Chapter 15 FINAL Flashcards
When an invetsor creates their portfolio what do they look at?
Risk + Return
What are the two types of investors
- an investor who prefers an investment with greater return with a greater level of risk
- Theres investors who are more risk averse and want safe assets
What are safer investments
GICs, Canada savings bond
What are riskier investments
TESLA
GOOGLE
Rank 6 investments from less risk/return to greater risk/return
Treasury bills
bonds
debentures
preferred shares
common shares
derivatives
What is return from a security?
- Either intrest or dvidends recieved
- Capiral gain (price change)
How do we calculate the % change?
Cash flow + (end - bed) / beg
What is cash flow?
intrest/dividends
What is the end-beg
Price change of security
What is the real rate of return?
Its how much an investment increase by due to inflation
How to find real rate of return
Nominat - infaltion rate
What is nominal rate?
Actual rate of return
There are four types of risk what is it?
Inflation
Business
Political
Liquidity
What is liquidity risk?
Due to inflation it decreases the cash flows amount making the price of securities fall.
What is a business risk
The risk associated with a specific industry or business
What is political risk
Risk associated in a particular country
What is a liquidy risk
its if the investment can be monetized quickly and easily
What is interest rate risk?
How a securities return is effected to do rise in interest rates
What is foreign exchange risk
How the streng/weakness of the canadian dollar will affect investment returns if investing in foreign securities
What is default risk
The risk associated with a company going bankrupt or defaults on debt obligations
What is systematic risk
Its risk associated with the overall market or economy
What is a non systematic risk
its risk associated with a specific firm
How do we measure the risk?
Beta
What is beta?
bta measures a securities return relative to the overall market
Higher beta =
more riskier
What is asset allocation
where we decide to put our money
what are the different assets a person can get risk and return
cash
fixed income
equtities
How do we determine asset allocation for an investor?
its dependant on what the investors objectives and risk tolerance is
How is the expected return of each asset in a portfolio based?
Their weighing and expected return
Ex: Exp. Return Weighting
Company A 8% 25%
Company B 10% 40%
Company C 12% 35%
The overall return would be:
.08 X .25 + .1 X .4 + .12 X .35 = .102 or 10.2%
Why do we need to diversify a portfolio
To eliminate risk to one specific firm
How should we invest?
In securities that move in opposite directions
What is correlation
measures how two securites are related
+1 correlation inficates
two securities are moving in perfect positive direction
-1 correlation inficates
two securities are moving in perfect negative direction
0 correlation indicates
No correlation
How do we want our securities to be correalted?
negative
If Company A’s beta = 2.0; if the market goes up 10%,
Company A’s shares will increase 20% - and vice versa
What are primary investment objectives
safety, income, return, capital growth
What are secondary investment objectives
marketability/liquidy
tax minimization
