Chapter 15 Flashcards
what does ‘portfolio management’ focus on?
risk
return
What do ‘financial decisions’ revolve around?
risk-return tradeoff
There are two types of investors what are they
- Those who prefer investments that generate a return for a given level of risk
- Some investors who are more risk averse and choose to own safe assets
What are examples of ‘safe’ assets
GICs,
Canada’s Savings Bonds
(both low risk, low return assets)
What are some ‘riskier assets’
Google
Amazon
Tesla
List assets from ‘less risk/less return’ to ‘greater risk/greater return’
Treasury bills
Bonds
Debentures
Preferred shares
Common shares
Derivatives
What is ‘total return’?
Its the sum of
1. Intrest & dividends paid (cash flow) you receive when you own the security
- Capital gain (price change)
How would you calculate % return?
Cash flow + (Ending value – beginning value)/ Beginning value
“Cash flow” = interest / dividends received
“(Ending value – beginning value)” = capital gain
What is the real rate of return?
+ is how much an investment has increased due to adjustments made after inflation
How do you calculate real rate of return?
Real rate of return (approximate) = Nominal rate – inflation rate
What is nominal rate
Its your actual rate of return
What are the four types of risk?
Inflation risk
Political risk
Business risk
Liquidity risk
What is ‘inflation risk”?
It reduces the future value of a securities csh flow and with this increase in inflation prices of securities tend to fall
What is business risk?
Its risk associated with a specific business or industry
What is a political risk?
Risk associated doing business in a country due to government policies and political instability
What is liquidity risk?
Its the risk associated with how quickly and easily an investment can be converted to cash without significant loss
What is intrest risk?
This is basically how a secuties return tend to change based on interest rates
If intrest rate rises, what happens?
Securities value tends to fall and vise versa
What is foreign exchange risk?
The risk of the fluctuations in the Canadian dollar can affect investment returns
What is defualt risk
Its risk associated ith a company going bankrupt or failing to meet debt obligatios
What is systemtaic risk?
risk associated with an overall market or economy and cannot be diversified or eliminated
What is non-systematic risk?
Its risk is associated with a specific firm or instruct and can be diversified away by spreading our investments
How do we diversify our baskets.
Buy different stocks in different industries in different countries
What is beta
Measures a securities return relative to the overall market
Higher beta == …?
Greater risk is relative to the overall market
What is asset allocation?
Where to put your money!!!
What are examples of asset allocation?
Cash
Fixed income
Equities
How does a person decide what they want to invest in?
A person’s risk tolerance and investment objectives
How does the expected return of a portfolio vary? (based on what factors)
It varies based on the expected return of each asset and their weighting in the portfolio.
Do this for each company and add it all up
Why should we diversify our portfolio?
To eliminate the risk specific to one firm
The best form of diversity
Is when securites move in opposite directions
What does correlation measure?
How returns of 2 securities are related
What shows a positive, negative or no correlation?
+1.0 indicates perfect positive correlation
-1.0 indicates perfect negative correlation
0.0 indicates no correlation
What is beta?
Measures the volatility of a security return relative to the overall market
Example of beta: If Company A’s beta = 2.0; if the market goes up 10%,
Company A’s shares will increase 20% - and vice versa
How are portfolio returns weighted
It’s the weighted average of returns for all securities.
What’s a rule of thumb to know about portfolio returns?
The overall portfolio risk will be lower than the weighted average of risks for all securities
What are some primary investment objectives?
- Security
- Income
- Capital growth
- Return
What are some Secondary investment objectives?
- marketability/ liquidity
- Tax minimization
What are the safety, income, and growth of ‘short-term, and long-term bonds?
Short term
Safety; Best
Income: very steady
Growth: Very limited
Long-term:
Safety: Next best
income: very Steady
Growth: Varies
What are the safety, income, and growth of ‘preferred shares + Common Shares’?
Perfered Shares:
Safety: Good
Income: Stead
Growth: varies
Common shares
Safety: Least
Income: varies
Growth: BEST
