Chapter 2 Vocabulary Flashcards
Risk means
Uncertainty
The tendency for a particular measure of performance, such as percentage rate of return, to revert to its historical average return
Reversion to the mean
Three parts of the efficient capital markets hypothesis
The stock market is brutally efficient
Current stock prices reflect all publicly available information
Stock prices react completely, correctly and almost instantaneously to incorporate the receipt of new information
States that the changes in stock prices are random
The Random Walk Hypothesis
Theory about the pricing of assets and the trade-off between the risk of an asset and the expected returns associated with the asset (used in the pricing of risky securities)
Capital asset pricing model
A measure if the volatility, or systematic risk of a security or a portfolio in comparison to the market as a whole
Beta (beta coefficient)
The difference between the expected return on a portfolio and the risk-free rate
Market risk premium
This means that an investor prefers less risk to more risk
Risk-averse
An investor who shows no particular concern about risk because the pain of losing a dollar is equal to the pleasure associated with winning a dollar
Risk neutral
An investor who enjoys taking risks, the pleasure of winning a thousand dollars exceeds the pain of losing a thousand dollars
Risk taker
Market capitalization
Current stock price * Number of shares outstanding
The goal of creating shareholder value is to
Maximize the marker value of the existing owners equity
Which strategic financial decision involves short-term assets and short term liabilities
Working capital management
Which strategic financial decision involves long term assets
Capital budgeting (investing)
Which strategic financial decision involves long term debt (shareholders equity)
Capital structure (financing)
The process of planning and managing a firm’s long term investments in projects and ventures
Capital budgeting
The goal of the capital budgeting decision is to
Maximize the net present value of the investments that are financed by the firm’s capital budget
The goal of working capital management is to
Minimize the cost of maintaining the net working capital position of the company
Refers to s firm’s specific mixture of long term debt and equity that it uses to finance its operations and investments
Capital structure
The goal relating to capital structure is to
Minimize the weighted average cost of capital of the company
To spread your wealth among a number of different investments and asset classes
Diversification
Achieving the highest return for each level of risk is known as investing efficiently. A like created from the risk-reward graph, compromised of optimal portfolios
Efficient frontier
The two types of risk
Unsystematic
Systematic
Total risk equals
Systematic risk + unsystematic risk
