readings 3

Question 1

Diversifiable risk

Answer 1

Also called unsystematic risk, a risk that can be eliminated without the loss of expected return by holding a portfolio of securities.

Question 2

Present value (PV)

Answer 2

The current value of a future amount, calculated by discounting the future value back at a known discount or interest rate for a specified period of time.

Question 3

Portfolio

Answer 3

A collection of financial investments, such as stocks, bonds, mutual funds, certificates of deposit, etc.

Question 4

Non-diversifiable risk

Answer 4

Risk that cannot be eliminated by simply holding a portfolio of securities; also known as systematic risk.

Question 5

Volatility

Answer 5

Fluctuations in a security or index over time.

Question 6

Discount rate

Answer 6

The interest rate used to determine the present value of future cash inflows; may derive from several sources, such as stated contract rates, costs to borrow, or expected rates of return on investments.

Question 7

Discounting

Answer 7

The process that takes a future value of money and equates it to present dollar value terms.

Question 8

Growth rate

Answer 8

The percentage increase of a specific variable within a specific time period; synonymous with interest rate in the context of the time value of money.

Question 9

Time value of money (TVM)

Answer 9

The concept that an amount of money is worth more today than the exact same amount of money at some point in the future.

Question 10

Political risk

Answer 10

The risk of local, state, or national governments “changing the rules” and disrupting firm cash flows.

Question 11

Future value (FV)

Answer 11

The value that a current amount will grow to at a given interest rate over a given period of time.