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BUSMAN 142 > CH6 > Flashcards

CH6 Flashcards

1
Q

Two of the most important factors to consider in investment decisions

A
  1. Expected return
  2. Risk of the investment
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2
Q

disadvantages of single period return

A

Does not take into consideration the time value of money.

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3
Q

internal rate of return equal to

A

present price of the share.

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4
Q

The two categories risk can be divided into:

A
  1. Systematic risk
  2. Non-systematic risk
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5
Q

Systematic risk

A

Risks that are a result of changes in the total economy.

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6
Q

Types of systematic risks (5 risks)

A
  1. Interest rate risk
  2. Cyclical risk
  3. Inflation risk
  4. Exchange rate risk
  5. Market risk
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7
Q

Non- systematic risk

A

Risks that result from the nature of its activities. ( the business’s activities)

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8
Q

Types of non-systematic risks (3 risks)

A
  1. Operating risk
  2. Financial risk
  3. Industry risk
  4. Other risk factors
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9
Q

interest rates and investments have an inverse relationship.

If interest rates increase..

A

Price of shares will decreases.

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10
Q

FIS

A

Fixed income securities.

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11
Q

How does higher interest rates affect FIS

A

Increases demand for FIS, since they offer a higher interest rate.

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12
Q

how to reduce the interest rate risk of an investment in securities

A
  1. buy securities with a short remaining term.
  2. Consider changes in CPI to predict interest rate changes.
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13
Q

cyclical risk

A

probability that returns will be negatively influenced by changes in the economic cycle.

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14
Q

Methods to reduce cyclical risk

A
  1. Diversification over time
  2. Diversification between different types of investments
  3. Timing
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15
Q

How should investors time the purchasing and selling of shares

A

purchases shares when the market is preforming poorly. Sell when the market is doing well( and prices are increasing)

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16
Q

inflations affects these investments most

A
  1. fixed income securities
  2. savings accounts
    3 mortages
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17
Q

approaches to hedge investments against inflation risk

A
  1. International diversification
  2. Balanced diversified portfolio
  3. Timing
  4. Inflation linked securities
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18
Q

exchange rate risk

A

uncertainty regarding returns for investors that are exposed to foreign securities.

19
Q

the more volatile the exchange rate between two countries

A

The higher the exchange rate risk the investor is exposed to.

20
Q

how can investors protect themselves from exchange rate risk

A
  1. Exchange rate recover
  2. Thorough analysis of company
  3. International diversification
21
Q

Exchange rate cover

A

-provided by financial institutions
- Bargain on fixed exchange rate when receiving investment revenue, therefore not exposed to unfavorable exchange rate movements.

22
Q

intrinsic value of a share

A

the value of the share according to the assets and liabilities of the company.

23
Q

how to determine if a share is under/over valued

A

compare the intrinsic value of the share with its market price.

23
Q

Market risk

A

probability that the market price of an investment will differ from its intrinsic value due to irrational investor behavior.

24
Q

strategies to protect oneself against market risk

A
  1. Timing
  2. Longer investment term
  3. Investment diversification
  4. Thorough analysis of the share.
25
Q

What happens if an enterprise uses debt capital in its capital structure

A

it can lead to an increase in the instability of the return on equity and earnings per share.

26
Q

positive financial leverage

A

cost of debt capital is less than the enterprises return on total assets

27
Q

negative financial leverage

A

cost of debt capital is higher than total return on total assets

28
Q

financial leverage factor

A

determines if positive or negative financial leverage is experienced.

29
Q

financial leverage is comparing

A

debt capital with return on total assets.

30
Q

For financial leverage a value > 1 indicates

A

positive financial leverage

31
Q

For financial leverage a value = 1 indicates

A

no financial leverage

32
Q

For financial leverage a value < 1 indicates

A

negative financial leverage

33
Q

considering these factors decreases exposure to financial risk

A
  1. Analysis of an enterprises capital structure
  2. Market interest rates
34
Q

Industry risks

A

Risks that are limited to specific industries

35
Q

Beta of a share

A

provides an indication of the share prices sensitivity relative to the prices of other shares in a specific market.

36
Q

System used to calculate the value for shares of a company or a portfolio of shares relatively quickly

A

The Barra system

37
Q

Beta of a share > 1

A

share is more sensitive than the market

38
Q

Beta of share < 1

A

Share is less sensitive than the market

39
Q

beta of share = 1

A

share price moves together with the market

40
Q

When shares are highly sensitive if market yields change

A

share exhibit large price differences

41
Q

When are are not sensitive

A

smaller changes in share price.

42
Q
A

BUSMAN 142 (4 decks)

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