Chapter 14 – Financial Economics Flashcards
Financial investment
Either buying or building an asset in the expectation that doing so will generate a financial gain
Economic investment
Paint for new addition to the nations capital stock, or for new replacements for capital stock that has worn out
Present value
The present day value, or worth, I returns are costs that are expected to arrive in the future
Stocks
Ownership shares in a corporation
Bankrupt
The situation when individuals or firms are unable to make timely payments on their debts
Limited liability rule
Rule that limits the risks involved in investing in corporations by tapping their potential losses at the amount they paid for their shares
Capital gains
The result from selling shares in the corporation for more money than was paid for them
Dividends
Shares of the corporations profits
Bonds
That contract; most often issued by governments and corporations
Default
A failure to make a bond promised payment
Mutual fund
A company that maintains a professionally managed portfolio, or collection, of stocks or bonds
Portfolio
A collection of investments
Index funds
Mutual funds that she was their portfolios to exactly match a stock or bond index
Actively managed funds
Mutual funds that constantly buy and sell assets in an attempt to generate high returns
Passively managed funds
Mutual funds that exactly match the assets contained in their respective underlying indexes
Percentage rate of return
The percentage gain or loss relative to the buying price on stocks or bonds over a given time period, typically a year
Arbitrage
Occurs when investors try to profit from situations where two identical or nearly identical assets have different rates of return
Diversification
The strategy of investing in a large number of investments to reduce the overall risk to the entire portfolio
Diversifiable risk
The risk specific to a given investment; can be illuminated by diversification
Non-diversifiable risk
Risk that pushes all investments in the same direction at the same time; eliminates the possibility of using good effects to offset bad effects.
Average expected rate of return
The probability weighted average of an investment possible future rates of return
Beta
A relative measure of nondiversifiable risk; measures the nondiversifiable risk of a given asset or portfolio
Market portfolio
Contains every asset available in a financial market
Time preference
The fact that people typically prefer to consume things in the present rather than in the future
Risk-free interest rate
I rate of return that does not compensate for risk
Security market line
The relationship between average expected rate of return and risk levels that must hold for every asset or portfolio trading in a financial market
Risk premium
The rate of interest that compensates for risk; depends on the size of the investments beta
