Chapter 1 Understanding Investments Flashcards
Investments
The study of the investments process.
Investment
The commitment of funds to one or more assets that will be held over some future time period.
Financial Assets
Paper or electronic claims on some issuer such as the federal or provincial government or a corporation.
Real assets
Physical assets, such as gold or real estate.
Marketable Securities
Financial Assets that are easily and cheaply traded in organized markets.
Portfolio
The securities held by an investor taken as a unit.
Expected Return
Anticipated return by investors for some future period.
Realized Return
Actual return on an investment for some previous period of time.
Risk
The chance that the actual return on an investment will be different from the expected return.
Risk Averse Investor
An investor who will not assume a given level of risk unless there is an expectation of adequate compensation for having done so.
Risk Free Rate of Return.
Expected return = _____ + _____
Return on a riskless asset, often proxied by the rate of return on Treasury securities.
Expected return = Risk-free rate (RF) + Expected risk premium.
Ex Ante
Before the fact. Regarding, before the investment is actually made, the investor expects higher returns from assets that have a higher risk, and the expected risk premium is positive. This is the only sensible expectation for risk averse investors who are assumed to constitute the majority of all investors.
Ex post
After the fact, or when it is known what has occurred. For a given period of time, such as a month or a year or even longer, the trade off may turn out to be flat or even negative.
Security Analysis
The first part of the investment decision process, involving the valuation and analysis of individual securities.
Portfolio Management
The second step in the investment decision process, involving the management of a group of assets. ex. a portfolio as a unit.
