Chapter 3 Flashcards
Appreciation
Appreciation - The change in the investment’s value from the beginning of the year to the end of the year.
Arithmetic Mean
Arithmetic Mean - Calculated by summing the annual holding period returns and dividing the sum by the number of years.
Beta
Beta - Commonly used to measure the volatility of a portfolio or security relative to the market.
Coefficient of Determination (r2 or R2)
Coefficient of Determination (r2 or R2) - A measure of the strength of the relationship between two variables.
Coefficient of Variation (CV)
Coefficient of Variation (CV) - Measures the amount of risk per unit of return. Standard deviation divided by expected return.
Correlation Coefficient
Correlation Coefficient - Ranges from –1.0 to + 1.0. Maximum risk reduction occurs at perfect negative (–1.0). No risk reduction occurs at perfect positive (+1.0).
Covariance
Covariance - A measure of how much two assets move together.
Dollar-Weighted Internal Rate of Return
Dollar-Weighted Internal Rate of Return - Measures the effect of all of the cash flows an investor controls. The objective is to determine the combined result of the timing and dollar volume of the transactions during the period, as well as the performance of the investment security. It would also be appropriate for gauging the performance of an investment manager with full discretion over an investor’s account.
Exchange Rate Risk
Exchange Rate Risk - Investments that are denominated in a foreign currency face this additional systematic risk.
Geometric Mean
Geometric Mean - Calculates the average return over time assuming all earnings remain invested.
Holding Period Return (HPR)
Holding Period Return (HPR) - Measures the total return over the entire period of investment. The Holding Period Return (HPR) is the ending value of the investment less the beginning value of the investment, plus or minus any cash flows, divided by the beginning value of the investment.
Internal Rate of Return (IRR)
Internal Rate of Return (IRR) - The earnings rate of a series of cash inflows and outflows over a period of time assuming all earnings are reinvested.
Kurtosis
Kurtosis - A measure of whether the data are heavy-tailed or light-tailed relative to a normal distribution.
Leptokurtic
Leptokurtic - A distribution that is more peaked (more kurtosis) than a normal distribution.
Liquidity
Liquidity - The ability to sell an investment quickly at a competitive price without any loss of principal or any price concessions.
Marginal Income Tax Rate
Marginal Income Tax Rate - The tax rate percentage applied to incremental taxable income.
Marketability
Marketability - The investor’s ability to easily find a market to sell his or her investment.
Net Present Value (NPV)
Net Present Value (NPV) - The difference between the initial cash outflow and the discounted future cash flows.
Platykurtic
Platykurtic - A distribution that is less peaked (less kurtosis) than a normal distribution.
Portfolio Risk (Total Risk)
Portfolio Risk (Total Risk) - The combination of systematic and unsystematic risk, which can be reduced through diversification.
Real Rate of Return
Real Rate of Return - Also called the inflation-adjusted return. Adjusts the nominal return to account for the loss of purchasing power due to inflation.
Realized Taxable Return
Realized Taxable Return - The return from the investment without considering income tax
Regression Analysis
Regression Analysis - A statistical method for estimating the relationship among variables.
Reinvestment Rate Risk
Reinvestment Rate Risk - The risk that the investor is unable to reinvest cash flows at the IRR.
Risk
Risk - The uncertainty of future outcomes or the possibility of an adverse result.
Semivariance
Semivariance - Only takes into consideration volatility below the mean return.
Skewness
Skewness - A measure of the lack of symmetry for a data set.
Standard Deviation
Standard Deviation - A statistical measure of the variation of numbers or data around the mean of those numbers or data.
Systematic Risks
Systematic Risks - Driven by macroeconomic factors that affect nearly all investments. Investors generally cannot avoid these types of risks by diversifying their portfolios.
Time-Weighted Internal Rate of Return
Time-Weighted Internal Rate of Return - Measures the effect of any cash flows associated with the investment security (such as a mutual fund or stock), but ignores the dollar volume and timing of investor-driven transactions during the period. This method is more appropriate for assessing the performance of a fund manager or a security because it includes the capital appreciation and dividends earned, but it is not affected by an investor’s timing decisions.
Total Risk (Portfolio Risk)
Total Risk (Portfolio Risk) - The combination of systematic and unsystematic risk and can be reduced through diversification.
Unsystematic Risks
Unsystematic Risks - Affect some individual types of investments while not necessarily affecting others. Typically, the effects of unsystematic risks can be eliminated through proper diversification strategies.
Variance
Variance - Calculated by squaring the standard deviation. Investments with high variances tend to be riskier than those with low variances.
Yield
Yield - The amount of cash the investment generates and the amount the investor receives or reinvests in a year.
Z-Scores
Z-Scores - Have a mean of 0 and a standard deviation of 1.0, which is the same as a standard normal distribution. A z-score equals the number of standard deviations that a result is from the mean. 122
