 0112 1 1268 Calculating Average Returns 0 Arithmetic Mean simple average of all observations in a series E T number of time periods 0 What is the average return over the last 3 years 3 year period KORS 2012 8727 2013 5074 2014 1417 8727 5074 1417 3 o Geometric Mean timeweighted return compounded value of success returns 0 Shows how effectively a managers has managed money 0 Takes into consideration and volatility volatility standard deviation variation of a mean 0 Neutral to cash inflows and outflows 0 GM is always less than AM T quotproduct of Ttimeperiod 1 o What is the average return over the last 3 years 3 year period KORS 2012 8727 2013 5074 2014 1417 1 1 8727 15074 1 147 3 1 3431 0 4128 VS 3431 Big Difference o More variation in returns increases the difference between AM and GM Inflation Adjusted Returns Real rate of return 1 1 HPR nominal holding period return I rate of inflation CPI SampP 500 Index 2014 114 CPI 17 1 114 0 1 017 1 9540 Chapter 2 Security Markets 0 Secondary markets 0 Primary markets Secondary markets 0 for existing assets currently traded between investors 0 Provide increased liquidity and a place to convert existing assets to cash 0 Provide ability to adjust asset allocation to new information 0 Provides valuation for existing assets Primary Markets 0 Market for buying assets directly from their sources the first market where an asset is originally bought and sold 0 Raises funds for issuer to expand capital base 0 Once sold assets begin trading on secondary markets 0 Drive competition on secondary markets enables primary markets to price new issues fairly 08282015 Chapter 2 participation in Markets What is the most expensive stock on the NYSE Class Notes FIN 3050 Investment Analysis 08282015 Organization of the Secondary Markets Organized Exchanges Class Notes FIN 3050 Investment Analysis 08282015 The NASDAQ stock market Class Notes FIN 3050 Investment Analysis 08282015