RSM336

What are the two alternatives to portfolio management?

1. Active management

2. Passive management

Popular Investment Styles/Strategies

1. Growth stocks and value stocks

2. GARP (growth at reasonable price)

3. Dividend based

4. Momentum

5. Contrarian

6. low volatility

2 approaches to active management

1. Top down approach

2. Bottom up approach

Active management

select securities that you believe will outperform the benchmark

Passive management

Simply replicate a benchmark

Top down approach

• Forecast interest rates, commodity prices, markets…

• Develop strategy that you believe will outperform market index

• Focus on industries/sectors

Bottom up approach

• Select stocks you think will outperform overall market

• Select the best stock in an industry

• Relative approach — which stocks are cheap? Which are expensive?

Sector Rotation

Shift portfolio into sector that is performing well

Fundamental analysis

Examines economic and financial factors

• Look at ratios P/E, P/S

Value Vs Growth

• Value - look for stocks with low P/E (focus on current price vs intrinsic value)

• Growth - look for stocks wit high earnings growth (P/E looks higher when compared to other styles)

Growth and Reasonable Price

Look at growth prospects

Avoid high P/E stocks

PEG ratio should not exceed 1 or else stock is overpriced

PEG ratio

= P/E Ratio / annual % growth of earnings

Dividend strategies

Screening stocks by dividend yield

• Invest in stocks that pay dividends

• Invest in higher yielding stocks

Momentum investing

• winners keep on winning

• Sell poor performers

Contrarian investing

• market price and investor decision move in opposite direction

• Negative periods are often followed by rising stock market

Technical analysis

Study price and trading volume

• History repeats itself

• Study charts

• Look for trends

Technical Indicators

1. Market breadth

2. Relative strength

Market breadth

• # of stocks that rise in price vs # of stocks that decline in price

Relative strength

• measure performance of stock relative to performance of overall market

• Relative strength = security price / industry price index

Two technical trading rules

1. Moving average oscillator

2. Trading range breakout

Treasury bills

• Safest and most liquid investment

• Guaranteed by gov and sold at discount to FV

r BEY

= (1000-p)/p * 365/n

Types of market orders

1. Market order

2. Limit order

3. Day order

4. Stop loss order

5. Stop limit order

6. All or none order