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13-low-basis-stock.html
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<!doctype html>
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<title>Study Session 4 | Reading 13 | Low-Basis Stock</title>
<meta name="description" content="Chartered Financial Analyst Level 3 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<section>
<h1>Reading 13</h1>
<h3>Low-Basis Stock</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">AlchemistsAcademy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
</section>
<section>
<h2>Introduction</h2>
<p><em>Definition: Stock that has a much higher market value than its tax cost</em></p>
<ul>
<li>Basis - refers to the price used for the calculation of capital gains</li>
</ul>
</section>
<section>
<h2>Understanding Stock risk</h2>
<ul>
<li>Market(systematic) risk vs. specific risk</li>
<li>Three stages of equity holding life</li>
<ol>
<li>Entrepreneurial stage - no diversification; maximum investment in one, high-potential idea</li>
<li>Executive stage - somewhat diversified; extent of diversification linked to the degree of control the individual has over the company's performance</li>
<li>Investor stage - high diversification</li>
</ol>
</ul>
<aside class="notes">
Market risk affects all securities in the same class while specific risk relates to each particular security in isolation.
</aside>
</section>
<section>
<h2>The Four Stages of Specific Stock Risk</h2>
<img src="images/13/four-stages-of-specific-stock-risk.png" alt="the four stages of specific stock risk" />
</section>
<section>
<h2>Reducing a Concentrated Exposure</h2>
<ul>
<li>Outright sale</li>
<li>Exchange funds</li>
<li>Completion portfolios</li>
<ul>
<li>Single-asset class vs. multi-asset class completion portfolios</li>
</ul>
<li>Hedging strategies</li>
</ul>
<aside class="notes">
There are several option available to an investor seeking to reduce her exposure to a given holding. An outright sale is the simplest and most straightforward option but it can trigger a tax liability upon realization of any capital gains. Exchange funds are created when an advisor brings together several individuals, each with a different concentrated position(s), and pools their assets. Completion portfolios allow investors to create a portfolio that behaves like a desired index or basket by combining their low-basis position with some or all of his additional liquid assets. This can be accomplished whether the low-basis position is concentrated in one single asset or in a group of similar assets. There are several hedging strategies availabe to investors looking to diversify their exposure.
</aside>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
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