Investment

Question 1

To invest

Answer 1

To invest is to allocate money in the expectation of some benefit/return in the future.

Question 2

To invest in other words

Answer 2

In other words, to invest means owning an asset or an item with the goal of generating income from the investment or the appreciation of your investment which is an increase in the value of the asset over a period of time.

Question 3

the formal definition of investment

Answer 3

the current commitment for a period of time, in order to derive future payments.
that will compensate for: the time the funds are committed,
The expected rate of inflation.
uncertainty of future flow of funds.

Question 4

Reason for investing

Answer 4

individual can trade-off present consumption for larger future consumption.

Question 5

Pure rate of interest

Answer 5

it is an exchange rate between future consumption and present consumption. market force determines this rate.

Question 6

Pure time value of money

Answer 6

the fact that people are willing to pay more for the money borrows and lenders desire to receive a surplus on their savings (money investing) gives rise to the value of time referred to as a pure value of money.

Question 7

Market forces

Answer 7

the actions of buyers and sellers that cause the prices of goods and services to change without being controlled by the government: the economic forces of supply and demand The value of these commodities is determined by market forces.

Question 8

There are four major factors that cause both long-term trends and short-term fluctuations.

Answer 8

These factors are government, international transactions, speculation and expectation, and supply and demand

Question 9

inflation

Answer 9

is the future payment will be diminished in value because of inflation?
Then the investor will demand an interest rate higher than the pure time value of money to also cover the respected inflation expenses

Question 10

uncertainty

Answer 10

if the future payment for the investment is not certain, the investor will demand an interest rate that exceeds the pure time value of money plus the inflation rate to cover the investment risk.

Question 11

Required rate of return (RRR)

Answer 11

the minimum rate of return an investor requires on an investment, including the pure rate of interest, and all other risk premiums to compensate the investors for taking the investment risk.

Question 12

expected rate of return

Answer 12

investors may expect to receive a rate of return different from the required rate of return. which is called expected rate of return. What would occur if these two rate of return are not the same?

Question 13

holding period return (HPR)

Answer 13

ending value of investment / begging value of investment

Question 14

Holding Period Yield (HPY)

Answer 14

HPR - 1

Question 15

Annual HPR

Answer 15

HPR**1/n

Question 16

Annual HPY

Answer 16

Annual HPR - 1 = HPR**1/n - 1

Question 17

computing means historical returns

Answer 17

for measure mean annual return in the condition when we have a set of annual return for an investment

Question 18

computing means historical returns

Answer 18

Arithmetic mean return (not calculating flactuation)

Geometric mean return (consider fluctuation also)

Question 19

Arithmic mean return

Answer 19

sigma HPY/n

Question 20

Geometric mean return

Answer 20

Pnumber*HPR**1/n - 1

Question 21

AM and GM comparison

Answer 21

when rates of return are the same for all years AM and GM are equal.
When the rate of return not the same for all years Am always higher than GM.
AM best for expected value for an individual year
GM best measure of an asset long term performance

Question 22

portfolio HPY

Answer 22

the mean historical rate of return for a portfolio of investment measure as the weighted average of HPYs for the individual investment for the portfolio, or the overall change in the value of the original portfolio.

Question 23

Ending market value (EMV)

Answer 23

is the total value of each various class of securities held in an investment account at the end of the reporting period. For example, an account with a number of investments including stocks, bonds, options, and mutual funds will have the EMV calculated for each type of investment.

Question 24

Beginning market value (BMV)

Answer 24

is the valuation at which a property or investment should exchange at the date of origination, and then at the beginning of each subsequent period. The beginning market value at the start of every period is thus equal to the ending market value of the previous period.

Question 25

Risk

Answer 25

refers to the uncertainty of the future outcomes of an investment
1. there are many possible returns due to an uncertainty
2. possibility is the likelihood of outcomes
3. the sum of probability of all possible outcomes is equal to 1.00 (expected return)
Sigma Pi*Ri
possibility * possible return

Question 26

measure the risk should reflect the uncertainty

Answer 26

because risk refers to the uncertainty on an investment

Question 27

The common measure of risk

Answer 27

the variance of the rate of return distribution of an investment

Question 28

Expected return

Answer 28

the sum of probability of all possible outcomes is equal to 1.00
Sigma Pi*Ri
possibility * possible return

Question 29

measuring the risk of expected return

the variance measure

Answer 29

Sigma probability*[Ri - E(Ri)]

Ri= possible return , E(Ri): expected return

Question 30

Standard deviation measure

Answer 30

the square root of variance measure

Question 31

Coefficient of variation (CV)

Answer 31

measure the risk per units of expected return and is a relative measure of risk

Question 32

Coefficient of variation (CV) formula

Answer 32

Standard deviation measure / Expected rate of return

Question 33

Risk of the historical rate of return calculation

Answer 33

variance of the series = sigma [HPY - E(HPY)]**2 / n