15 Flashcards
long term bonds - how long until maturity? low or high risk? low or high price volatility?
> 10 years to maturity
high risk
high price volatility
Non-systematic or specific risk
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.
ex-post rate of return
amount you earned on an investment including distributions/price you paid
growth equities characteristics
medium risk; average capitalization; potential for above average earnings growth; aggressive management; lower dividend payout; higher PE ratios; likely higher price volatility,
ex-ante rate of return
projected rate of return
rank securities from lowest expected return AND lowest risk to highest
tbills-bonds-debentures-pref shares-common shares-derivatives
systematic risk
can’t be diversified away… risk comes from inflation, business cycle, interest rates
non-systematic risk
risk a security or group of securities will change in price by different degree and/or direction than market. can be reduced through diversification.
variance
measures extent to which realized returns differ from expected return or mean.
standard deviation
square root of the variance. the more volatile an instrument has been in the past, the wider the range of possible future outcomes. greater the standard deviation, the greater the risk.
beta
measure that links the risk of an individual equity to the market as a whole. higher the beta, the greater the risk.
expected return
r1w1+r2w2+…+rnwn where r is return on a holding and w is holding weight (%) in portfolio
how many equity holdings to reduce risk in a portfolio?
- after this, additional risk reduction is minimal. the portfolio is always left with systematic (aka market) risk.
beta 1.0
equity which moves up or down to the same degree as the market
beta >1.0
equity which moves up or down more than the market
