Chapter 14 – Financial Economics Flashcards

0
Q

Financial investment

A

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

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1
Q

Economic investment

A

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

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2
Q

Present value

A

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

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3
Q

Stocks

A

Ownership shares in a corporation

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4
Q

Bankrupt

A

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

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5
Q

Limited liability rule

A

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

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6
Q

Capital gains

A

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

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7
Q

Dividends

A

Shares of the corporations profits

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8
Q

Bonds

A

That contract; most often issued by governments and corporations

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9
Q

Default

A

A failure to make a bond promised payment

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10
Q

Mutual fund

A

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

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11
Q

Portfolio

A

A collection of investments

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12
Q

Index funds

A

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

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13
Q

Actively managed funds

A

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

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14
Q

Passively managed funds

A

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

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15
Q

Percentage rate of return

A

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

16
Q

Arbitrage

A

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

17
Q

Diversification

A

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

18
Q

Diversifiable risk

A

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

19
Q

Non-diversifiable risk

A

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

20
Q

Average expected rate of return

A

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

21
Q

Beta

A

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

22
Q

Market portfolio

A

Contains every asset available in a financial market

23
Q

Time preference

A

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

24
Risk-free interest rate
I rate of return that does not compensate for risk
25
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
26
Risk premium
The rate of interest that compensates for risk; depends on the size of the investments beta