Chapter 14 – Financial Economics

Question 0

Financial investment

Answer 0

Either buying or building an asset in the expectation that doing so will generate a financial gain

Question 1

Economic investment

Answer 1

Paint for new addition to the nations capital stock, or for new replacements for capital stock that has worn out

Question 2

Present value

Answer 2

The present day value, or worth, I returns are costs that are expected to arrive in the future

Question 3

Stocks

Answer 3

Ownership shares in a corporation

Question 4

Bankrupt

Answer 4

The situation when individuals or firms are unable to make timely payments on their debts

Question 5

Limited liability rule

Answer 5

Rule that limits the risks involved in investing in corporations by tapping their potential losses at the amount they paid for their shares

Question 6

Capital gains

Answer 6

The result from selling shares in the corporation for more money than was paid for them

Question 7

Dividends

Answer 7

Shares of the corporations profits

Question 8

Bonds

Answer 8

That contract; most often issued by governments and corporations

Question 9

Default

Answer 9

A failure to make a bond promised payment

Question 10

Mutual fund

Answer 10

A company that maintains a professionally managed portfolio, or collection, of stocks or bonds

Question 11

Portfolio

Answer 11

A collection of investments

Question 12

Index funds

Answer 12

Mutual funds that she was their portfolios to exactly match a stock or bond index

Question 13

Actively managed funds

Answer 13

Mutual funds that constantly buy and sell assets in an attempt to generate high returns

Question 14

Passively managed funds

Answer 14

Mutual funds that exactly match the assets contained in their respective underlying indexes

Question 15

Percentage rate of return

Answer 15

The percentage gain or loss relative to the buying price on stocks or bonds over a given time period, typically a year

Question 16

Arbitrage

Answer 16

Occurs when investors try to profit from situations where two identical or nearly identical assets have different rates of return

Question 17

Diversification

Answer 17

The strategy of investing in a large number of investments to reduce the overall risk to the entire portfolio

Question 18

Diversifiable risk

Answer 18

The risk specific to a given investment; can be illuminated by diversification

Question 19

Non-diversifiable risk

Answer 19

Risk that pushes all investments in the same direction at the same time; eliminates the possibility of using good effects to offset bad effects.

Question 20

Average expected rate of return

Answer 20

The probability weighted average of an investment possible future rates of return

Question 21

Beta

Answer 21

A relative measure of nondiversifiable risk; measures the nondiversifiable risk of a given asset or portfolio

Question 22

Market portfolio

Answer 22

Contains every asset available in a financial market

Question 23

Time preference

Answer 23

The fact that people typically prefer to consume things in the present rather than in the future

Question 24

Risk-free interest rate

Answer 24

I rate of return that does not compensate for risk

Question 25

Security market line

Answer 25

The relationship between average expected rate of return and risk levels that must hold for every asset or portfolio trading in a financial market

Question 26

Risk premium

Answer 26

The rate of interest that compensates for risk; depends on the size of the investments beta