financial analysis
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Defining Financial Analysis
• Financial analysis is the process of evaluating financial and other information for decision-making.
• A six-step approach is suggested for systematic financial analysis.
Six-step Process
• Identify purpose of financial analysis
• Corporate overview
• Financial analysis techniques
• Detailed accounting analysis
• Comprehensive analysis
• Decision or recommendation
Corporate Overview
• Industry analysis--key economic characteristics, historical context, profit drivers, business risks
• Firm’s business strategy--competitive strategy given the industry characteristics
Industry Analysis
• Competition--growth rates, concentration ratios, degree of product differentiation, economies of scale (& relative fixed & variable costs), substitute products
• Legal barriers--patent & copyrights, licensing, regulation
• bargaining power of buyers (& suppliers) & price sensitivity
Industry Analysis Criteria
• What is the industry?
• Relative size & significance
• Largest companies
• Geographic presence
• Business cycle effects, current situation
• Future potential
Business Strategy
• Cost leadership: low cost producer, economies of scale, efficient production, low input prices
• Product differentiation: specific attributes that customers value (e.g., quality, variety, service, delivery time), brand name
• Importance of core competencies
Business Strategy Criteria
• Historical perspective
• Primary focus of operations
• Most important strategy
• Major operating segments
• Corporate outlook/ forecast
Qualitative Analysis--Dell Computer
• Industry—primarily PCs: high tech, competitive (e.g., Gateway, IBM, Apple, others), changing products, high growth rates, low barriers of entry
• Business strategy--(1) cost leadership strategy: direct selling, made-to-order manufacturing, early on the internet, low receivables; (2) product differentiation?? [IBM clones, Intel & Microsoft components]
• Current situation—market share; what is the impact of the business cycle (e.g., PCs are durable goods)?
Quantitative Financial Analysis
• Systematic analysis of key elements based on analysis context
• Ratios, cash flows, common-size, time series, comparative (e.g., specific firms, industry, all firms), models (e.g., DuPont, Altman’s)
• In-depth analysis for “red flag” items
Quantitative Financial Analysis
• Financial Statements
• Common-size Analysis
• Financial Ratios
• Growth/trend Analysis
• Quarterly analysis
• DuPont Model
• Market Analysis
Detailed Accounting Analysis
• Does accounting information capture the underlying business reality?
• Identify areas of “accounting flexibility” & evaluate accounting policies (choices) & disclosures; especially notes & MD&A
• Evaluate earnings management potential
• Recast accounting numbers when necessary
Comprehensive Analysis
• Summarize key points: what is particularly important for decision making?
• “Red flags” are particularly important
• Consider a written executive summary
• Consider a rating scale, such as 1-10
Decision
• What is the recommendation or decision?
• What is the key rationale for this decision? [This is based on the specific decision: for a credit decision the key factors relate to credit risk, with particular focus on leverage and liquidity.]
• Be prepared to defend this decision.
Capital Markets
Equity Debt
Primary Initial public offering
Bank loan, initial debt security offering
Secondary Buying & selling of stocks on securities markets
Buying & selling on secondary debt market
Credit Decisions
• Commercial banks provide short-term commercial loans
• The major concern: will the company pay interest & principal when due?
• Loan terms: interest rate, collateral, debt covenants
Equity Investment Decisions
• Public securities trade on formal market exchanges (these are secondary markets)
• Buying & selling are now relatively cheap transactions
• Mutual funds are a useful alternatives to individual securities
• Stock investing has high short-term risks
SEC Regulation
• Mission: Protect investors & maintain integrity of the securities markets
• Established following the Great Market Crash (SEC Act of 1934)
• SEC requires public registration, proxy statements & annual (10-K) and quarterly (10-Q) reports, 8-K for specific events
• Update: Sarbanes-Oxley Act of 2002 & Public Company Accounting Oversight Board; Dodd-Frank, 2010
Goals of Financial Accounting in a Market Economy?
• Capture business economics of the firm (e.g., relationship to industry, competitive strategy, business model). How does firm create value?
• Reduce management discretion on financial reporting (what is reality? Vs. misleading information--analysts sort this out). Note management incentives for earnings management
Accounting Regulators
• Securities & Exchange Commission (SEC)--regulates securities markets and financial reporting (10-K, 10-Q, 8-K)
• Financial Accounting Standards Board (FASB)--promulgates GAAP
• International Accounting Standards Board (IASB)—issuing International Financial Reporting Standards (IFRS)
U.S. Standard Setters: 1938-Present
• Committee on Accounting Procedures (CAP) issued 51 Accounting Research Bulletins (ARBs)--1938-59
• Accounting Principles Board (APB) issued 31 Opinions--1959-73
• Financial Accounting Standards Board (FASB) has issued 168 Statements through 2009 (SFASs) plus other standards—now Standards Codification in 4 volumes, by topic
The FASB Structure
F A S A C
P r o n o u n c e m e n t s
D u e P r o c e s s
F A S B
P r o n o u n c e m e n t s
D u e P r o c e s s
G A S B G A S A C
F A F
S p o n s o r i n g O r g a n i z a t i o n s
The FASB
• Seven member board, full time, appointed by FAF, presumed independent
• Extensive due process: agenda items, discussion memoranda (DM), exposure drafts (ED), pronouncements, public exposure with written & oral comments
• Super-majority (5-2 vote) [simple majority used 1977-90]
• Standard setting a political process
Annual Report Information
• Corporate Overview
• MD&A
• Financial Statements: Balance Sheet, Income Statement, Statement of Cash Flows, Statement of Equity
• Notes to financial statements
• Auditor’s Opinion
Management Incentives
• Managers have incentives to present information in the most favorable light (e.g., bonuses, stock options, promotions)
• Accounting choice: accounting polities, estimates, additional disclosures
• Standardize vs. estimates: what is reality?• Management have best information, but
communications to investors may not be completely credible
Financial Statement Considerations
• Managers’ information on economic reality
• Estimation errors
• Distortion from managers’ accounting choices & disclosure
• Question: Can investor perceptions be manipulated?
Finance Theory Perspectives
• Efficient Markets
• Random Walk
• Portfolio Theory
• Beta Analysis
• Economic Behavior & Agency Theory
• Earnings Management & Accounting Choice
Efficient Markets
• Markets are efficient if information is impounded immediately in capital prices in an unbiased fashion
• Research supports market efficiency in the semi-strong form, for short windows
• Why?—Analyst following
• Note long-term anomalies & other challenges (e.g., behavioral economics)
Random Walk
• The concept that a professional portfolio cannot outperform a randomly selected stock portfolio
• Research generally confirms this result
• Consistent with efficient markets; that is, all information has been impounded in stock price
Portfolio Theory
• Harry Markowitz introduced the concept of portfolio diversification with his 1952 dissertation
• Portfolio theory insists that investment portfolios should be diversified to reduce the risk relative to return
• Capital asset pricing model: E(Ri) = Rf + β[E(Rm) – Rf)
Beta Analysis
• Beta (β) comes directly from the slope of the market model: Rit = αi + βiRmt + eit
• Beta measures the relationship between price movements of the individual stock to market averages
• Beta is a measure of systematic risk, where a β=1 stock should move with the market; a β>1 stock has greater market risk
Economic Behavior
• Rationality: assume bounded rationality—people are intendedly rationale but limited
• Self-interest behavior:ObedienceSimple self interestOpportunism (self interest with guile--
that is, willing to violate normal ethical boundaries for personal benefit)
Agency Theory
• Contracts have a principal (e.g., owners) and agent (e.g., managers). The principal will attempt to maximize wealth, contract to avoid conflict, and minimize transaction and agency costs.
• Agency costs: information asymmetries (limited information by one side), adverse selection, moral hazard (e.g., shirking).
How to Reduce Agency Costs
• Better acquisition decisions
• Monitoring--including audits and financial reporting
• Align preferences of agents with principals (e.g., debt covenants, management compensation)--a reason for stock options
• Control devises such as budgets
Earnings Management
• Operations and discretionary accounting methods to adjust earnings to a desired outcome, often income smoothing
• Underlying theory: agency theory, transaction cost economics
• Importance of efficient contracting: corporations are a network of contracts and exist because they write contracts efficiently
Accounting Choice
• Discretionary choices to optimize behavior, using techniques such as:
1. Select alternative accounting methods (e.g., inventory) & level of disclosure (e.g., contingencies)2. Lobbying (e.g., on proposed standards)3. Financial, production & investment activities
Discretion Under GAAP
• Taking a bath
• Creating hidden reserves
• Off-balance-sheet financing
• Overstating performance (e.g., aggressive revenue recognition)
• Not reporting obligations (contingencies, commitments, other liabilities)
Earnings Manipulation
• Because alternatives are allowed, financial accounting has many discretionary aspects.
• Managers can manipulate income by timing (e.g., recognition this year v next year) and classification (e.g., ordinary v extraordinary)
• Accruals can be mandatory (e.g., other post employment benefits) or voluntary (e.g., depreciation)
Earnings Quality
• Importance of full disclosure
• Look for “conservative” reporting
• Review indicators of high quality
• Relationship of risk to earnings quality
• Be aware of earnings management incentives and evidence of earnings manipulation
Normalizing Income
• Attempt to determine earning power--related to normal operating earnings
• Remove the “noise”--usually associated with nonrecurring items
• Separate analysis of nonrecurring items--reorganization, “big bath” write-offs, changing GAAP
• Evidence of earnings manipulation may require substantial adjustments to arrive at “normal earnings”
Financial Analysis Decision
• Based on Elliott’s “value chain of information”: this is the $1,000 per hour stage
• The purpose of financial analysis is to arrive at an informed recommendation or decision
Financial Statements
• Balance Sheet
• Income Statement
• Statement of Cash Flows
• Statement of Stockholders’ Equity
Balance Sheet
• Assets: probable future economic benefits
• Liabilities: probable future economic sacrifices
• Stockholders’ Equity: residual interest, representing ownership interest (also called net assets)
Assets
• Current Assets (cash & cash equivalents, short-term marketable securities), accounts receivable, inventory, other)
• Property, plant & equipment
• Long-term investments
• Other assets
Liabilities
• Current Liabilities (accounts payable, accrued & other current liabilities)
• Long-term debt
• Commitments & contingencies
• Other liabilities
• Potential off-balance sheet debt
Stockholders’ Equity
• Preferred stock
• Common stock
• Other paid-in capital
• Retained earnings
• Treasury stock
• Other comprehensive income
• Other equity items
Income Statement
• Revenues: inflows from major operations• Expenses: outflows from major operations• Gains & Losses: changes in equity from
peripheral activities• Net income: bottom line all operating
activities recorded on the income statement• Comprehensive income: Changes in equity
from all non-owner sources
Operating Expenses
• Cost of goods sold (manufacturing)
• Cost of sales (services or services included)
• Operating expenses (selling, general & administrative, research & development, other)
• Interest income & expenses & related
• Provision for tax
Non-recurring Items
• Extraordinary items
• Discontinued operations
• Accounting changes
• Other non-recurring items
• Other gains & losses
Earnings Measures
• Gross profit
• Operating income
• Income before tax
• Income from continuing operations
• Net income
• Comprehensive income
Cash Flow Statement
• Cash Flows from Operations
• Cash Flows from Investing Activities
• Cash Flows from Financial Activities
• Statement of Stockholders’ Equity
Cash From Operations
• Net income
• Depreciation & amortization
• Other operating adjustments
• Changes in non-cash working capital items
Cash From Investing & Financing
• Cash from investingInvestment purchases
Investment maturities & sales
Capital expenditures• Cash from financing
Issuance of equityPurchase/acquisition of equity New debt
Debt maturities or retirement
Dividends
Treasury Stock
Statement of Stockholders’ Equity
• Reconciliation of stockholders’ equity, alternative formats used
• Key categories (changes)Common stock, other paid-in capitalRetained earningsTreasury stockOther comprehensive income
Quantitative Financial Analysis
• Systematic analysis of key elements based on analysis context
• Quantitative techniques to standardize financial information for relevant comparisons
• In-depth analysis for key factors, including “red flags”
Quantitative Financial Analysis
• Financial Statements
• Common-size Analysis
• Financial Ratios
• Growth Analysis
• Du Pont Model
• Earnings Quality/Normalizing Earnings
Useful Financial Comparisons
• Benchmarks: rules of thumb or averages
• Common Sense
• Trend Analysis (analysis over time)
• Near Competitors
• Industry Averages
• Market Averages
Common-size Analysis
• Overview vs. detail
• Balance sheet: total assets = 100%
• Income Statement: sales (or total revenues) = 100%
• Comparisons over time & across firms (or industry averages)
• Useful starting point for financial overview
Ratio Analysis
• A ratio converts financial information to a percentage, one approach to standardization
• Each ratios provides a somewhat different analysis• Ratios overlap—a problem in one area should
show up as problems in other areas• The importance of specific ratios differs, based on
the purpose of the financial analysis• Ratios for the most recent period are usually the
most important
Ratio Categories
• Liquidity—cash, working capital & cash flow related
• Activity—turnover ratios as possible efficiency measures
• Leverage—debt & solvency analysis
• Performance (or profitability)—bottom line or earnings related
Liquidity Ratios
• Current ratio: current assets/current liabilities
• Quick (acid test) ratio: (cash+marketable securities+net receivables)/current liabilities
• Cash ratio: (cash+marketable securities)/current liabilities
• Operating ratio: cash flows from operations/current liabilities
Leverage Ratios
• Debt to equity ratio: total liabilities/total stockholders’ equity
• Debt ratio: total liabilities/total assets• Interest coverage: (income before tax +interest
expense)/interest expense [note that the numerator is earnings before interest and taxes or EBIT]*
• Long-term debt to equity: long-term liabilities/total stockholders’ equity
• Debt to market equity: total liabilities at book value/total equity at market value
*alternatively: (income from continuing operations + interest expense + tax expense)/interest expense
Activity Ratios
• Inventory turnover: cost of sales [or COGS]/average inventory
• Receivables turnover: sales/average accounts receivable
• Payables turnover: sales/average accounts payable
• Working capital turnover: sales/average working capital
• Fixed asset turnover: sales/average property, plant & equipment
• Total asset turnover: sales/average total assets
Activity Ratios in Days
• Average days inventory in stock: 365/inventory turnover
• Average days receivables outstanding: 365/receivables turnover
• Average days payable outstanding: 365/payables turnover
• Length of operating cycle: average days inventory + average days receivables
Profitability
• Gross margin: (Sales-cost of sales)/sales• Return on sales: net income/sales• Return on assets: net income/average total assets• Pretax return on assets: earnings before interest &
taxes/average total assets• Return on total equity: net income/average
stockholders’ equity• Dividend payout: common dividends/net income
[per share basis: dividends per share / EPS]
Du Pont Model
• ROE = Profitability x Activity x Solvency
• Net Income / Average Common Equity = (Net Income / Sales) x (Sales / Average Total Assets) x (Average Total Assets / Average Common Equity)
• ROA = Profitability x Activity
Decomposition using Du Pont
• Start with Return on Sales• Activity is avg. total asset ratio—this is a measure of asset
turnover or efficiency• ROS x ATAR is Return on Assets (calculate as net income
/ average total assets)• Solvency is ATA / Avgas. Common Equity—this is a
standard leverage ratio• ROA x Solvency is Return on Equity (calculate as net
income / average common equity)• In summary, the differences between ROS, ROA & ROE
depend on activity & solvency
Du Pont Model
Ratio
Profit (Return on Sales)
Activity (Asset Turnover)
Return on Assets
Solvency (Common Equity Leverage)
Return on Equity
Calculation
Net Income/Sales
Sales/Avg. Total Assets (ATA)
Net Income/ATA
ATA/Average Common Equity (ACE)
Net Income/ ACE
Ratio Analysis Limitations
• Ratios are presented on a percentage basis• Relative size is ignored (e.g., both large &
small firms can be compared)• It is assumed that all numbers used are
correct (consider both possible errors and earnings management)
• If the numbers are not reliable, ratios are not particularly useful
Rating the PC Companies
Dell Gateway Apple
Liquidity 4 5 8
Activity 9 6 8
Leverage 6 6 8
Perform. 6 1 RF 2 RF
Du Pont 6 1 RF 2 RF
Overall 6 2 RF 4
Growth Analysis (period-by-period change)
• Long-term trends over time can be significant. Are current year performance measures consistent with earlier years (e.g., maintaining consistent ratios while sales are rising smoothly)?
• As a first step, present growth rates (including % increases) for the last 5-10 years
• Declining or negative growth rates might be obvious red flags; Red flags and other indicators of poor growth performance require further analysis
Base-Year Analysis(also called Trend Analysis)
• Set the earliest year, evaluated as the base year, at 100. [Note: this assumes that earliest year is “normal.”] Calculate growth by dividing the more current year numbers by the base year number.
• This is an alternative presentation to growth rate percentages over 5-10 years (or more)
Quarterly Analysis
• The most recent financial data is presented quarterly (e.g., 10-Q). [The one exception is at year end, with annual information is presented]
• Financial analysts focus on quarterly data and the quarterly earnings announcement is the most important (& earliest) information
• Common-size and ratios analysis is conducted, and compared over earlier quarters: particularly important are current quarter data to (1) the previous quarter and (2) the same quarter one year ago
Quantitative Market Analysis
• Stock prices & stock charts
• Earnings per share—actual & forecast
• Price earnings ratios (PE)
• Dividend yield
• Market value & market-to-book
• Price earnings to growth ratios (PEG)
• Valuation models
Stock Prices
• Prices change continuously
• Using daily closing price
• Stock charts, various periods
• Industry & market comparisons
• Internet sites
Earnings Per Share (EPS)
• Performance measure on per share basis
• Basic vs. diluted
• Forecasted EPS (Analysts’ Estimates on Yahoo)
• Annual vs. quarterly EPS
• Annual—last 4 quarters
• 5 year forecasts (relevance vs. reliability)
PE Ratios
• Stock price as a market premium for earnings
• Which price? (most current, historic…)• Which EPS? (current year actual--usually
last 4 quarters, future forecast, basic vs. diluted)
• Closing prices• Alternatives & how to evaluate them
Market-based Ratios
• Price earnings ratio (PE): Stock price / EPS
• Dividend Yield: Dividend per share / Stock price
• Market value: stock price x shares outstanding
• Market-to-book: market value / stockholders’ equity
Dividends
• Dividends given on a per share basis; focus on dividends per share, last 4 quarters. [Note—equivalent to dividends/shares outstanding.]
• Dividend yield: dividends per share/stock price—income focus; average yield is about 2% for the S&P 500.
• Dividend payout: dividends per share/earnings per share.
Market-related Ratios
• Market-to-book: market value / stockholders’ equity [or measure on a per share basis—stock price / book value per share]—why is a “market premium to book” common?
• Sales to market value: annual sales to outstanding shares x (1) year-end closing market price or (2) most recent closing market price.
Price Earnings to Growth (PEG)
• High PE is usually associated with the expectation of high earnings growth, which can be evaluated with PEG
• “Historic PEG” = PE based on actual EPS / 5-year historic earnings growth
• “Forecast PEG” = PE based on forecast EPS / 5-year earnings forecast
• PEG is useful to evaluate growth stocks, less useful for income stocks
Earnings-based Growth Model
• P = kE / (r – g) where P is “expected” stock price, k is dividend payout rate (actual or predicted), E is EPS, r is the discount rate, and g the projected earnings growth rate
• This model requires dividends, the discount rate is arbitrary (it could be the actual cost of capital—or based something else), and the growth rate is a forecast; results can change substantially using different assumptions
Stock Screening
• The purpose of stock screening is the determine which firms meet specific criteria (such as minimum ROE or dividend yield)
• Several internet sites have stock screeners, such as Yahoo
• The technique is useful to limit the number of companies on which to conduct a complete financial analysis
Corporate Liabilities
• Accounts Payable
• Commercial Paper & other short-term market liabilities
• Other current liabilities
• Corporate Bonds
• Other long-term market debt
• Other liabilities (including off-balance-sheet)
Credit Risk
• Credit risk: probability that a corporation will either default on debt or declare bankruptcy.
Default risk: probability that a corporation will not pay interest & principal when they come dueBankruptcy risk: probability that a corporation will file for bankruptcy
Default Risk
• What is the chance (probability) that the corporation will fail to make interest or principal payments when due?
• Because of high collection costs, creditors evaluate credit risk carefully
• Failure events: restructurings, especially troubled debt restructuring; default; bond rating down-grading; going-concern qualifications; bankruptcy
Bankruptcy Risk
• Probability that a firm will file for Chapter 11 bankruptcy.
• Importance of failure events: losses, defaults, troubled debt restructuring, going concern qualified audit opinion
• Altman’s Z-score can be used as a prediction model for credit risk
Financial Leverage
• Financial leverage is the relative mix of debt (especially long-term debt) & equity
• Long-term debt increases credit risk & has interest charges• The financial leverage index (FLI) is ROE/ROA• A high FLI indicates the increasing use of leverage to raise
ROE relative to ROA• The financial structure leverage ratio (FSLR) is average total
assets/average common equity. This is the same ratio used in the DuPont Model for solvency. A higher ratio means higher leverage, but also a higher ROE. The ratio is identical to FL1 if there is no preferred stock. When preferred stock is present, the FSLR is higher than FLI.
Altman’s Z-score, 1983 Model
• 6.56 x (working capital / total assets)
• + 3.26 x (retained earnings / total assets)
• + 6.72 x (EBIT / total assets)
• + 1.05 x (book value of equity / book value of debt)
• = Altman’s Z-score
Altman’s Z-score
• Indicator of overall financial health
• Cutoffs: les than 1.1 bankrupt1.1 – 2.6 gray areagreater than 2.6 healthy
• A Z-score of 1.1 or less does not mean the company is bankrupt, but does suggest that financial problems may exist
Bond Ratings
• Bond rating agencies include Standard & Poor’s & Moody’s
• Corporations are expected to have investment grade ratings, Baa and above (for Moody’s)
• Bond ratings below investment grade are junk bonds, which is usually recognized as a red flag
Bond Ratings
S & P Moody’s Category
Highest AAA Aaa Investment
Very High AA Aa Investment
High Qual. A A Investment
High Qual. BBB Baa Investment
Speculative BB Ba Below
Speculative B B Below
Speculative CCC Caa Below
Speculative D C Below
Credit Analysis Process
• Loan Purpose
• Corporate Overview
• Financial Analysis
• Accounting Analysis
• Comprehensive Analysis
• Loan Decision
Loan Purpose
• Commercial Bank Loan: term loan
revolving line of creditother
• Commercial Paper
• Corporate Bonds
Corporate Overview
• Wide variety of firms need bank loans
• Size characteristics—local or regional to national & global
• Industry specializations, including impact on bank credit risk
• Large companies have more credit options
Quantitative Financial Analysis
• Primary focus is on financial report analysis, with less emphasis on market information
• Particular interest in liquidity & leverage
• Evidence of financial health (as measured by credit risk) rather than earnings performance & forecasts
Accounting Analysis
• Emphasis on liquidity & cash flow information
• Analysis of unrecorded obligations & potential overstated assets
• Forecasts of sales & operations plus future cash flows
Comprehensive Analysis
• Summary of key information (executive summary recommended)
• Importance of credit risk
• Adequate information to make informed recommendations/decisions
Loan Decisions
• Yes/ No on loan
• What interest rate (prime rate +)?
• What collateral?
• What Debt covenants?
• Other considerations (e.g., compensating balances)
Investment Portfolio
• Importance of Portfolio Diversification
• Based on Investor Goals
• Short-term, liquidity focus
• Mid-term, return but limited risk focus
• Long-term, return focus
Mutual Funds
• Investment portfolios managed by professionals & regulated by the SEC
• Advantages: diversification, professional management, liquidity, small investment
• Disadvantages: Fees, average returns less than expected, lack of control over investments, taxes
Mutual Fund Categories
• Money Market Funds
• Bond
• Stock: growth, income, value, asset allocation, international, sector, regional
• Balanced
• Real estate, usually REITs
Gotrocks Funds
• Growth Fund: maximize long-term market appreciation using large-cap stocks (focus on earnings & earnings growth potential)
• Income Fund: maximize intermediate- & long-term income using bonds and large-cap stock that pay high dividends (+ total return as a secondary goal)
• Value Fund: invest in large-cap stocks that out of favor—requires evidence of substantial stock price drop & ongoing restructuring (usually low market-to-book)
Investment Strategies
• Buy & hold
• Index funds
• Dollar-cost averaging
• Risk measures, such as Beta analysis
• Asset allocation decisions; e.g., % of cash, bonds & stocks
Six-step Analysis
• Investment purpose
• Corporate overview
• Quantitative financial & market analysis
• Detailed accounting analysis
• Comprehensive analysis
• Recommendation or decision
Investment Purpose
• Short-term (stressing liquidity & low risk)• Long-term (e.g., retirement—stressing long-
term return, willing to accept more risk)
• Using market averages such as the Dow Jones Industrial Average
• Utilities may fit income funds because of high dividend yields
• High tech firms may fit growth funds
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