CSC 2
An industry with a record of stable earnings and continuous dividend payments and which has demonstrated relative stability in poor economic conditions.
Defensive Industry
Chart formations that usually precede a sizeable advance or decline in stock prices.
Reversal Pattern
A method of market and security analysis that studies investor attitudes and psychology as revealed in charts of stock price movements and trading volumes to predict future price action.
Technical Analysis
The average of security or commodity prices calculated by adding the closing prices for the underlying security over a pre-determined period and dividing the total by the time period selected.
Moving Average
An active, leading, nationally known common stock with a record of continuous dividend payments and other strong investment qualities.
Blue-chip
A chart formation indicating that the current trend will continue.
Continuation Pattern
The theory that a stock’s price reflects all available information and reflects its true value.
Efficient Market Hypothesis
A trend reversal pattern that can occur either at a market top or at a market bottom and consists of a shoulder, a head, and a second shoulder and the breaking of a neckline.
Head-and-Shoulders Formation
An industry that has moved out of the maturity stage and is now growing at rates slower than the overall economy, or has a slowing growth rate.
Declining Industry
decline industry
An industry that experiences slower, more stable growth rates in profit and revenue than growth or emerging industries.
Mature Industry
An industry in which sales and earnings are consistently expanding at a faster rate than in most other industries.
Growth Industry
An industry that is particularly sensitive to swings in economic conditions.
Cyclical Industry
Which investors use sentiment indicators to determine what the majority of investors expect prices to do in the future so that they can take the opposite position?
Contrarion Investors
Based on the assumption that price moves in predictable waves; used to forecast when the market will start moving in a particular direction and when it will ultimately reach its peak or trough.
Cycle Analysis
Security analysis based on facts about a company as revealed through its financial statements and an analysis of economic conditions that affect the company’s business.
Fundamental Analysis
An economic principle whereby the per unit cost of producing each unit of output falls as the volume of production increases.
Economies of Scale
A price level at which a security stops falling because the number of investors willing to buy the security is greater than the number of investors wishing to sell.
Support Level
The theory that stock price movements are random and bear no relationship to past movements.
Random Walk Theory
The line joining the two recovery points in a head-and-shoulders formation.
Neckline
__________ accompanied by increased volume may be considered confirmation of a change in trend.
Breaking of a Neckline
The breaking of a neckline, either downside break or upside break, accompanied by _______________ may be considered confirmation of a change in trend.
Increased Volume
A form of technical analysis that relies on statistics to construct indicators and has thus been greatly enhanced by computer technology.
Quantitative Analysis
A price level at which the security begins to fall as the number of sellers exceeds the number of buyers of the security.
Resistance Level
Measure investor expectations or the mood of the market. These indicators measure how bullish or bearish investors are.
Sentiment Indicators
Industries in which risk and uncertainty are unusually high because analysts lack definitive information
Speculative Industry
The use of charts and patterns to forecast buy and sell decisions.
Chart Analysis
What are the 3 Industry Classifications used by Fundamental Analysts?
Cyclical Defensive Speculative
What are the 3 Categories of Macroeconomic Factors where a change in one requires a change in investment strategies?
Fiscal Policy Monetary Policy Inflation
Name the 4 Life Cyles used to Classify Industries
Emerging Growth Growth Maturity Decline
emerging growth growth maturity declining
What do competitive forces in an industry affect?
Growth and Risk Levels
What are the Key Assumptions of Technical Analysis
All market influences are reflected in price activity;
Prices move in persistent trends;
The future repeats the past.
Bears and selling are related to ___________
Supply
Bulls and buying are related to _______________
Demand
As demand increases, prices __________
Advance
increase
rise
go up
As Supply increases, prices ______________
Decline
fall
go down
decrease
What happens to prices when supply and demand are balanced?
They move sideways - bulls & bears fight for control.
What is the primary task of a Technical Analyst?
Identify a trend in its early stages and carry positions to take advantage of the trend until it reverses.
Identify the factors that can limit the effectiveness of fiscal policy:
1. A lag between fiscal action and its impact on the economy.
2. A time lag between the decision to take fiscal policy action and getting approval from parliament.
What economic event could cause a tilting of the yield curve?
The Bank of Canada raising short-term rates to slow the rate of economic growth.
What would be the direction of a stock price, if you are a believer in the random walk theory.
It will be impossible to predict as past prices are no predictor of future prices.
What are the 4 ways by which analysts classify an industry?
Product or service Stage of growth Competitive forces Reaction to the economic cycle
What are the five basic competitive forces that determine the attractiveness of an industry?
Threat of new entry
Competitive rivalry
Threat of substitutes
Bargaining power of buyers
Bargaining power of suppliers
What is the significance of a symmetrical triangle?
Consolidation of an existing trend
Identify the theory that suggests that investors make intelligent decisions after weighing all available information.
Rational Expectations Hypothesis
Samra believes that the Canadian dollar is going to decline in the future. What type of industry would you recommend she invest in?
Cyclical Industries
Identify the issues that support the argument that capital markets are inefficient
New information is not available to everyone at the same time.
Investors do not react in the same way to the same information.
Not everyone can make accurate forecasts and correct valuation decisions.
Mass investor psychology and greed may at times cause investors to act irrationally.
Trader who makes use of sophisticated computerized strategies to swiftly sell or buy large quantities of equities is using what strategy?
Program Trading
What is the main problem with a large government debt?
It restricts both fiscal and monetary policy options; impairs the government’s ability to reduce taxes or increase spending
What impact does economic growth have on bonds?
Bond yields tend to rise
bond yeilds rise
What does a head-and-shoulders bottom formation signal?
Bullish signal for the stock
What does a head-and-shoulders top formation signal?
Bearish signal for the stock.
Tuan recognizes a symmetrical triangle formation in the movement of the price of a stock he is interested in. How will Tuan interpret this pattern?
It suggests a continuation pattern, or pause in the market trend.
What is Company Analysis?
Process of examining company specific factors that can influence investment decisions.
What is one of the goals of company analysis?
To identify risks and opportunities
Tells you whether management is making good use of the company's resources.
Statement of Comprehensive Income Analysis
What are the factors involved in performing company analysis to determine whether a company represents a good investment?
Revenue
Operating Costs
Dividend Record
What does a rising trend in operating costs of a company indicate?
The company may have difficulty keeping overall costs under control and therefore losing potential profits.
What does a falling trend in operating costs of a company indicate?
The company is operating costs effectively and is likely to be more profitable in the future.
How do you determine the main reasons for any changes in a company's ability to pay its operating costs?
Measured by using the gross profit margin ratio.
What are the reasons for a company to have unusually high dividend payout rate (more than 65%)?
- Stable earnings that allow a high payout;
- Declining earnings, which may indicate a future cut in the dividend;
- Earnings based on resources that are being depleted.
What are the reasons for a company to have a low dividend payout rate?
- Earnings reinvested back into a growth company’s operations
- Growing earnings, which may indicate a future increase in the dividend amount
- Cyclical earnings at their peak, along with a company policy to maintain the same dividend in good and
bad times
- A company policy of buying back shares, rather than distributing earnings through higher dividend payouts
What type of securities are suitable for a company with a heavy debt load?
Common Shares
Total dollar amount of all debt, preferred and common stock, and retained earnings of a company. Can also be expressed in percentage terms.
Capital Structure
A financial ratio that shows the earnings available to each common share.
EPS - Earnings Per Common Share
What issues need to be considered when analyzing capital structure?
- a large debt issue approaching maturity may need to be refinanced;
- retractable/extendible bonds may need to be financed if investors chosse to retract/extend;
- convertable securities represent a potential decrease in EPS through dilution;
- outstanding warrants or stock options represent a potential increase in the number of common shares outstanding.
The effect of fixed charges (i.e., debt interest or preferred dividends, or both) on per-share earnings of common stock.
Leverage
Financial calculations based on a company’s financial statements, often providing clues about the company’s financial health.
Financial Ratios
How to calculate Trend Ratio
-Selecting a base period,
- Treat the figure or ratio (trend) for that period as 100
- Then divide it into the comparable ratios for subsequent periods.
When is the base period in a trend ratio negative?
When a loss was sustained in the base year.
When is it impossible to calculate a trend ratio?
When the base period is negative
Cyclical Industries usually fall under what 3 categories?
Commodity
Industrial
Consumer
Forest Products, mining and Chemicals
Commodity Cyclical Industries
Transportation, capital goods and steel and building materials
Industrial Cyclical Industries
Merchandising and automobiles
Consumer Cyclical Industries
What are the 4 categories of cycle lengths?
Long-term - more than 2 years;
Seasonal - one year;
Primary/Intermediate - 9-26 weeks
Trading - 4 weeks
What are the 4 methods used by technical analysts to identify trends and potential turning points?
Chart Analysis
Quantitative Analysis
Analysis of Sentiment Indicators
Cycle Analysis
What does the Debt-to-Equity Ration tell you?
The portion of borrowed funds relative to the amount of money invested into the company
What does the dividend discount model (DDM) calculate?
The Intrinsic value of a stock
What is a "rights offerring"?
It allows existing shareholders to buy additional shares at a price that is slightly below its current market value.
In what way will a rights offering impact the number of common shares outstanding?
It will result in additional common shares outstanding
How is the net profit margin calculated?
Net Profit - Share of Profit from Associates / Revenue
What does Net Profit Margin measure?
How effectively management runs the business after accounting for both expenses and taxes
What can be considered leveraged capital?
Debt & Preferred Share Equity
Is common share capital considered leverage capital?
No. Belongs to common shareholders.
You have calculated a company's current ratio. What additional information will you need to calculate its quick ratio?
Investory figures
What are the 4 operating performance ratios?
Gross Profit Margin
Net Profit Margin
Return on Common Equity
Inventory Turnover
What is another name for quick ratio?
Acid Test
What does the quick ratio meaure?
Whether or not a company will be able to make its short-term (current) liability payments.
What are the 4 categories of financial ratios?
L-O-V-R
Liquidity
Operational
Value
Risk Analysis
Which ratio indicates the efficiency of management in turning over the company's goods as a profit?
GPM - Gross Profit Margin
What does it mean if a company was said to have a dividend payout ratio of 70%?
It paid out 70% of its earning as dividends to common shareholders. The rest is retained in the company to finance future growth.
What is another name for the current ratio?
Working Capital Ratio
In what circumstance would it be impossible to apply the trend line method?
If the base period figure is negative - ie if the EPS is negative in the base year
All else being equal, how are a company's earnings and P/E ratio related
They are inversely related - ie if price earnings go up, P/E ratio goes down.
What is the formula for the DDM - Dividend Discount Model?
Intrinsic value of stock = Div 1 yr from now/ r-g
What does a company's P/E ratio tell you?
How much investors are paying per dollar of income for the company's stock.
Where would it be recorded on a company's financial statements that a company has changed auditors?
In the notes to the financial statements.
If a company converted its short term loans to long term loans, would its working capital ratio improve or decline?
The working capital ratio would improve
A company has a total capital of 12 million in which 4 million is in the form of common share equity. What percentage of its capital structure is leveraged?
12-4 = 8; 8/12 = 66.67%
How is the pre-tax cost of a dividend calculated?
Div / 1 - tax rate
How is Dividend Yield calculated
Common (preferred) share dividend / Current Market Price of Share
Why do some analysts sometimes remove "other liabilities" from the debt to equity ratio?
To focus on a company's financial risk based solely on the use of leverage.
For what company would using the DDM be most effective?
A company that pays stable dividends with a stable dividend yield
The EPS formula divides the company's profit by what?
The weighted number of common shares outstanding
Analysts look for a minimum equity value per preferred share of at least how many times?
2x
When calculating EPS, the weighted number of common shares outstanding is part of the calculation. What does weighted refer to?
It takes into account the length of time the common shares were outstanding
What debts are included in the debt to equity ratio
Short term, long term, bonds and debentures outstanding
An investor is considering going long on a stock. What type of company would an investor prefer?
One with high ROE, with an upward trend
What does a high investory turnover indicate?
A better balance between inventory and sales volume
What could result in a potential increase in number of outstanding common shares?
investments outstanding or derrivatives that could be excercised
All else being equal, using the DDM, how would an increase in R impact a stock's intrinsic value?
The stocks intrinsic value would fall.
What generally accounts for the difference between a company's equity per common share and its share price?
Its actual or potential earnings
You short the stock with the...
Highest P/E
You go long on the stock with the ...
Lowest P/E
Assuming a company sells tangible products and has inventory, which is higher - current ratio or quick ratio
Current ratio
What ratio best describes how effective a company's management is in maintaining or increasing profitability in relation to invested shareholder capital?
Return on Common Equity
What would suggest a company is most likely to have a greater number of common shares in the future?
The company has issued rights
The type of risk where an investor will not be able to buy or sell a security quickly enough because buying or selling opportunities are limited.
Liquidity risk
Spreading investment risk by buying different types of securities in different companies in different kinds of businesses and/or locations.
Diversification
A statistical measure of risk, expressed as a percentage; the higher the measure for an investment, the greater the volatility of returns and therefore the greater the risk.
Standard Deviation
A rate of return adjusted for the effects of inflation.
Real rate of return
The type of risk where the value of financial assets and the purchasing power of income will decline due to the impact of inflation on the real returns produced by those financial assets.
Inflation rate risk
A transactional rate of return measure that takes into account all cash flows and increases or decreases in a security’s value for any time frame.
Holding period return
A top-down approach to investment, focusing on analyzing the prospects for the overall economy and investing in those sectors that are expected to outperform.
Sector rotation
A measure of the sensitivity (i.e., volatility) of a stock or a mutual fund to movements in the overall stock market.
Beta
A non-controllable, non-diversifiable risk that is common to all investments within a given asset class.
Systematic Risk / Market Risk
The type of risk where a debt security issuer will be unable to pay interest on the prescribed date or the principal at maturity.
Default Risk
The rate of return that was actually received by an investor.
Ex-post
The type of gain from selling a security for less than its purchase price.
Capital Loss
The type of risk where changes in interest rates will adversely affect the value of an investor’s portfolio.
Interest Rate Risk
The type of gain from selling a security for more than its purchase price.
Capital Gain
The type of risk associated with a government introducing unfavourable policies making investment in the country less attractive; also, the general instability associated with investing in a country.
Political Risk
A projection of expected returns – what investors expect to realize as a return.
Ex-ante
The type of risk inherent in a company’s operations, reflected in the variability in earnings.
Business Risk
The risk that the price of a specific security or a specific group of securities will change in price to a different degree or in a different direction from the market as a whole.
Non-Systematic Risk
When fund managers and investors use a stock index to measure the overall direction and performance of the market.
Indexing
A portfolio is equally allocated to three securities. Security A has an expected return of 12%. Security B has an expected return of 10%. Security C has an expected return of 6%. Calculate the expected return on the portfolio.
9.33% (equal weight = 100/3 - 33.33% each)
Larry purchased 100 GHI common shares at a price of $13 per share. Three months later, GHI common shares paid a dividend of $0.10 per share. Larry sold all of his 100 GHI common shares at a price of $14 per share. Calculate Larry’s rate of return for the GHI common shares.
8.46% (0.1 div + 1 cap gain = 1.10/13x100)
Select the diversification strategy that will reduce the risk of a portfolio
Perfect negative correlation
What would be the typical beta of a defensive industry?
Lower than 1
What is the real rate of return of a 8% rate in 3% inflation
5%
The S&P/TSX Composite Index rises by 6%. ABC Equity Fund has a beta of 2.2. Calculate the expected change in the value of ABC Equity Fund.
13.2% (6% x 2.2 rise)
Sharjeel purchases an equity fund at $20 per unit anticipating that the unit value will increase to $25 by the end of the year. Instead, the fund unit value increases to $24 but he receives $0.50 in dividends for each unit. Calculate the ex-ante rate of return.
252% (5/20 - because its the expected)
Identify a strategy to reduce the risk of investing in high-yield or junk bonds.
Invest in High yield bonds with short terms to maturity, e.g., less than 3 years.
The style of management that focusses on identifying the current phase of the economic cycle, the direction the economy is headed in and the various sectors affected.
Sector Rotation
The shift that an industry rotation manager makes as she executes her investment strategy.
Defensive and Cyclical Investments
The largest typical contributor to the total return of a bottom-up investment manager’s portfolio.
Capital Gains Appreciation
A growth manager is choosing between 4 different equities. Determine which of Stock A (high beta, high dividend yield); Stock B (low beta, high price/cash flow); Stock C (low dividend yield, high price-earnings ratio); or Stock D (low standard deviation, low price/book value) she would likely choose.
Stock C
What does NHA stand for?
A First mortgage insured under the National Housing Act.
The return based on expected returns
Ex-Ante
The return based on actual historical returns
Ex-Post
What is the formula to calculate the rate of return on a portfolio?
Cash flow + (Cap Gain)/Beginning Value
What is often used to represent the risk-free rate of return?
T-Bill Yield
Concentrates on the fundamentals of specific companies' stocks rather than broad economic factors.
Bottom-Up Approach
Analyzes the overall economy first to determin which industries may do well.
Top-Down Approach
Name the 2 management approaches that focus on bottom-up analysis
Growth Mangers
Value Managers
Name the 2 common measures of risk
Standard Deviation
Beta
How do you calculate the Real Rate of Return
Nominal Rate of Return - Annual Inflation Rate
The uncertainty about a company's future performance
Business Risk
Unfavorable changes in government policies could negatively affect investments
Political Risk
The rate of inflation affecting the real return of an investment
Inflation Risk
Whether an investment can be sold at a fair price on reasonably short notice
Liquidity Risk
The market value of an investment will be affected by changes in interest rates
Interest Rate Risk
Incurring losses as a result of unfavorable changes in exchange rates
Foreign Exchange Rate Risk
The entity issuing the asset will be unable to fulfill its obligations to investors
Default Risk
2 best approaches to a passive investment strategy
Indexing
Buy and Hold
A value manager applies what active investment management strategy?
Bottom-Up Approach
Gabriel is investing in the common shares of a growth company. In relationship to the T-Bill rate, what return should he expect?
T-Bill rate PLUS a risk premium
Name the management approact that focuses on Top-Down analysis.
Sector Rotation
Name the 3 active management approaches
Value manager
Growth manager
Sector rotation
If the overall market declined by 10% and the price of DEF shares went down 15%, what might this suggest about DEF's beta?
Beta is 1.5 (15/10)
If a stock's expected return was 8% but it actually returned 6%, what is the stocks alpha?
-2%
What is the formula for Alpha?
Actual return - Expected return
Measures the value added by a portfolio manager
Alpha
What is the range of correlation?
Can be -1 to +1 and anything in between
Portfolio A has an Alpha of 2 and a beta of 1.10. What would be the expected nominal rate of return for the portfolio if the overal equity market return was 8%?
10.8 (8 x 1.10 = 8.8+2)
Investment Management approach that works best in down markets
Value Investing
Investment Management approach that works best in up markets
Growth Managers
Eric is considering investing in a high-yield corporate bond that has a quoted yield to maturity of 23%. What risk would be most relevant to eric as he considers this investment?
Default risk
ABC stock has a beta of 2. The equity market's expected rate of return is 12%. What is the expected return of ABC stock.
24% (2x12)
Inflation measurement
CPI
Name the 3 Asset Classes
Cash and Equivalents
Fixed Income Investments
Equities
Put the investment types in order of risk from highest to lowest
Derivatives
Common Shares
Preferred Shares
Debentures
Bonds
Treasury Bills
What 3 risks would definetely be associated with a canadian investor receiving dividends from a US company?
Foreign Exchange Rate
Business
Inflation
During an ecomomic downtown, what is correct regarding the performance of cyclical and defensive stocks
Defensive industries tend to outperform cyclical industries
The correlation coefficient ideal to minimize non-systematic risk
-1
Type of investing that suggests the market is inefficient
Value Investing
It is estimated that most of the benefits of diversification have been acheives when a stock portfolio owns how many different stocks?
32
Measures the volatility of a specific stock in comparison to the overall market
Beta
RIsk averse investors prefer what in relation to betas and alphas
Low betas and High alphas
what type of stock would have the highest beta
cyclical company
Name and describe three fixed-income manager styles
Term to maturity
Credit Quality
Interest Rate Anticipators
What valuation characteristics are value managers looking for?
Low Price to Earnings ratio
Low Price to Book Value ratio
Low Price to Cash Flow
High dividend yield
What valuation characteristics are growth managers looking for?
High Price to Earnings ratio
High Price to Book Value ratio
High Price to Cash Flow ratio
Low dividend yield
A ratio measure of the portfolio’s risk-adjusted rate of return using standard deviation as the measure of risk.
Sharpe ratio
The agreement between a portfolio manager and a client that provides the guidelines for the manager.
IPS
An asset allocation strategy that involves adjusting a portfolio to take advantage of perceived inefficiencies in the prices of securities.
Tactical Asset Allocation
An asset allocation strategy of systematic rebalancing of the securities in the portfolio so that they match the long-term strategic asset mix.
Dynamic Asset Allocation
Apportioning investment funds among different categories of assets, such as cash, fixed income securities and equities.
Asset Allocation
The portfolio’s consistent long-term asset mix.
Strategic Asset Allocation
A standard against which an investment or portfolio is measured
Benchmark
A measure of how much risk is involved to produce a return.
Risk-Adjusted Rate of Return
What is the standard deviation of a T-Bill? What about its Beta?
0
What are the 3 primary investment objectives?
Safety of Principal
Income
Growth of Capital
Investment strategy that involves purchasing multiple financial instruments with staggered maturity dates to create a steady stream of income, commonly used in retirement planning.
Laddering
What are the 7 steps of the portfolio approach?
Determine investment objectives and constraints
Design an investment policy statement
Develop the asset mix
Select the securities
Monitor the client, the market, and the economy
Evaluate portfolio performance
Rebalance the portfolio
Is it possible for a portfolio to have a negative Sharpe Ratio?
Yes - if there is a negative expected return or if it is lower than the risk free rate of return
How is a customers investment horizon usually measured?
By life events
Does a risk averse investor prefer high or low alpha?
High
Which asset allocation technique consists of temporarily modify a portfolios asset allocation to take advantage of investment opportunities in an asset class?
Tactical Asset Allocation
Make investment decisions based on their outlook for
the markets and securities in which they invest. In almost all cases, they intend to outperform the return on a specific benchmark index.
Active Management
A document in which an issuer is required to disclose information about presently known trends, commitments, events or uncertainties that are reasonably expected to have a material impact on the issuer’s business, financial condition or results of operations. The prospectus must state that it is available on request.
Annual Information Form
A firm that holds the securities belonging to a mutual fund or a
segregated fund for safekeeping. Can be either the insurance
company itself, or a qualified outside firm based in Canada.
Custodian
A fee that is typically charged by a mutual fund when the fund is
redeemed within 90 days of the initial purchase.
Early Redemption Fee
A type of fee-based fund with a lower MER. These funds reduce or eliminate the double charge.
F-Class Funds
Many mutual fund companies began offering _________ mutual funds to accommodate fee-based financial advisors,
F-Class
A sales charge applied to the purchase price of a mutual fund when the fund is originally purchased.
Front-end Load
A disclosure document limited to two double-sided pages in length designed to give mutual fund investors key information about a fund.
Fund Facts
The cardinal rule in making investment recommendations. All relevant information about a client must be known in order to ensure that the registrant’s recommendations are suitable.
KYC - Know Your Client
What does a KYC require you to understand about a client?
- personal and financial circumstances
- Investment knowledge
- Investment needs and objectives
- risk profile
- investment time horizon
The rule that requires you to know certain aspects of the products you recommend.
KYP - Know Your Product
What does KYP require you to know about a product?
- features,
- risks
- costs
- potential performance in different types of market environments.
A pool of capital gathered to buy securities according to a specific investment mandate. The pool seeds a fund managed by an investment professional that is paid a management fee to carry out the mandate.
Managed Product
The total expense of operating a mutual fund expressed as a
percentage of the fund’s net asset value. It includes the management fee as well as other expenses charged directly to the fund such as administrative, audit, legal fees etc., but excludes brokerage fees.
MER - Management Expense Ratio
That part of the capital market in which short-term financial obligations are bought and sold. These include treasury bills and other federal government securities, commercial paper, and other instruments with one year or less left to maturity.
Money Market
An investment fund operated by a company that uses the proceeds from shares and units sold to investors to invest in stocks, bonds, derivatives and other financial securities.
Mutual Fund
_________ offer investors the advantages of diversification and professional management and are sold on a load or no-load basis.
Mutual Funds
Mutual Fund shares/units are redeemable on demand at the fund's current _____________________
NAVPS - Net Asset Value Per Share
This legislation deals with mutual fund prospectus and Fund Facts disclosure.
National Instrument 81-101
This legislation, and its companion policy, contain requirements and guidelines for the distribution and advertising of mutual funds.
National Instrument 81-102
A web-based system that permits mutual fund salespersons and
investment advisors to file applications for registration electronically.
NRD - National Registration Database
For a mutual fund, this represents the market value of the fund’s share per unit and is calculated as total assets of a corporation less its liabilities, then divided by the total units outstanding.
NAVPS - Net Asset Value Per Share
A fund that does not charge a fee to purchase or redeem units.
No-load Fund
For mutual funds, this refers to the price an investor pays to purchase shares in the fund. The offering price includes the charge or load that is levied when the purchase is made.
Offering Price
For rights, this (also known as the subscription price) refers to the price shareholders pay to purchase additional shares of the company based on the terms of the rights offering.
Offering Price
The most common structure for a mutual fund. Allows the trust to avoid taxation by flowing capital gains and income, net of fees and expenses, to unit holders.
Open-end Trust
The investor or manager attempts to replicate the performance
of a specific market index without trying to beat it.
Passive Investment Strategy
A pre-authorized plan to make regular purchases in small amounts.
PAC - Pre-Authorized Contribution Plan
The price at which debt securities or preferred shares may be redeemed, at the option of the issuing company.
Redemption Price
Usually, a trust company appointed by a company to monitor the issuing of common or preferred shares.
Registrar
What does a registrar do when a transaction ocurrs?
They receive both the old, cancelled and the new certificate from the transfer agent and record and sign the new certificate.
A written document provided to the client that includes any information that a reasonable client would consider important about the relationship between the client and the mutual fund dealer and its sales representative.
Relationship Disclosure
A condensed prospectus distributed by mutual fund companies upon request to purchasers and potential purchasers of fund units or shares.
Simplified Prospectus
A fee charged by a mutual fund when an investor exchanges units of one fund for another in the same family or fund company.
Switching Fee
Facilitates the electronic filing of securities information as required by the securities regulatory agencies in Canada and allows for the public dissemination of information collected in the filing process.
SEDAR+ System for Electronic Document Analysis and Retrieval
An aggregate of all the trading costs paid by the mutual fund over the course of a year. Is expressed as a percentage of assets.
Trading Expese Ratio
Fee that a mutual fund manager may pay to the individual or organization that sold the fund for providing services such as investment advice, tax guidance and financial statements to investors. Paid annually and continues for as long as the investor holds shares in the fund.
Trailer Fee
An agent, usually a trust company, appointed by a corporation to maintain shareholder records, including purchases, sales, and account balances. May also be responsible for distributing dividend cheques.
Transfer Agent
This is the formal document that outlines the agreement between the issuer and the holders. In the case of bonds, it outlines such things as the coupon rate, if interest is paid semiannually and when, and any other terms and conditions between both parties.
Trust Deed
An order initiated by the investor that is not based on advice provided by the advisor
Unsolicited Orders
A measure of return calculated by averaging the return for each subperiod in which a cash flow occurs into a return for a reporting period.
TWRR - Time-Weighted Rate of Return
Mutual funds that are structured on the assumption that risk tolerance declines as investors grow older. The fund pursues a growth strategy in its early years by holding more risky assets. It then gradually moves towards less risky assets as the target date approaches. The fund manager adjusts the fund over time, without any action required from the fund holder.
Target-date Funds
What is the assumption of a Target-date fund?
That risk tolerance declines as investors grow older.
Also known as Target-based funds or life cycle funds
Target-date funds
Referred to as a Statement of Trust Income Allocations and Designations. When a mutual fund is held outside a registered plan, unitholders of an unincorporated fund are sent this form
by the respective fund.
T3 Form
Referred to as a Statement of Remuneration Paid. This form is issued annually by employers to employees reporting total compensation for the calendar year. Employers have until the end of February to submit these forms to employees for the previous calendar year.
T4 Form
A plan that enables set amounts to be withdrawn from a mutual fund or a segregated fund on a regular basis
Systematic Withdrawal Plan
A mutual fund’s shareholders have a continuing right to withdraw their investment in the fund simply by submitting their shares to the fund itself and receiving in return the dollar amount of their net asset value. This characteristic is the hallmark of mutual funds.
Right of Redemption
When must payment for securities that have been redeemed be made by?
Payment must be made by the fund within two business days from the determination of the net asset value
A systematic withdrawal plan where the investor receives an annual income from the fund by redeeming a specified percentage of fund holdings each year
Ratio Withdrawal Plan
A group of managed products (particularly mutual funds) with a
similar investment mandate
Peer Group
This method of fund valuation reduces the extensive calculations of the daily valuation method by providing a good
approximation. It assumes a constant rate of return through the period, eliminating the need to value the portfolio on the date of each cash flow. It weights each cash flow by the length of time it is held in the portfolio.
Modified Dietz Method
Withdrawals are designed to deplete the entire investment by the end of the plan, while providing as high an income as possible during the plan holder’s expected lifetime. The amount
withdrawn on each date is based on periods that are continually readjusted to the changing life expectancy of the plan holder. Readjustments are based on mortality tables.
Life Expectancy-adjusted Withdrawal Plan
Sets out to match the performance of a broad market index, such as the S&P/TSX Composite Index or the FTSE Canada Universe Bond Index. Index funds are typically categorized under the type of asset class they tend to replicate.
Index Fund
What categories are Index funds typically classified under?
The type of asset class they tend to replicate
Changes in the target-date fund’s asset allocation mix over time. The fund pursues a growth strategy in its early years by holding more risky assets. It then gradually moves towards less risky assets as the target date approaches. The fund manager adjusts the fund over time, without any action required from the fund holder.
Glide Path
A systematic withdrawal plan where a specified amount is withdrawn over a pre-determined period with the intent that all capital will be exhausted when the plan ends.
Fixed-period Withdrawal Plan
A systematic withdrawal plan where the fund holder chooses a specified dollar amount to be withdrawn on a monthly or quarterly basis.
Fixed-dollar Withdrawal Plan
Funds in this category must invest a minimum of 90% of their noncash assets in equity securities. The main investment objective of these funds is long-term capital growth.
Equity Fund
What is the main investment objective of equity funds?
Long-term capital growth
Invest in preferred shares as well as high-quality common shares, with a history of consistently paying dividends.
Dividend Funds
A method of calculating the NAVPS of a mutual fund. The incremental change in the value of a fund from day to day is expressed as an index from which the return can be calculated. This method of calculation is beneficial for mutual funds, which generally calculate NAVPS daily. It greatly simplifies their return calculation at the end of the month.
Daily Valuation Method
A portfolio strategy whereby the fund manager does not replicate the market exactly but sticks fairly close to the market weightings by industry sector, country or region or by the average market capitalization.
Closet Indexing
A fund that invests primarily in bonds and derives its income mostly from interest payments made by bond issuers to the fund.
Bond Fund
Where do most of the interest payments come from for Bond funds?
Interest payments made by bond issuers to the fund
Invests in both stocks and bonds to provide a balanced mix of income and capital growth.
Balanced Funds
This type of fund has similar objectives to those of balanced funds, but they differ in that they typically do not have to hold a specified minimum percentage of the fund in any class of
investment
Asset Allocation Funds
The deemed cost of an asset representing the sum of the amount originally paid plus any additional costs, such as brokerage fees and commissions.
Adjusted Cost Base
Name the 8 different categories of Mutual Funds
Money-Market
Fixed Income
Balanced
Equity
Commodity
Specialty
Alternative
Target-Date
What are the tax consequences on redemption of mutual funds held in non-registered accounts?
They are subject to tax on capital gains when the fund is sold as well as on annual distributions of income and capital gains earned within the fund.
What are the tax consequences of mutual funds held within registered accounts on redemption?
No immediate tax consequences.
Name the 4 types of systematic withdrawal plans offered by mutual funds
ratio withdrawal
fixed-dollar withdrawal
fixed-period withdrawal
life expectancy-adjusted withdrawal
How is the performance of mutual funds measured?
By calculating the return realized by a portfolio manager over a specified period.
What are the 3 types of ways to calculate mutual fund performance?
TWRR
Daily Valuation Method
Modified Dietz Method
How is the quality of a mutual funds performance determinded?
By comparing it against a relevant standard - either a fund's benchmark index or the average return on the funds peer group of funds.
ETF where the portfolio manager takesan active role in investment selection.
Active ETF
In the context of ETFs, these are typically passive ETF investments intended to provide the majority of returns, as opposed to satellite holdings which are more focused on riskier sector ETF holdings
Core Holdings
Focused on commodity holdings or holdings that replicate or are related to commodities.
Commodity ETF
Name the 3 types of Commodity ETF's
Physicalbased ETFs
Futures-based ETFs
Equity-based ETFs
ETFs that employ covered calls to enhance the yield and reduce the volatility of owning the underlying stock or portfolio.
Covered Call ETFs
Has a contractual agreement with an ETF company to aid in the creation and redemption of ETF units.
Designed Broker
Commodity ETF that invests in listed companies that are involved in exploration and development or in the processing or refining of a commodity.
Equity-based ETFs
A summary disclosure document that ETFs are required to produce and file
ETF Facts
Open-end mutual fund trusts that hold the same stocks in the same proportion as those included in a specific stock index. Designed to mimic the performance of a specified index by investing in the constituent companies included in that index. Like the stocks in which they invest, shares can be traded throughout the trading day.
ETF
Shares trade on major stock exchanges
ETFs
Exchange-traded debt obligations issued by a bank that promises to pay investors a return on their investment based on the performance of a specific reference asset such as an index or another benchmark.
ETNs
The ETF holds all of the stocks in the same weight as the respective index. The full replication process tracks extremely close to the benchmark index, with minimal tracking error.
Full replication
ETFs that invest in futures contracts of different commodities, with an underlying portfolio of money market instruments to cover the full value of the contracts. As near-term contracts approach expiration, they are rolled over into more distant contracts.
Futures-based ETFs
The process where a basket of stocks is exchanged for ETF units, rather than for cash.
In-kind Exchange
An ETF that seeks to replicate, net of expenses, the inverse performance of a reference index.
Inverse ETF
An ETF that delivers daily investment results that correspond to a multiple of the daily performance of a reference index.
Leveraged ETF
An ETF that invests in the commodity directly. They are limited to only a few storable, non-perishable commodities, such as gold and silver.
Physicial-based ETF
Increments of shares, typically consisting of 10,000, 25,000 or
50,000 shares, set by the respective ETF company
Prescribed number of units
The loss that results when a near-term futures contract approaches expiration and is rolled over into more distant contract.
Roll Yield Loss
The process by which the portfolio manager selects a smaller sample of securities and their weighting to best match the performance of the overall index.
Sampling
Holdings that are focused on riskier sectors of the markets. Used to boost returns above the core asset returns.
Satellite Holdings
The current cash market price of a commodity or financial instrument that is available for immediate delivery.
Spot Price
Constructed with derivatives, such as swaps, to achieve the return effect of the index. As a result, their exposure is notional, rather than real.
Synthetic ETFs
The simple difference between the return on an underlying index or reference asset and the return on the ETF that tracks the index or reference asset.
Tracking Error
Name the 2 instruments under which ETFs are regulated
NI 81-102 - limits the use of leverage and derivatives
NI 81-104 - allows for more aggressive strategies
How are distributions of ETF's classified?
Dividend and interest distributions
Capital gains distributions
Non-taxable distributions
What are the 2 factos that determine the size of an ETFs capital gains distributions?
1 - The net of the fund’s current capital gains, less any capital losses, plus specific gain allocations.
2 - Any amount from the CGRM, which reduces the tax paid on capital gains generated by redemptions.
Name the 4 risks specific to ETFs
- Risk related to tracking error
- Concentration risk
- Risk related to the composition of the ETF
- Risk related to securities lending
Name 4 of the types of ETFs available on the market
Index-based ETFs (standard)
Rules-based ETFs
Synthetic ETFs
Leveraged ETFs
What should you consider when comparing ETFs and mutual funds?
Management style
Transparency of holdings
Costs
Liquidity
Tracking error