Final Flashcards
What are the two lessons from capital market history? What is this trade-off called?
1.) There is a reward for bearing risk
2.)The greater the potential reward, the greater the risk
risk to reward ratio
What were the two types of returns discussed in class?
Total dollar return and Total % return
What is the dividend yield?
Income/beg. price
What is the capital gains yield?
(end. price - beg. price)/beg. price
Which category of investments performed the best over the years 1925-2013?
Small companies
Which category was most volatile?
Small companies
Which category provided a positive return for every year during the 88 year time period?
T-Bills
What types of investments (stocks vs. bonds) is more volatile?
Stocks
What is the risk premium? Which category of investments has the highest risk premium?
Extra return earned for taking risks
Small companies
What is variance? What is standard deviation? What do they showcase?
V - avg^2 diff between the actual return adn the avg return
SD - positive square root of V
Volatility
What is the shape of the curve when data has normal distribution?
Bell - shaped
What is an efficient capital market?
A market where information regarding the value of securities are incorporated into its prices accurately and in real time.
What are the three forms of market efficiency?
Strong - public and private info
semistrong - public info
weak - past infro
What is a portfolio?
group of assets such as stocks and bonds held by an investor
Why are realized returns generally not equal to expected returns?
There is the expected and unexpected component
What are the two components to announcements and news?
expected and surprised component
Define systematic and unsystematic risk.
System - risk that influences large number of assets (market)
Unsystematic - at most infliences a small number of risks (unique)
What type of risk are investors compensated for?
Systematic
What does portfolio diversification provide?
Reduce variability of returns without an equivalent redcution in expected returns
How is total risk measured?
systematic risk + unsystematic risk
How is systematic risk measured?
using the beta coefficient
Understand what beta values showcase.
=1 - asset has the same systematic risk as the overall markter
<1 - less systematic risk
>1 - more systematic risk
=0 - risk free
What is the equation for the market risk premium? What does the value of the market risk premium tell?
E(Rm) = - Rf
extra return earned for taking risk
What is the CAPM and what does it show are the 3 factors that affect expected return.
defines the relationship between risk and return
1 - risk free
2- beta
3 - risk premium
