Chapter 11 Flashcards
Investment
An asset that Generates Income Return
Speculation
An Asset whose value depends solely on supply and Demand
Derivative securities
value derived from the value of other assets
Option
right of owner to buy or sell an asset
ST Goals
1 year
Intermediate term
1-10 years
LT Goals
10+ years
Lending Investments
Savings accounts and Bonds
Ownership Investments
Preferred stocks and common stocks
Income Return
Any payments you receive directly from the company or organization in which you invested
Nominal Rate of Return
without inflation
Real Rate of Return
with inflation
Sources of Risk
Interest Rate Inflation Business Financial Liquidity Market Political& Regulatory Exchange Rate Call
Portfolio
Group of Investments held by an investor
Systematic Risk
Risk that cannot be eliminated through diversification
Unsystematic Risk
Risk that can be eliminated through diversification
Capital Gain/ Loss
A gain or loss on the sale of a capital asset.
Interest Rate Risk
Risk of fluctuation in security prices due to changes in market interest rates
Inflation risk
The risk that rising prices will eat away the purchasing power of your money
Business Risk
Risk of fluctuation in security prices resulting from good or bad management decisions
Financial Risk
Risk associated with a company’s use of debt. (Risk that they will not be able to pay back on all obligations held)
Liquidity Risk
Risk associated with the inability to liquidate a security quickly and at a fair market price
Exchange rate risk
Risk of fluctuation in security prices from the variability in earnings resulting from change in exchange rates
Call Risk
Risk to bondholders that a bond may be called before maturity
Asset Allocation
Attempt to ensure that the investors strategy reflects his or her time horizon and is well diversified, generally with assets of different class of investment type
Asset Allocation (Through Age 54)
Majority in Common stock (80,20)
Asset Allocation (Age 55-64)
Start moving some investments into bonds
60, 40
Asset Allocation (Over age 65)
Spend more than saving, Movement away from stock
40 stock, 40 bond, 20 T-bill
Asset Allocation (Retirement)
20 stock, 20 T-Bill, 60 Bonds
Efficient Market
All relevant information about the stock is reflected in the Stock Price
Mind Game/ Financial Personality
Overconfidence
Disposition Effect(Sell winners, keep losers)
House Money Effect(Winners take abnormal Risk)
Loss then Risk Aversion Effect(Losers take more risk)
Herd behavior (Follow the Crowd)
