Module 10 Flashcards
capital gain
$ amnt by which financial instrument increases in value over time
capital loss
$ amnt by which financial instrument decreases in value over time
total dollar return =
capital gain or loss + dividend income
rate of return
allows us to compare investments w/ diff absolute values
probability distributions
can help in determining risk
matches probability to associated outcomes
can be discrete or continuous
risk neutral
indifferent btwn sure income and uncertain income w/ same expected value
may be willing to take risk if payoff higher
risk averse
prefer sure income over uncertain income w/ same or even higher expected value
willing to pay risk premium
requires compensation to bear extra risk
risk lowing
prefer uncertain income over sure income
sensitivity analysis
approach for assessing risk that uses several possible returns
obtain sense of variability among outcomes
range
diff btwn most pessimistic outcome and most optimistic outcome
standard deviation
measure of dispersion or variability
large SD
more dispersion in outcomes
confidence interval
used to identify range of most likely outcomes
coefficient of variation
measure of relative dispersion
used to compare risk of assets w/ differing expected returns
lower CV
less dispersion and more stability and less risk
