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Finance > Investments Ch 5-8 > Flashcards

Investments Ch 5-8 Flashcards

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1
Q

Nominal Interest Rate

A

The interest rate in terms of nominal (not adjusted for purchasing power) dollars.

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2
Q

Real Interest Rate

A

The growth rate of purchasing power; the excess of the interest rate over the inflation rate.

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3
Q

Effective Annual Rate (EAR)

A

Interest rate annualized using compound rather than simple interest.

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4
Q

Annual Percentage Rate (APR)

A

Interest rate is annualized using simple rather than compound interest.

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5
Q

Dividend Yield

A

The rate of return provided by a stock’s dividend payments.

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6
Q

Risk-Free Rate

A

The interest rate that can be earned with certainty by leaving money in risk-free assets such as T-bills, money market funds, or the bank.

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7
Q

Risk Premium

A

An expected return in excess of that on risk-free securities. The premium provides compensation for the risk of an investment.

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8
Q

Excess Return

A

Rate of return in excess of the risk-free rate.

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9
Q

Risk-Averse

A

A risk-averse investor will consider risky portfolios only if they provide compensation for risk via a risk premium.

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10
Q

Risk-Neutral

A

A risk-neutral investor finds the level of risk irrelevant and considers only the expected return of risk prospects.

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11
Q

Risk lover

A

A risk lover is willing to accept lower expected return on prospects with higher amounts of risk.

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12
Q

Value At Risk (VaR)

A

Measure of downside risk. The loss that will be incurred in the event of an extreme adverse price change with some given, typically low, probability.

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13
Q

Kurtosis

A

Indicates probability of observing extreme high or low values.

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14
Q

Expected Shortfall (ES)
or
Conditional Tail Expectation (CTE)

A

The expected loss on a security conditional on returns being in the left tail of the probability distribution.

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15
Q

Sharpe Ratio

A

Reward-to-volatility ratio; ratio of portfolio excess return to standard deviation.

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16
Q

Sortino Ratio

A

Excess return divided by lower partial standard deviation.

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17
Q

Fair Game

A

An investment prospect that has a zero risk premium.

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18
Q

Utility

A

The measure of welfare or satisfaction of an investor.

19
Q

Certainty Equivalent Rate

A

The rate that a risk-free investment would need to offer to provide the same utility score as the risky portfolio.

20
Q

Mean-Variance Criterion

A

The selection of portfolios based on the means and variances of their returns. The choice of the higher expected return portfolio for a given level of variance or the lower variance portfolio for a given expected return.

21
Q

Indifference Curve

A

A curve connecting all portfolios with the same utility according to their means and standard deviations.

22
Q

Capital Allocation Decision

A

The allocation of invested funds between risk-free assets versus the risky portfolio.

23
Q

Capital Allocation Line (CAL)

A

A graph showing all feasible risk-return combinations of a risky and risk-free asset.

24
Q

Capital Market Line (CML)

A

A capital allocation line provided by the market-index portfolio.

25
Q

Diversification

A

Spreading a portfolio over many investments to avoid excessive exposure to any one source of risk.

26
Q

Insurance Principle

A

The law of averages. The average outcome for many independent trials of an experiment will approach the expected value of the experiment.

27
Q

Systematic Risk,
Market Risk,
or
Nondiversifiable Risk

A

Risk factors common to the whole economy.

28
Q 
Nonsystematic risk,
Unique Risk,
Firm-Specific Risk,
or
Diversifiable Risk
A

Risk factors that can be eliminated by diversification.

29
Q

Portfolio Opportunity Set

A

The expected return-standard deviation pairs of all portfolios that can be constructed from a given set of assets.

30
Q

Optimal Risky Portfolio

A

An investor’s best combination of risky assets to be mixed with safe assets to form the complete portfolio.

31
Q

Minimum-Variance Frontier

A

Graph of the lowest possible portfolio variance that is attainable for a given portfolio expected return.

32
Q

Efficient Frontier of Risky Assets

A

The portion of the minimum-variance frontier that lies above the global minimum-variance portfolio.

33
Q

Input List

A

List of parameters such as expected returns, variances, and covariances necessary to determine the optimal risky portfolio.

34
Q

Separation Property

A

The property that portfolio choice can be separated into two independent tasks: (1) determination of the optimal risky portfolio, which is a purely technical problem, and (2) the personal choice of the best mix of the risky portfolio and the risk-free asset.

35
Q

Risk Sharing

A

Sharing the risk of a portfolio of given size among many investors.

36
Q

Risk Pooling

A

Investing the portfolio in many risky assets.

37
Q

Single-Factor Model

A

A model of security returns that acknowledges only one common factor. A factor-model is a way of decomposing the factors that influence a security’s rate of return into common and firm-specific influences.

38
Q

Single-Index Model

A

A model of stock returns that decomposes influences on returns into a systematic factor, as measured by the return on a broad market index, and firm-specific factors.

39
Q

Regression Equation

A

An equation that describes the average relationship between a dependent variable and a set of explanatory variables.

40
Q

Residuals

A

Parts of stock returns not explained by the explanatory variables (the market-index return). They measure the impact of firm-specific events during a particular period.

41
Q

Security Characteristic Line

A

A plot of the excess return on a security over the risk-free rate as a function of the excess return on the market.

42
Q

Scatter Diagram

A

Plot of returns of one security versus returns of another security. Each point represents on pair of returns for a given holding period.

43
Q

Information Ratio

A

Ratio of alpha to the standard deviation of diversifiable risk

44
Q

Tracking Portfolio

A

A portfolio constructed to have returns with the highest possible correlation with a systematic risk factor.

Finance (8 decks)

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