Investments Ch 4 Flashcards
Uncertainty that the realized return will not equal the expected return
Risk
Non-diversifiable risk. This type of risk is inescapable, because no matter how well an investor diversifies, the risk of the overall market cannot be avoided.
Systematic risk
Systematic risks can be remembered using the acronym PRIME.
Purchasing power risk
Reinvestment rate risk
Interest rate risk
Market risk
Exchange rate risk
The loss of purchasing power through inflation
Purchasing power risk
The risk that proceeds available for reinvestment must be invested at a lower interest rate than the instrument that generated the proceeds
Reinvestment rate risk
The risk that a change in interest rates will cause the market value of the fixed income security to fall
Interest-rate risk
The risk of the overall market
Market risk
The downside momentum of the market can impact prices of otherwise strong stocks.
The risk associated with changes in the value of currencies
Exchange rate risk
The uncertainty of returns caused by the possibility of major change in the political or economic environment of a country. Closely related to exchange risk.
Country risk, also called political risk
This type of risk can be largely eliminated. Examples include business risk, and financial risk.
Unsystematic risk, aka non-systematic, or diversifiable risk
Risk related to the nature of a firm’s operation
Business risk
Risk related to how the firm finances its assets
Financial risk, also known as credit, risk, or default risk
By diversifying with overseas investments, investors achieve risk reduction because of ________ of foreign securities with US securities.
lower correlation
The uncertainty of the price at which one country’s currency can be converted in another’s.
Exchange rate risk
The lowering of the value of a currency relative to the currencies of one or all other nations. Can also result from a rise in value of other currencies relative to the currency of a particular country.
Devaluation
Generally means an increase in the currency’s value
Revaluation
_____ implies that a security or commodity can be sold or purchased without delay and without substantial change in price absent new information. Describes both transaction speed and stability of price.
Liquidity
________ refers only to the speed of a transaction. A necessary, but not the only, condition for liquidity.
Marketability
Savings/checking/money market accounts and mutual funds are _________ rather than marketable.
Redeemed
REITs, closed-end funds, ETFs, and brokered CDs are considered _________.
Marketable.
The speed and ease with which a security may be bought or sold regardless of price fluctuations
Marketability
The middle point between two extremes.
Mean
The sum of each of the values being considered divided by the total number of values
arithmetic mean
If you are considering the possible range of returns (in percentage) for a portfolio, a _______distribution applies.
normal
If you are considering the possible ending value (in $) as of some future date, a _______ distribution applies because an unleaveraged portfolio can never be worth less than zero.
lognormal
_______ and ________ both express the extent to which the movements of stocks/securities in the same portfolio are similar or not.
Correlation coefficient / covariance
Considers an infinite possibility of outcomes. Measures the extent to which two stocks are related to each other or how the price movements of one of the securities is related to the price movement of the second security.
Covariance
Falls within a specific range. A standardized version of the covariance where the values can range from +1 (perfectly positively correlated) to -1 (perfectly negatively correlated).
Correlation coefficient
To determine the correlation coefficient of the returns in a portfolio on the exam, the _________ of each security’s return and the _________ between the returns on the securities are needed.
standard deviation / covariance
Perfectly positively correlated securities have a relationship of ______.
+1.0
The securities move exactly together, and there is no reduction of portfolio risk.
Perfectly negatively correlated securities have a value of _______.
-1.0
The securities move exactly opposite to one another. Risk is completely eliminated. The portfolio’s standard deviation is 0.
A measure of relative variability used to compare investments with widely var ting rates of return and standard deviations.
Coefficient of Variation
The standard deviation divided by the average or mean return
Coefficient of Variation
Measures variability of returns used in a non diversified portfolio and is a measure of total risk.
Standard deviation
Measures volatility of returns used in a diversified portfolio and is a measure of systematic risk
Beta
The risk quantified by __________ includes variability, non diversified portfolio, total risk.
Standard Deviation
In a normal (bell-shaped) distribution, _____ of all results will fall within +- one standard deviation of the average or mean, _____ will fall within two standard deviations, and ____ will fall within three standard deviations.
68% / 95% / 99%
When the correlation coefficient of an equally weighted portfolio is less than 1, the risk must be _______ the average risk.
lower than
The greater the beta coefficient, the _______ the systematic risk (nondiversifiable) associated with the individual stock.
greater the
Equals (correlation coefficient * standard deviation of stock) / Standard deviation of the market
Beta
A _________ is the weighted average of each security in the portfolio multiplied by its beta.
portfolio’s beta
