US RPA 2 Flashcards

Vocabulary flashcards covering investment management strategies, stock types, market risks, and financial reporting based on lecture notes.

Impact of market risk on stock price movements

The single most important risk affecting the price movements of common stocks.

Components of an investment decision

It consists of two steps: asset allocation and security selection.

Passive investment management strategy

The investor doesn’t actively seek out trading possibilities in an attempt to outperform the market.

Buy-and-hold strategy

Buying and holding stocks until some future time in order to meet some objective.

Index fund

A pool of assets designed to duplicate the performance of some market index as nearly as possible.

Tax efficiency of index funds

These funds basically buy and hold, selling shares only when necessary, resulting in larger tax efficiency.

Enhanced index fund

Index funds that are tweaked by their managers to be a little different.

Performance of active and passive investment strategies

Passive equity index funds outperformed active funds within each asset class, except for one, when results were adjusted for survivorship bias.

Active management strategy

Assumes that investors possess some advantage relative to other market participants.

Uncertainty surrounding investment decisions

This is a key feature of the investment environment.

The lure of active management

Investors are lured to attempt stock picking & concentrating their portfolios despite sound reasoning supporting diversification & asset allocation.

The importance of earnings per share (EPS) in stock selection

A company’s earnings are critical in determining stock valuation.

Value stocks

Stocks that have prices considered 'cheap' relative to earnings, book value, & other measures thought indicative of value.

Growth stocks

Stocks that emphasize expectations about future growth in earnings.

Value investing

Generally consistent with a contrarian strategy, whereby the investor chooses stocks considered out of favor by most investors.

Security analysts

Professionals who provide recommendations to individual investors.

Sell-side analysts

They cover actively traded stocks in the U.S. & provide research reports used to 'sell' an idea to investors.

Buy-side analysts

Analysts employed by money management firms such as pension funds, mutual funds, & investment advisors.

Information sources used by analysts

Presentations by top management, annual reports, & Form 10-K reports filed with the SEC.

Annual reports

Reports that provide financial statements & supporting details about a company.

Form 10-K reports

Annual filing report with the SEC for publicly traded companies containing more financial information than the annual report to stockholders.

Rotation strategy

Involves an investor rotating out of certain asset classes while rotating into other asset classes.

Momentum investing

Relates to purchasing/selling stocks showing strong/weak recent price performance.

Market timing

Attempting to earn excess returns by varying the percentage of portfolio assets in equity securities.

Market efficiency and rational asset pricing

Security prices accurately reflect investor expectations about future cash flows in a rational market.