Chapters 3 - 5 Flashcards
The process by which interest is paid on interest that has been previously earned
Compounding
A series of equal annual payments
Annuity
Compound value of a series of equal annual payments
Future sum of annuity
A series of equal annual payments with the payments made at the beginning of the year
Annuity due
A series of equal annual payments in which the payments are made at the end of each year.
Ordinary annuity
The present worth of a series of equal payments
Present value of annuity
The payments of interest twice a year
Semi-annual compounding
The stages of life during which individuals accumulate and subsequently use financial assets
Financial life cycle
A financial statement enumerating cash receipts and cash disbursements
Cash budget
The increase in the value of an asset such as a stock or bond
Capital gain
A decrease in the value of an asset such as a stock or a bond
Capital loss
Price appreciation that has not been realized
Paper profits
An individual retirement plan that is available to workers
Individual retirement account (IRA)
A retirement plan that is available to self-individuals
Keogh account (HR-10 plan)
A contract sold by an insurance company in which the company guarantees a series of payments and his earnings are not taxed until they are distributed
Tax-deferred annuity
A theory that stock prices correctly measure the firms future earnings and dividends and that investors should not consistently outperform the market on a risk-adjusted basi
Efficient market hypothesis (EMH)
The sum of the anticipated dividend yield and capital gains
Expected returns
The return necessary to induce the investor to purchase an asset
Required return
The sum of income and capital gains earned on an investment
Realized return
Nondiversifiable risk; risk associated with fluctuations in security prices
Systematic risk
Systematic risk; the risk associated with the tendency of a stocks price to fluctuate with the market
Market risk
The uncertainty associated with changes in interest rates; the possibility of loss resulting from increases in interest rates
Interest rate risk
The risk associated with reinvesting earnings or principal at a lower rate than was initially earned
Reinvestment rate risk
The uncertainty that future fluctuation will erode the purchasing power of assets and income
Purchasing power risk
The price of foreign currency in terms of another currency
Exchange rate
An increase in the value of one currency relative to other currencies
Revaluation
A decrease in the value of one currency relative to other currencies
Devaluation
The uncertainty associated with the changes in value of foreign currencies
Exchange rate risk
The risk associated with default by a country’s government
Sovereign risk
The risk associated with individual events that affect a particular security
Unsystematic risk
The risk associated with the nature of a business
Business risk
The risk associated with a firms sources of financing
Financial risk
The total risk associated with owning a portfolio; the sum of systematic and unsystematic risk
Portfolio risk
The process of accumulating different securities to reduce the risk of loss
Diversification
Deviation from the average
Dispersion
A portfolio whose return is not maximized given the level of new risk
Inefficient portfolio
The portfolio that offers the highest expected return for a given amount of risk
Efficient portfolio
An index of risk; a measure of the systematic risk associated with particular stock
Beta coefficient
Simultaneous purchase and sale to take advantage of price differences in different markets
Arbitrage
