Exam 2 Flashcards

1
Q

Risk Return trade off

A

The greater the risk, the greater the potential return

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2
Q

assumption about investors

A

they are averse to risk (dont like)

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3
Q

Formula for interest

A

Principle * interest * fraction of a year

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4
Q

Formula for return in $

A

amount received - amount invested

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5
Q

Formula for return in %

A

Return in $ / amount invested

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6
Q

Alt names for return in %

A

rate of return / expected return

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7
Q

Required rate of return

A

the minimum acceptable potential return given the risks

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8
Q

Decision rule

A

expected return must be greater than required return for people to invest

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9
Q

Formula for expected return in dollars

A

take each scenario and multiply return by weight, add the products to get the total

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10
Q

Formula for expected rate of return

A

Return in $ / Amount Invested

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11
Q

Efficient Portfolio

A

provides either greatest expected return or least risk relative to amount invested

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12
Q

Calculate expected portfolio return

A

% holding * return expected for all holdings then added together

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13
Q

objective of portfolio construction

A

to invest in assets whose prices are non or negatively correlated

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14
Q

company specific risk

A

derived from events specific only to a company

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15
Q

alternate names for company specific risks

A

diversifiable risk

nonsystematic risk

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16
Q

market risk

A

derived from events that affect all/most investments in the marketplace

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17
Q

alternate names for market risk

A

nondiversifiable risk

systematic risk

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18
Q

which risk does diversification mitigate

A

only company specific

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19
Q

MPT

A

Modern Portfolio Theory - investors want to max return and manage risk

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20
Q

Discount Rate

A

rate charged to financing operations for businesses

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21
Q

Present Value

A

the amount if invested today will grow to a specified amount by a specified date

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22
Q

To compound or discount more or less frequently than annually you

A

Divide interest by number of terms and multiply periods by number of terms

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23
Q

When is each annuity paid

A

Ordinary - at the end of each period

Annuity Due - at the beginning of each period

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24
Q

Amortizing Loan

A

borrower pays principal and interest, loan balance is zero at maturity, highest payment

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25
Non-amortizing loan | interest only loan
borrow pays interest only, loan balance is the principal at maturity, medium payment
26
Negative Amortizing loan
borrow pays less than interest, loan balance is greater than principal at maturity, lowest payment
27
Formula to determine amortization payment
FV = PV(1+i)^n | FV is always 0
28
Uneven cashflows
find the present value of each of the sums and then add together (divide PV by (1+i)^n)
29
Formula to determine interest portion of amortization payments
principal * interest * fraction of a year. for subsequent years use the principal - payments for principal
30
relative valuation
determined by comparing it to a similar assets value
31
absolute value
the fundamental value is based on its own characteristics
32
asset - based valuation
absolute fundamental value is determined by the asset the company owns
33
discounted cashflow analysis
absolute fundamental value is based on present value of the future cashflows based on require return (i)
34
equilibrium
when market price = fundamental value, investors will hold the asset and have a neutral outlook
35
discounted cashflow analysis steps
place future cashflows on a timeline find present value of the cashflows (v) PV formula compare v to market value buy, sell, or hold
36
undervalued
asset is worth more than what the market thinks its worth, you should buy it
37
overvalued
asset is worth less than what the market thinks it is, you should sell it
38
bullish
prices undervalued, will return more than expected, going up
39
bearish
prices overvalued, will return less than expected, going down
40
goal of financial services company
maximize the wealth of the owners
41
goal of financial management
maximize the wealth of stakeholders
42
5 subsectors of financial services
``` lending institutions insurance companies investment banks securities brokers funds ```
43
lending institutions
products are loans and cash accounts | revenue is interest and fees
44
insurance companies/underwriter
product is policies | revenue is premiums and returns from investing premium money
45
investment banks
product is securities underwriting, consulting and mergers and acquisitions revenue is flotation costs passed from the issuer
46
securities/stock brokers
product is executing trades | revenue is commission paid by investors
47
funds
product is shares in the fund and pro money management | revenue is management fees of the funds
48
Market
a place where buyers and seller meet to exchanges goods and services
49
bull market
prices are rising
50
bear market
prices are falling
51
flat , sideways market
prices are steady over time
52
public market | NYSE / NASDAQ
open to anyone with money not on a terror list, highly regulated
53
private market
only open to those invited, where an owner is willing to sell, less regulated
54
what is the SEC/ do they do
government organization that regulates public businesses and protects investors
55
IPO
initial public offering - when a private company goes public and offers people to buy shares
56
3 functions of securities underwriter
locates investors aids regulatory compliance aids pricing of IPO shares
57
seasoned offering
releasing more shares after you are already public, technically new offering
58
primary market
consists of transactions involving the issuance of new securities
59
buyers and sellers of primary markets
sellers are issuers | buyers are investors
60
secondary market
transactions between investors
61
buyers and sellers of secondary market
sellers and buyers are both investors
62
which market do seasoned offerings occur
secondary
63
are issuers involved in secondary market transactions
no
64
2 examples of secondary markets
NYSE / NASDAQ
65
does the secondary market affect the primary market, why
yes, seasoned offerings can only be released at current prices
66
when is the most ideal time to release IPO
bull market
67
efficient market
one in which all participating has access to all info
68
first implication of efficient market
1 - if all info is accessible immediately, it is factored into the price of the security
69
second implication of efficient market
2 - markets react only if the info is different than what was expected
70
third implication of efficient market
3 - it is impossible to consistently beat an efficient market
71
fourth implication of efficient market
4 - more participants, more efficiency, fewer participants offer more opportunity to outperform
72
real assets
physical, tangible assets - gold/land
73
financial assets
valuable based on legal rights they bestow (profits and dividends) - stock/bond