vu mgt613 Mid Term Subjective Solved Past Paper No.1

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The objective of investment portfolio is to minimize the company risk. It include diversification of stocks.

Portfolio objectives are always going to center on return and risk, because these are the two aspects of most interest to investors. Indeed, return and risk are the basis of all financial decisions in general and investing decisions in particular. Investors seek returns, but must assume risk in order to have an opportunity to earn the returns. Furthermore, an individual can be a composite of these stages at the same time. The four stages are:

1. Accumulation Phase: In the early stage of the life cycle, net worth is typically small, but the time horizon is long. Investors can afford to assume large risks.
2. Consolidation Phase: In this phase, involving the mid-to-late career stage of the life cycle when income exceeds expenses, an investment portfolio can be .accumulated. A portfolio balance is sought to provide a moderate trade-off between risk and return.
3. Spending Phase: In this phase, living expenses are covered from accumulated assets rather than earned income. Although some risk taking is still preferable, the emphasis is on safety, resulting in a relatively low position on the risk-return tradeoff.
4. Gifting Phase: In this phase, the attitudes about the purpose of investments changes. The basic position on the trade-off remains about the same as in phase 3.

The clearinghouse for futures markets operates in the same way as the clearinghouse for options. Buyers and sellers settle with the clearinghouse, not each other. Thus, the clearinghouse, and not- another investor, is actually on the other side of every transaction and ensures that all payments are made as specified. It stands ready to fulfill a contract if either buyer or seller defaults, thereby helping to facilitate an orderly market in futures. The clearinghouse makes the futures market impersonal, which is the key to its success, because any buyer or seller can always close out a position and be assured of payment.

A call option gives the holder the right to buy (or "call away") 100 shares of a particular common stock at a specified price any time prior to a specified expiration date. Investors purchase calls if they expect the stock price to rise, because (lie price of the call and the common stock will move together. Therefore, calls permit investors to speculate on a rise in the price of the underlying common stock without buying the stock itself.

A put option gives the buyer the right to sell (or "put away") 100 shares of a particular common stock at a specified price prior to a specified expiration date. If exercised, the shares are sold by the owner (buyer) of the put contract to a writer (seller) of this contract who has been designated to take delivery of the shares and pay the specified price. Investors purchase puts if they expect the stock price to foil, because the value of the put will rise as the stock price declines. Therefore, puts allow investors to speculate on * decline in the stock price without selling the common stock short.

Bottom-Up Approach to Fundamental Analysis

With the bottom-up approach, investors focus directly on a company's basics, or fundamentals. Analysis of such information as the company's products, its competitive position, and its financial status leads to an estimate of the company's earnings potential and, ultimately, its value in the, market. The emphasis in this approach is on finding companies with good long-term growth prospects, and making accurate earnings estimates.

Top-Down Approach to Fundamental Analysis

The top-down approach is the opposite of the bottom-up approach. Investors begin with the economy and the overall market, considering such important factors as interest rates and inflation. The next consider future industry prospects or sectors of the economy that are likely to do particularly well (particularly poorly). Finally, having decided that macro factors are favorable to investing, and having determined which parts of the overall economy are likely to perform well, individual companies are analyzed.

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Value Fund

A stock mutual fund that primarily holds stocks that are deemed to be undervalued in price and that are likely to pay dividends. Value funds are one of three main mutual fund types; the other two are growth and blend (a mix of value and growth stocks) funds.

Growth Fund

A diversified portfolio of stocks that has capital appreciation as its primary goal, with little or no dividend payouts. Portfolio companies would mainly consist of companies with above-average growth in earnings that reinvest their earnings into expansion, acquisitions, and/or research and development.

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Income Stock:

By law dividend must be paid out of the company's earning they cannot be paid from borrowed funds. The bottom line profit a firm makes is its net income after taxes (NIAT). The firm's board of directors may pay a dividend from the amount if they believe it to be in the shareholder's best interest. NIAT may be retained in its entirely within the firm the entire amount may be paid out of more typically a portion of these earnings might be retained and a portion paid out. The proportion of NIAT paid as a dividend in the firm's payout ratio.

Income stocks are those that have historically paid a larger than average percentage of their NIAT as dividend to their shareholders.

Penny Stocks:

Penny stocks fall into a catch all category that refers to unusually risky specially in expensive share. Shares that sell for less than dollar 1 each would be considered penny stocks.