Fin 3050 Exam 3

close end fund

* fixed number of shares
* not stand by ready
* trade at discount 10% to 15% below value

open-end fund

stand by ready at all times to buy or sell back

net asset value (NAV)

computed at the end of each day

NAV formula:

(total value of securities - liabilities) / shares outstanding

load fund

fund that charges commission for sale of shares

front end load (Class A)

fee charged when purchasing

back-end load (Class B/deferred)

fee charged upon redemption

no load

no sale comission

turnover ratio formula:

lesser of purchases/ avg daily assets

12b-1 fees

pay for advertising and marketing

management fees

based on size of fund

expense ratio

administrative costs

You wan to invest in ______

mid-cap growth funds

trading costs

how much trading a fund does

dollar cost average is

small steady increments rather than a single lump sum to avoid the risk of investing all your cash at a market peak

dollar cost average formula:

(investment/ NAV)

avg price per share

(total NAV/ years)

avg cost per share

(total investment/shares purchased)

large-cap funds are:

* mkt value > $8.3 bill
* no 12b-1 fees

mid-cap funds are:

* mkt value btwn $1.2- $8.3bill

small cap funds are:

mkt value < $1.2 bill

growth fund

rapid sales and earnings

blend fund

growth & value stocks

value fund

undervalued company

sharpe ratio

risk relative to the return

a higher sharpe ratio indicates:

a fund’s adjusted risk performance ability

sharpe ratio formula:

(AM - Rf) / std dev

advantages of mutual funds:

* diversification
* professional management
* ease of buying/selling
* require small amounts of money down
* multiple withdraw options
* reinvestment of income and capital gains

disadvantages of mutual funds:

* withdrawal costs
* ongoing management and 12b-1 fees
* poor performance not matching S&P 500
* inability to control when capital gain distributions occur
* potential market risk

appropriate benchmark for stocks

S&P 500

appropriate benchmark for aggressive growth

value line

appropriate benchmark for small cap

russell 2000

appropriate benchmark for mid cap

S&P 400

appropriate benchmark for international

EAFE

appropriate benchmark for tax bonds

barclays

a higher turnover means:

* greater gains
* paying more taxes

leverage ETFs include:

* bull 3x fund
* bear 3x fund

hedge funds collect

pools of money from investors

hedge funds do:

* not required to diversify
* managers have more freedom

qualified hedge fund managers criteria:

* net worth of $1 mill
* recurring income over $200,000

high watermark

managers receive performance fees only when they hit certain mark

hedge fund styles include:

* market neutral


* arbitrage
* distressed securities
* macro
* short selling
* market timing

market neutral goal:

offset risk with opposite position

arbitrage goal:

identify misspricing between securities

distressed securities goal:

buy securities offered at deep discounts

macro goal:

profit from changes in the global economy

short selling goal:

only short sell

market timing goal:

identify trends in the market

target date (life-cycle) mutual funds do:

* reduce exposure
* inc bond holdings

choose a target date that is:

later and with greater exposure

Selecting Mutual Fund Criteria

* look for no-load funds
* consider funds with low expense ratio (lower than .30%)
* low turnover ratio (lower than 50%)
* research the fund manager (5 year experience)
* diversify
* consider index funds
* calculate how fees affect your return
* read the reviews
* evaluate performance
* dollar-cost average
* stay the course

expected return

weighed avg return on a risky asset from today to some future date

ex-post returns

actual historical or obsessed returns

ex-ante returns

future returns and expected returns

a higher standard deviation indicates

greater dispersion around the mean

variance

(return-E(R))^2 x Pr(s)

portfolios

group of assets held by an investor

mean-variance dominance

* uses risk return to measure between securities


* uppermost left point

risk adversion

having high expected returns with minimal risk association

coefficient of variation (CV)

means risk-return trade-offs

coefficient of variation formula

std dev/ mean

portfolio std deviation falls as

number of securities increase

non-systematic risk

diversifiable risk

systematic risk

non-diversifiable risk

time diversification

the greater holding period return, the standard deviation decreases

correlation

tendency of returns to move up or down together

range of coefficient of correlation

\-1 , 0, 1

portfolio managers prefer

\-1

negative correlation is able to:

drive down standard deviation

standard deviation of two asset portfolio formula:

2\[(Xa^2)(SDa^2)+ (Xb^2)(SDb^2)+2(Xa)(Xb)(SDa)(SDb)CORR(A,B)\]^(1/2)

the beta for the market is

1

beta measures

how sensitive the security’s return is to the overall market

4 ways to diversify

1. diversify across industries
2. diversify company size
3. diversify across growth/value stocks
4. diversify globally

efficient frontier

portfolio with maximum return for a given risk and the minimum risk given return