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Finance > Exam 2 > Flashcards

Exam 2 Flashcards

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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
Q

Non-amortizing loan

interest only loan

A

borrow pays interest only, loan balance is the principal at maturity, medium payment

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26
Q

Negative Amortizing loan

A

borrow pays less than interest, loan balance is greater than principal at maturity, lowest payment

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27
Q

Formula to determine amortization payment

A

FV = PV(1+i)^n

FV is always 0

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28
Q

Uneven cashflows

A

find the present value of each of the sums and then add together (divide PV by (1+i)^n)

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29
Q

Formula to determine interest portion of amortization payments

A

principal * interest * fraction of a year. for subsequent years use the principal - payments for principal

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30
Q

relative valuation

A

determined by comparing it to a similar assets value

31
Q

absolute value

A

the fundamental value is based on its own characteristics

32
Q

asset - based valuation

A

absolute fundamental value is determined by the asset the company owns

33
Q

discounted cashflow analysis

A

absolute fundamental value is based on present value of the future cashflows based on require return (i)

34
Q

equilibrium

A

when market price = fundamental value, investors will hold the asset and have a neutral outlook

35
Q

discounted cashflow analysis steps

A

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
Q

undervalued

A

asset is worth more than what the market thinks its worth, you should buy it

37
Q

overvalued

A

asset is worth less than what the market thinks it is, you should sell it

38
Q

bullish

A

prices undervalued, will return more than expected, going up

39
Q

bearish

A

prices overvalued, will return less than expected, going down

40
Q

goal of financial services company

A

maximize the wealth of the owners

41
Q

goal of financial management

A

maximize the wealth of stakeholders

42
Q

5 subsectors of financial services

A 
lending institutions
insurance companies
investment banks
securities brokers
funds
43
Q

lending institutions

A

products are loans and cash accounts

revenue is interest and fees

44
Q

insurance companies/underwriter

A

product is policies

revenue is premiums and returns from investing premium money

45
Q

investment banks

A

product is securities underwriting, consulting and mergers and acquisitions
revenue is flotation costs passed from the issuer

46
Q

securities/stock brokers

A

product is executing trades

revenue is commission paid by investors

47
Q

funds

A

product is shares in the fund and pro money management

revenue is management fees of the funds

48
Q

Market

A

a place where buyers and seller meet to exchanges goods and services

49
Q

bull market

A

prices are rising

50
Q

bear market

A

prices are falling

51
Q

flat , sideways market

A

prices are steady over time

52
Q

public market

NYSE / NASDAQ

A

open to anyone with money not on a terror list, highly regulated

53
Q

private market

A

only open to those invited, where an owner is willing to sell, less regulated

54
Q

what is the SEC/ do they do

A

government organization that regulates public businesses and protects investors

55
Q

IPO

A

initial public offering - when a private company goes public and offers people to buy shares

56
Q

3 functions of securities underwriter

A

locates investors
aids regulatory compliance
aids pricing of IPO shares

57
Q

seasoned offering

A

releasing more shares after you are already public, technically new offering

58
Q

primary market

A

consists of transactions involving the issuance of new securities

59
Q

buyers and sellers of primary markets

A

sellers are issuers

buyers are investors

60
Q

secondary market

A

transactions between investors

61
Q

buyers and sellers of secondary market

A

sellers and buyers are both investors

62
Q

which market do seasoned offerings occur

A

secondary

63
Q

are issuers involved in secondary market transactions

A

no

64
Q

2 examples of secondary markets

A

NYSE / NASDAQ

65
Q

does the secondary market affect the primary market, why

A

yes, seasoned offerings can only be released at current prices

66
Q

when is the most ideal time to release IPO

A

bull market

67
Q

efficient market

A

one in which all participating has access to all info

68
Q

first implication of efficient market

A

1 - if all info is accessible immediately, it is factored into the price of the security

69
Q

second implication of efficient market

A

2 - markets react only if the info is different than what was expected

70
Q

third implication of efficient market

A

3 - it is impossible to consistently beat an efficient market

71
Q

fourth implication of efficient market

A

4 - more participants, more efficiency, fewer participants offer more opportunity to outperform

72
Q

real assets

A

physical, tangible assets - gold/land

73
Q

financial assets

A

valuable based on legal rights they bestow (profits and dividends) - stock/bond

Finance (7 decks)

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