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Behavioral Finance > Finals > Flashcards

Finals Flashcards

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1
Q

Practice of spreading your investments around to reduce exposure to risk.

A

Diversification

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2
Q

Degree of risk that an investor is willing to endure given the volatility in the value of an investment.

A

Risk Tolerance

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3
Q

Exposure to danger, possibility of failure

A

Risk

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4
Q

Represents a combination of systematic risk and unsystematic risk, potential internal and external threats

A

Total Risk

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5
Q
  • cannot be predicted
  • cannoy be avoided
  • undiversifiable risk
  • the possibility that an event at the company level could trigger severe instabillity or collapse an entire industry or economy.
A

Systematic risk

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6
Q

Kinds of Systematic risk

A

(1) Natural disaster
(2) War & Terrorism
(3) Inflation
(4) Interest rates
(5) Exchange rates
(6) Political instability
(7) Death of the owner

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7
Q
  • can be controlled
  • can be mitigated
  • diversificable risk
A

Unsystematic Risk

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8
Q

Aspects of Diversification

A

(1) Diversifying across sector and industries
(2) Diversifying across companies
(3) Diversifying across asset classes
(4) Diversifying across time frames
(5) Diversifying across borders

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9
Q

Investors tendency to favor companies fron their own country over those from other countries or regions

A

Home Country Bias

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10
Q

Refers to the total value or worth of a comopany. Tells us how much a company is valued at in the stock matket.

A

Capitalization

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11
Q

Two ways to measure capitalization

A

(1) Market capitalization
(2) Enterprise value

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12
Q

Determining the value or price of an asset and returns on financial assets, including stocks, bonds, currencies, and real estates.

A

Asset Pricing

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12
Q

Determining the value or price of an asset and returns on financial assets, including stocks, bonds, currencies, and real estates.

A

Asset Pricing

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13
Q

Two types of asset pricing

A
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14
Q

Two types of asset pricing

A

(1) equity
(2) bonds

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15
Q

Is an idealized portrayal of how financial markets price securities and thereby determine expected returns on capital investments.

A

Capital Asset Pricing Model

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16
Q

If the required return is less than the estinated return… then

A

Investors should buy (accept)

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17
Q

If the required return is greater than estimated return… then

A

Investors should sell (reject)

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18
Q

Are tangible assets with a useful life longer than a year.

Not intended for sale in the regular course of the business’s operation

A

Capital Assets

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19
Q

Classification of Capital Assets:

A

(1) Useful life of more than 1 year
(2) Acquisition cost exceeds the company’s designated minimum limit.
(3) Not intended to be sold as part of the business’ operation

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20
Q

Are any profit that you make when you dispose of capital assets.

A

Capital gains

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21
Q

When asset is sold for a price that is lower than the original purchase price.

A

Capital loss

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22
Q

If the company purchased an asset lower than the limit, then it is considered as an outright expense.

A

Not Capital Assets

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23
Q

Is Inventory considered as Capital Assets?

A

No, because Inventories are part of the business operation and can be sold as part of the operation.

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24
Q

Purpose of categorizing asset as capital assets

A

(1) for you to know how much income that asset could bring to you
(2) to find investors

25
Q

A cost is included in the value of an asset and expensed over the useful life of that asset, rather than being expensed in the period the cost was originally incurred.

Assets that can be depreciated

A

Capiralization in Accounting

26
Q

Can land be capitalized?

A

No, because land does not depreciate.

27
Q

Refers to the amount of outstanding stock, debt, & retained earnings (book value), or may refer to market capitalization.

A

Capitalization in Finance

28
Q

Measure of business’ equity and the value of an asset as it appears on a balance sheet.

A

Book value

29
Q

The price of an asset would sell for on tbe open market.

A

Market value

30
Q

Market where prices represent all relevant financial information about an underlying asset or security.

Market price reflect all available and relevant information.

A

Market Efficiency

31
Q

A hypothesis that states that share prices reflect all information and consistent alpha generation.

Argues that markets are efficient, leaving no room to make excess profits by investing since everything is already fairly and accurately priced.

A

Efficient Market Hypothesis

32
Q

Term used to assess an assets ability to generate excess returns to a benchmark on the overall market.

A

Alpha

33
Q

States that in an efficient market, the stock price is random because you cant predict, as all information is already available to everyone.

A

Random Walk Theory

34
Q

Three Forms of Market Efficiency

A

(1) Weak Form Efficiency
(2) Semi strong Form Effciency
(3) Strong Form Efficiency

35
Q

All past information is reflected in the market prices.
No form of technical analysis can aid investors

A

Weak Form Efficiency

36
Q

All publicly available information is reflected in the current prices.
Investors cannot utilize either technical or fundamental analysis.

A

Semi Strong Form Efficiency

37
Q

All public and private information, inclusive of insider trading, is reflected in market prices.
No type of info can give an investor an advantage on the market.

A

Strong Form Efficiency

38
Q

Asset prices do not accurately reflect its true value which may occur for several reasons.

A

Inefficient market/Market Inefficiency

39
Q

Reasons for Market Inefficiencies

A

(1) Market Anomalies
(2) Momentum Effect
(3) Small Cap
(4) Insider Trading

40
Q

Distortions on returns that contradict the efficient market hypothesis.

A

Market anomalies

41
Q

Suggests that stocks that have performed well in the past continue to perform well in the future and vice versa

A

Momentum effect

42
Q

Smaller companies tend to outperform larger companies over time.

A

Small cap

43
Q

Illegal practice of trading on the stock exchange to one’s own advantage

A

Insider trading

44
Q

Phenomena that undermine the efficiency of the markets

A

(1) Behavioral biases
(2) Market bubbles and crashes
(3) Information asymmetry
(4) Market manipulation

45
Q

Has some characteristics of a developed market, but does not fully meet its standards.

A

Emerging markets

46
Q

Risk of Emerging markets

A
  • political instability
  • domestic infrastructure problems
  • currency volatility
  • illiquid equity
47
Q

Tendency to favor action over inaction, often to our benefit

A

Bias in action or Action bias

48
Q

Behavioral biases in action

A

(1) Myopic loss aversion
(2) Recency bias
(3) Regret aversion

49
Q

Combination of loss aversion and mental accounting

A

Myopic loss aversion

50
Q

Incorrecly believe thag recent events will occur again soon

A

Recency bias

51
Q

Make emotional, rather than logical decisions in order to avoid feeling regret

A

Regret aversion

52
Q

Selling or disposing of an asset or security.

A

Disposition

53
Q

Other types of disposition

A
  • transfer
  • assignments
54
Q

Business also dispose assets

A

Business disposition

55
Q

Selling off subsidiary business interest or investments

A

Divestiture

56
Q

Types of divestiture

A

(1) Spin off
(2) Split up
(3) Split off

57
Q

Creation of new independent company byvselling or distributing new shares of its existing business.

A

Spin off

58
Q

Segmenting into two or more separately run entities

A

Split up

59
Q

Corporate reorganization method

A

Split off

60
Q

Business disposition significance is determined by:

A

(1) investment test
(2) income test

61
Q

Investor behavior in which they have a tendency to sell winning investments too early before realizing all potential gains.

A

Disposition effect

Behavioral Finance (3 decks)

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