Business VIII Flashcards
Example of problem with increasing rate of return with risk:
- if you want to double your money (and you start now) you can do so over a 10 year period by earning a 7% return.
- if you wait 8 years before you start to invest, so you have to double it in the remaining 2 years, then you have to earn 40% annually!!! (which is almost impossible without taking huge risks).
- instead of trying to get rich quickly, become comfortably well-off slowly.
What are the three factors that determine how much you have left at the end of your investment horizon?
- time
- how much you invest
- rate of return on your investment
What happens when you try it increase your rate of return?
You increase your risk.
- it’s easier to concentrate on the two factors that contribute to how much you have left at the end of your time horizon:
- time
- how much you invest
Zero-based budgeting
- A budgeting method where all expenses must be justified for each new budget cycle.
- this is in contrast to traditional types of budgeting where department managers only have to justify increases or decrease in the prior period budget
How does zero based budgeting work?
- In zero based budgeting every function is analyzed and justified from a “zero-base” as if the company was starting anew.
- from this zero-base perspective all the company’s departmental budgets are examined to see if their function contributes to the company’s needs in the upcoming period.
How is zero-based budgeting beneficial?
It forces managers to be more cost effective. It also identifies:
- budgets that have become bloated over time
- wasteful and obsolete processes
- areas where outsourcing may be a better alternative.
Downside to zero-based budgeting?
It favors departments that generate revenue over departments such as
- HR
- accounting
where the benefits are less tangible.
Same-store sales
(aka “comps”, “comparable store sales”)
A statistic used in retail industry analysis that compares:
- the sales of stores that have been open for at least one year.
Same store sales compare:
- revenues earned by a retail chain’s established outlets for a certain time period, such as fiscal quarter or on a seasonal basis, for the current period and the same period in the past (usually the same period of the previous year).
- same store sales allow investors to determine what portion of new sales has come from:
- sales growth
and what portion can be attributed to:
- the opening of new stores.
Holdings
The contents of an investment portfolio held by an individual or entity such as a mutual fund or pension.
Who manages the investment portfolio of closed-end funds?
Investment advisors.
Net interest income
The difference between the revenue that is generated from a bank’s assets and the expenses associated with paying out its liabilities.
A bank’s assets include:
- personal loans
- commercial loans
- mortgages
- securities
A bank’s liabilities are:
- customer deposits
The excess revenue that is generated from the spread between interest paid out on deposits and interest earned on assets is the “net interest income”.
What comprises over half of most banks revenues?
Net interest income.
General provisions
A balance sheet item representing funds set aside by a company to pay for losses that are anticipated to occur in the future.
For Example: a bank would set aside funds in the case of a set of questionable loans.
Risk asset
Any asset that carries a degree of risk (has a significant degree of price volatility). Such as:
- equities
- commodities
- high yield bonds
- real estate
- currencies
What is a “risk asset” in banking?
An asset owned by a bank whose value may fluctuate due to changes in:
- interest rates
- credit quality
- repayment risk, etc
