Chapter 6: Investment Risk Flashcards
what is nominal returns?
returns unadjusted for inflation
what are real returns?
return an investment provides after stripping the effects of inflation
how is the real rate of return calculated?
(1+real rate of return) = 1+nominal rate of return/(1+inflation rate)
what are total returns?
returns on investment from both income productions (dividends) and any capital gain
what is the holding rate of return?
return on an asset or portfolio over the period with which it was held
how do rates of return on asset classes vary?
volatility for equities is usually much higher than fixed income securities, longer the available time the more can be invested into equities
what is currency risk?
risk arising from fluctuations in the value of currencies against one another
what is interest rate risk?
risk that interest rates move against one another, can also affect investors capital in terms of fixed income securities
what is issuer risk?
risk that the bond issuer gets into financial difficulties and cannot keep up interest payments or defaults on the final repayment
what risk factors affect the riskiness of investment in shares?
- liquidity, growth, volatility, strategic risk of the institution
what is growth risk?
whether the investors shares rise in price and will the company make enough profits to pay steady and rising dividends
what is the reward that can be gained from taking on growth risk?
if the company does very well, investors may make large capital gains with no ‘cap’ on how high these could be
what strategic risks are companies subject to?
- industry and cyclicality
- competence of management
- financial soundness of the company
what are the distinguishing features of property?
- subjective nature of valuation
- high up front costs
- complex legal considerations
what risks are associated with property?
location, use of the property on its value, credit quality, length of the lease
what market factors affect property risk?
changing interest rates, performance of individual property sectors, prospects for rental income growth
what is liquidity risk concerned with?
ease with which investment assets can be: sold for cash, used as collateral to secure cash flows
how is investment risk usually measured?
measured in terms of degree of fluctuation or volatility
how does standard deviation relate to level of risk?
low=low risk
high= high risk (greater volatility)
what is a benchmark in investing?
simply a standard against which it is reasonable to compare the performance of a share or fund
what is a typical funds benchmark?
- performance of peer funds to which it belongs
- relevant market index
- return on a particular government bond or risk free asset
what do different beta factors convey?
- beta factor of one= moves in line with benchmark
- beta factor greater than one= varies more widely than the market or benchmark
- beta factor less than one= fluctuates less than the wider benchmark
how are beta values calculated
over a 36 month period, calculated from historical data
what is the alpha measurement?
difference between the funds expected returns (beta) and its actual returns