Chapter 4 Return and Risk Flashcards

1
Q

Return

A

The Level of profit from an investment, or the reward for investing.

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2
Q

Income

A

cash that investors periodically receive as a result of owning an investment

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3
Q

Total Return

A

combining the capital gain (or loss) with the income

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4
Q

Expected Return

A

vital measure of performance, what you think the investment will earn in the future that determines what you should be willing to pay for it

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5
Q

Inflation

A

price changes in an upward direction

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6
Q

Deflation

A

price level heads in a downward direction

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7
Q

Satisfactory Investment

A

the present value of benefits (discounted at the appropriate rate) equals or exceeds its cost.

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8
Q

Normal Return

A

the actual return that the investment earns expressed in current dollars.

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9
Q

Real Rate of Return

A

equals the nominal return minus the inflation rate, and it measures the increase in purchasing power provided by an investment.

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10
Q

Required Return

A

the rate of return that fully compensates for an investment’s risk premium.

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11
Q

Expected Inflation Premium

A

represents the average rate of inflation expected in the future.

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12
Q

Risk Premium

A

varies depending on specific issue (the type of investment, its maturity, and its features) and issuer characteristics (industry and company factors).

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13
Q

Holding Period

A

the period of time over which one wishes to measure the return on an investment.

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14
Q

Realized Return

A

the portion of income received by the investor during the period.

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15
Q

Paper Return

A

capital gain before the sale occurs.

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16
Q

Holding Period Return

A

total return earned from holding an investment for a specified time. Equals Income during the period+capital gain/beginning investment value.

17
Q

Internal Rate of Return

A

determines the compound annual rate of return earned on investments longer than one year. (Yield)

18
Q

PV

A

Present Value, earliest value

19
Q

FV

A

Future value, latest value

20
Q

Reinvestment Rate

A

the rate of return you start with

21
Q

Fully Compounded Rate of Return

A

earning interest on interest

22
Q

Rate of Growth

A

the compound rate of change in the value of a stream of income, particularly dividends or earnings.

23
Q

Risk-return tradeoff

A

attempting to minimize risk for a given level of return or to maximize return for a given level of risk

24
Q

Business Risk

A

the degree of uncertainty associated with an investment’s earnings and the investment’s ability to pay the returns owed investors.

25
Q

Financial Risk

A

uncertainty surrounding a firm’s ability to meet its financial obligations because it has borrowed money.

26
Q

Purchasing Power Risk

A

the chance that unanticipated changes in price levels will adversely affect investment returns

27
Q

Interest Rate Risk

A

the chance that changes in interest rates will adversely affect a security’s value.

28
Q

Liquidity Risk

A

the risk of not being able to sell an investment quickly and at a reasonable price.

29
Q

Tax Risk

A

the chance that Congress will make unfavorable changes in tax laws

30
Q

Event Risk

A

occurs when something happens to a company that has a sudden and substantial impact on its financial condition.

31
Q

Market Risk

A

the risk that investment returns will decline because of market factors independent of the given instrument.

32
Q

Standard Deviation

A

measures the dispersion of returns around an asset’s average or expected return. (most common single indicator of an asset’s risk)

33
Q

Risk Indifferent

A

required return does not change as risk goes up.

34
Q

Risk Averse

A

Required return increases as risk increases

35
Q

Risk Seeking

A

Required return decreases for an increase in risk.