Investment Process: Portfolio: Collection of investment assets

Asset allocation: choice among broad asset classes

1. Top- Down approach: asset allocation followed by security analysis 
2. Bottom- Up: investment based on price attractiveness 
Security Selection: choice of securities within each asset class
Financial Crisis: housing changes
1. Old way: local institute made mortgage loans; portfolio of long term mortgage loans; main liability
of deposits; “originate to hold”
2. New way: securitization; buy mortgage loans and bundle into large pools; mortgage backed
securities are tradable claims against underlying mortgage pool; “originate to distribute”
Credit Default Swaps (CDS) insurance contracts against borrower default: Investors bought sub-prime
loans and CDSs, then, few big swap issuers did not have enough capital to issue CDSs back; making
lack of capital= failure of CDO insurance
Federal Government Policies: 
Fiscal: use of government spending/taxes for specific purpose of economy stabilization
Monetary: action from federal reserve to influence $ supply
Supply side: address productive capacity of economy with the goal to increase production. 
Asset Classes: Fixed Income: money market securities, bonds, and preferred stock
Common stock, and derivative securities
Municipal Bonds: state and local municipalities, different from treasuries and agencies, g.o. Vs. revenue,
industrial development, federally tax exempt, 
r(tax exempt) = r(taxable) * (1- tax rate)
r(taxable) = r(tax exempt) / (1 - tax rate)
Equity basics:dividend yield= annual div/ po
Capital gains= p1-po/po      p/e ratio: price/earnings     
Market indices: dew jones industrial average: 30 blue chip corporations, 1896 price-weighted index
s&p 500: broad based index of 500 firms, market value weighted index
Market indexes: stock weight; price weighed (DJIA) = sum of prices/ # in the index
Derivatives: call option: right to buy underlying asset at strike price, value of calls decrease as strike
price increases. Put value increases as strike price increases. Both increase with time until expiration 
Options: right, not obligation to buy/sell, exercised when profitable, and must be purchased. 
Premium= price of option itself. Futures= obligated to make/take delivery, long/short term positions must
buy/sell at future $, contracts entered into without cost
Primary Markets: new issue/created/sold, issuer received $ from sale
Secondary Markets: Current owner sells to another party issuer = no $ from sale (chart)
Bid: Offers to buy, price at which dealer is willing to buy. Investors “sell to the bid”
Ask: Sell offers, $ which dealer will sell. Investors pay asked price to buy security, profit for market
making in security
Market Orders: specify ticket and quantity, immediate execution at best price, buy executed at lowest
price, sell executed at highest bid
Limit Orders: Order only executed if trade made at limited price/better. Buy: limited $ lower, sell, lim $ up
Stop Order: price is trigger/activation point, if reached or passed, order becomes market to execute at
best price. Risk: price can suddenly plummet/rise, price is different than expected
Buying on margin: borrowing part of purchase price position using loan from broker, investor contributes
rest, profit when stock rises. Refers to % contributed by investor. Maintenance margin= minimum equity
that must be kept in account, call if value of securities fall too much. 
Short Sales: long position: buy first, sell later. Bullish. 
Short position: sell first, buy later, sale of shares not owned by investor, borrowed via broker. Bearish. 
Round trip= purchase and a sale 
Short Sales: profit from a decline in the price of a stock or security, borrow stock via dealer, sell and
deposit proceeds and margin an account, close out position: buy stock and return to party which was
borrowed. Required initial margin: 50%, more for low-priced stocks. Liable for any cash flows, dividend on
stock, sell 100 short shares or stock at $60/share: $6,000 pledged to broker, 50% margin. $3,000, now
$9000 in account. Short sale equity= total margin account - market value 
Mutual Funds: Opened ended investment companies; money market, equity, sector, bond, international,
balanced of fund, asset allocation/flexible, index. 
Components of return: changes in NAV, dividend, capital gains. R= nav1-nav0 + income + cap gain/Nav 0
Fund expense ratio: management fee, operating expense, 12b-1 fee. Sale charges: front end load, back
end load 
NAV and effective load: cost to initially purchase one share of load fund= NAV+ front end load % 
Stated loads range from 0-8.5%, load is designed to offset expenses of marketing the fund; goes to
broker who sells fund to investor. Offering price= NAV/ (1-load) NAV= Offering price * (1-load)
Rates of Return: Holding period return: rate of return over given investment period: ps= sale price, pb=
buy price, div= cash dividend. HPR= (Ps-Pb+Div)/Pb
Arithmetic Average: Sum of returns in each period divided by number of periods 
Geometric Average: Single per-period return; gives same cumulative performance as sequence of
actual returns, compound period by period returns; find per period rate that compound to same final
value. 
Real vs Nominal Interest Rates: Nominal: growth of your money
Real: growth of your purchasing power. 
VAR: Expectation of the squared deviation of a random variable from its mean.
STD: quantifies amount of variation or dispersion of a set of data values. 
Domestic Macro Economy: GDP: Market value of goods and services produced over period of time C+ I
+ G + NX