Asset Management Prep

Finance 101
Capital Asset Pricing Model is a model used to determine a theoretically appropriate required
rate of return of an asset, to make decisions about adding assets to a well-diversified
portfolio.
CAPM Formula
Expected Return of Investment = Risk-Free Rate + Beta* Market Risk Premium
Market Risk Premium = Expected Rate of market – Risk-Free Rate
Beta – measures how much risk the investment will add to a portfolio (if it is riskier than
market and increase the risk of the portfolio, beta is greater than one)
Market Risk Premium: Return expected from the market above the risk-free rate
Expected rate of return often use a major stock index, such as the S&P 500 to substitute for
the market
 when an investor is able to use CAPM to perfectly optimize a portfolio’s return relative to
risk, it would exist on a curve called the efficient frontier, which coincides with the capital
market line
Free Cash Flow Formula = Net Income after cash+ Non-Cash Expenses – Increase in
Working Capital (+Inventory + Accounts Receivables – Account Payables) – Capital
Expenditure
WACC is used as a discount rate when budgeting for a new project
WACC = Cost of Equity*%Equity + Cost of Debt*%Debt*(1-Tax Rate)+Cost of Preferred

Stock*%Preferred Stock (from Bloomberg Terminal)
Price to Earnings Multiple e.g. PE =70x, it means that an investor is willing to pay $70 for
every $1 of earnings
- Market Capitalization / Net Income
- Price per share / Earnings per Share
Enterprise
Difference between growth stock and value stock

Value Stocks Growth Stocks
Relatively low P/E ratio High P/E ratio
Low price to book ratio High price to book ratio
Relatively slow earnings growth Rapid earnings growth
High dividend yield Low or no dividend yield
Sluggish sales growth Rapid sales growth
Many investors look for companies that have both low valuations using P/E and EV/EBITDA
and solid dividend growth  Growth stock
Commonly used valuation metrics:
- EV / EBITDA (Earnings before interest, taxes, depreciation, and amortization)
EV = market capitalization + debt - total cash
The lower the EV/EBITDA, the cheaper the valuation for a company
- EV / EBIT
- Price / Earnings:
Low P/E ratio, it may indicate that the stock is undervalued.
Investors can often buy undervalued stock at a discount and then profit when the price
of that stock climbs. That said, sometimes a low P/E ratio reflects a genuine lack of
growth potential.  Need to benchmark with other competitors
Higher P/E ratios may not be overvalued if their earnings and revenue are growing at
an amplified pace
- Price / Book:
- Meaning:
PB ratio represents the market value for every dollar of tangible assets
Low P/B ratio means that the stock is "backed up" by tangible (saleable) assets
High P/B ratio probably means that investors have high expectations for Co.
- Application:
P/B ratios are nice for companies that have negative earnings (since P/E ratios
don't really work in that case). If a company's P/B ratio is high compared to others
in its industry, then the stock might be overvalued. If its P/B ratio is low compared
to others in its industry, then it might be undervalued or the company may be
performing poorly.
Investment Products available in the market

1) Equities
2) Fixed Income Securities
a. Debt instrument issued by government, corporation or other entity to finance
and expand their operations
b. Able to provide investors a return in fixed periodic payments and eventual
return of principal at maturity
c. Examples:
i. Bonds
ii. Guaranteed Investment Certificates
iii. Treasury Bills (More liquid, between 1 to 12 months)
iv. Treasury Bonds (Less Liquid, could date up to 20 years)
v. Laddered Portfolio (Comprised of several bonds)
3) Mutual Funds
a. Collection of stocks, bonds and other securities owned by a group of investors
b. High liquidity as the units can be converted into cash at any time (but might
incur cost)
c. Open-end funds vs Close-end funds
d. Examples:
i. Bond funds (can lose value as the underlying bonds in the fund an be
sold prior to maturity)
ii. Mortgage funds (less risky than bond mutual funds due to shorter fund
terms)
iii. Dividend Funds (income from these funds qualifies for the dividend
tax credit, and shares which consistently pay dividends are chosen)
iv. Balance Funds (mixture of safety, income and capital appreciation)
v. Equity Funds (primary objective is capital growth)
vi. Specialty Equity Funds (diversify into specialty areas that they feel
have the potential to outperform the overall markets)
vii. International Funds
Institutional vs Retail Investors

- An institutional investor is a person or organization that trades securities in large
enough quantities that it qualifies for preferential treatment and lower fees
- Institutional clients are often bound by their own service to clients
Alpha: perceived as a measurement of a portfolio manager's performance. Alpha is used for

mutual funds and all types of investments. It is often represented as a single number (like 3 or
-5), but this refers to a percentage measuring how the portfolio or fund performed compared
to a benchmark index (i.e., 3% better or 5% worse).
Beta: determine the volatility of an asset or portfolio in relation to the overall market. Beta is
often used as a risk-reward measure meaning it helps investors determine how much risk
their willing to take to achieve the return for taking on that risk:
- A beta of less than 1 means that the security will be less volatile than the market.
- A beta of greater than 1 indicates that the security's price will be more volatile than
the market. If a stock's beta is 1.5, it is considered to be 50% more volatile than the
overall market.
Major Stock Index

- S&P 500 (US)
- Nasdaq Composite (US)
- Dow Jones Industrial Average (US)
o Indicates the value of 30 large, publicly owned companies based in the
United States
- FTSE 100 (Footsie 100)- London Stock Exchange
Why Buy side/Asset Management:

One, idea generation that requires you to form a unique perspective on an investment.
Two, the independent nature of the research process that requires the agent to synthesize
information from multiple sources.
Why their firm
Why their investment strategy

This ties in closely to the stock pitch that follows. In order to properly execute that pitch, you
will need an understanding of the firm's strategy (growth, value, long-only etc)
Franklin Templeton’s top strategy: A mix of growth and contrarian picks
Top-Rated Franklin Templeton Funds as of 1/31/19

Overall
Fund Name Get Info Risk Grade
Rating
Franklin Utilities R FRURX A+ B-
Franklin Convertible Securi FISCX A+ C+
Templeton Developing Market TEDMX A+ C+
Franklin Growth A FKGRX A C+
Franklin DynaTech A FKDNX A- C
Franklin Floating Rate Dly FAFRX B+ C
Franklin New Jersey TaxFree FNIIX B+ B
Franklin Payout 2019 R6 FPOEX B B+
Franklin Payout 2020 R6 FPOGX B B+
Franklin PA Tax-Free Inc C FRPTX B- B
Pitch a stock
Aim for 2-3 minutes - know it extremely well and tailor it to their strategy. i.e. focus on the
tangible book, ROIC, FCF if value fund, EPS/margin upside if growth fund. Be ready to pitch
another stock. have It's best to know one name like the back of your hand, and have another
name or two that you can pitch - long or short - from a high-level. See the stock pitch
template for a more detailed look at this.
There are some nuances to this process and the best way to prepare is to practice. So know
your resume, story and stock pitch's cold. In fact, know all five points for your firm. This
should provide a solid foundation for initial interviews.
5 ways to measure the volatility of the mutual fund

-Alpha
-Beta
-Standard Deviation – the annual rate of return
-R Square
-Sharpe Ratio- The higher a fund's Sharpe ratio, the better a fund's returns have been relative
to the risk it has taken of: (Expected Return – Risk Free Rate) / Standard Deviation of
portfolio returns
Franklin Templeton Products
Mutual Fund: Formed by different asset classes
Asset Class:
EQUITY
Franklin Templeton offers a wide range of active equity strategies, including international
growth (Franklin) and value (Templeton®) styles as well as emerging markets, specialist
sector, market cap, Shariah and single country strategies.
FIXED INCOME
Franklin Templeton is a global leader in fixed income with depth and breadth of expertise in
all major sectors of the fixed income market. These include global bonds, emerging market
debt, high-yield and investment grade corporate, mortgage-backed securities and municipal
bonds.
MULTI ASSET
Franklin Templeton provides total portfolio solutions through a variety of outcome-oriented
strategies to investors across the globe.
Multi-asset funds may invest in a number of traditional equity and fixed income strategies,
index-tracking funds, financial derivatives as well as alternative investments
BALANCED
A balanced fund primarily invests in a mixture of both stocks and bonds. Balanced funds are
designed for investors seeking a mixture of income and capital appreciation, with potentially
lower volatility and more diversification.
ALTERNATIVES
Real Assets
These funds typically invest in tangible assets that derive their value from their substance and
physical properties. Real assets include real estate, public and private infrastructure, natural
resources, precious metals, and commodities.
Real Estate
These funds typically invest in land plus anything permanently fixed to it, including
buildings, through direct investment, partnerships, or real estate investment trusts (REITs).
Property types include commercial and corporate facilities in addition to raw land,
multifamily residential properties, and farm land.
Infrastructure
These funds typically invest in basic physical systems owned and operated by governmental
entities and businesses. These projects can include transportation, communications, water and
sewage, and electric systems that are vital to economic development and prosperity.
Hedge Strategies
Also referred to as alternative strategies, these investment strategies use both long and short
positions in markets and securities as well as derivatives in an attempt to minimize market
beta returns while seeking alpha and risk-adjusted returns. Some of the most common
strategies are long and short equity, global macro, relative value, and credit.
Private Equity
Private equity funds typically invest in equity capital that is not quoted on a public exchange.
Instead, the funds take direct ownership positions in private companies, which potentially
may provide above-market returns and control of the investment, at the risk of reduced
liquidity and diversification.
Private Debt
Private debt funds typically invest in non-listed debt issues, including bonds, notes, and loans
issued by private companies. As with private equity, private debt positions may potentially
provide greater returns and control than what is available in the public markets, but with
reduced liquidity.
MONEY FUNDS
invests only in highly liquid instruments: cash, cash equivalent securities, and debt-based
securities with a short-term maturity of less than 13 month and high credit ratings
Capabilities of Franklin Templeton

- Target Risk
- Target Return
- Target Date
- Target Income
- Retirement Funding
- Education Funding
- Managed Volatility
- Inflation Protection

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Finance 101

Market Risk Premium = Expected Rate of market – Risk-Free Rate

WACC is used as a discount rate when budgeting for a new project

WACC = Cost of Equity%Equity + Cost of Debt%Debt*(1-Tax Rate)+Cost of Preferred

Difference between growth stock and value stock

Investment Products available in the market

Institutional vs Retail Investors

Alpha: perceived as a measurement of a portfolio manager's performance. Alpha is used for

Major Stock Index

Why Buy side/Asset Management:

Why their firm

Why their investment strategy

Top-Rated Franklin Templeton Funds as of 1/31/19

5 ways to measure the volatility of the mutual fund

Mutual Fund: Formed by different asset classes

Capabilities of Franklin Templeton

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