Risk Flashcards
Initial Margin
funds or interest earning securities deposit money provide capital to absorb losses
Maintenance Margin
level at which the account must be replenished or position reduced
Margin call
when the maintenance margin is reached, broker will ask for additional margin funds
Share Price = $100
60% initial margin
40% maintenance margin
100 shares purchased
Stock price falls to $70 per share. Which is the margin percentage?
3000/7000 = 43%
Share Price = $100
60% initial margin
30% maintenance margin
100 shares purchased
How far can the stock price fall before a margin call?
57.14
Risk defined
possibility of loss or something bad will happen
Possibilities that an expected outcome will not be achieved
Risk calculation
probability of loss times the expected loss
Uncertainty defined
not having confidence in something
not knowing or being able to accurately predict future outcomes
Purchasing power risk
the risk that the value of a unit of currency or asset held will decline in relation to whit it will buy today
Purchasing power risk application
advisors make it priority to explain the long term dangers of inflation
Geo political investment risk
The risk that changes in the political environment may impact an economy or its financial markets, leading to poor performance
Sovereign Risk
the risk that the central bank of a county will change activities, polls or regulations which will negatively impact conditions
Reinvestment risk
risk than an investor will have to reinvest the proceeds from an asset (bond) at a lower rate than originally invested
usually more prevalent when rates are declining
Fair game
a risky investment with a risk premium of zero (Gamble)
Risk averse investor
rejects investments that offer fair games or worse; willing to consider risky investments only if return is above risk free return
