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Investment Analysis > Week 1 > Flashcards

Week 1 Flashcards

1
Q

Investment (definition)

A

The process of committing funds to one or more asset that will be held over some future periods with the expectation of wealth generation

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2
Q

Expected return (definition)

A

The anticipated return expected by investors over some future holding period

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3
Q

Realised return (definition)

A

The actual return on an investment over some previous period

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4
Q

Risk (definition)

A

The chance that the realised return on an investment will differ from the expected return

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5
Q

Risk tolerence (definition)

A

The extent of risk that an investor is willing to undertake

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6
Q

Risk-return tradeoff (definition)

A

The principle that the higher the risk the higher the reward

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7
Q

Risk and return have what type of relationship?

A

Positive

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8
Q

What is an example of a risk free security?

A

Government bonds

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9
Q

Direct investment (definition)

A

Where investors buy and sell securities themselves, typically through brokerage accounts

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10
Q

Indirect investment (definition)

A

Where investors buy and sell shares of investment companies which, in turn, hold portfolio of securitites

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11
Q

Example of a non-marketable financial asset

A

Savings account

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12
Q

Example of a marketable financial asset

A

Stocks and bonds

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13
Q

Money market security (definition)

A

Securities with an original maturity of 1 year or less. Highly-liquid and considered very safe. Issued by governments or private firms

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14
Q

Capital market securitites

A

Securities with more than 1 year in original maturity

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15
Q

What are the four types of bonds

A
  • corporate bonds-issued by companys for debt financing
  • municipal bonds
  • government bonds
  • agency bonds
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16
Q

Why might a company issue bonds rather than get a bank loan?

A

Bond market offers more favourable terms and has lower interest rates

17
Q

Preferred stock (definition)

A

Shares of a company with dividends that are paid out before common stock dividends are issued. The dividend is fixed. Typically do not hold voting rights

18
Q

Common stock (definition)

A

Equity security representing ownership. ‘Residual claimants’ on income and assets and have no promise from the company to recieve dividends. Typically have voting rights

19
Q

Book value (definition)

A

The accoutning value of the equity as shown on the balance sheet

20
Q

Aggregate market value (definiton and how to calculate)

A

Measures the total value of all outstanding equity shares. Calculated by multiplying price per share with the cumber of shares

21
Q

Dividend yield (definition and how to calculate)

A

The percentage of a compnays share price that it pays out in dividends. Calculated by divinding the dividend per shar with the stock price

22
Q

Payout ratio (definition and how to calculate)

A

Percentage of net income a firm pays to its stock holders. Dividing dividends with net income

23
Q

P/E ratio (definiton)

A

Ratio of stock price to historical or estimated earnings. Basically shows how much the market pays for $1 of earnings

24
Q

Stock dividend (definition)

A

A payment by the corporation in shares of stock rather than cash

25
Q

Stock split (definition)

A

A corporate action that divides each share into multiple shares

26
Q

Why do companys split stock?

A
  • preffered trading range for stock is between $10-$100. Less attractive to investors if outside that range
  • conveys positive information about the firms performance. Unsuccesful companys wouldn’t split stock
  • generates publicity
27
Q

What is a derivative?

A

Instruments whos value is derived based on prices of other assets

28
Q

Options (definition)

A

Financial derivative that gives the buyer the right to buy and sell the underlying asset at a stated prices within a specififed period

29
Q

Futures (definiton)

A

Financial derivative that obligate the parties to transact an asset at a predetermined future date and price

30
Q

Forwards (definition)

A

A financial derivavtive that is an agreement between two parties to undertake an exchange at an agreed future date at a price agreed now

31
Q

Swaps (definition)

A

A derivative contract in which one party exchanges one stream of cash flow for another from another party

32
Q

Hedgers-what they use derivatives for example

A

Wheat farmer and buyer. Agree to a fixed price to buy wheat as the price fluctuates.
Goal to reduce potential loss

33
Q

Speculators

A

Speculators trade based on their educated guesses on where they believe the market is headed. For example, if a speculator thinks that a stock is overpriced, they may sell short the stock and wait for the price to decline, at which point it can be bought back for a profit.

34
Q

Primary market

A

Market for new issues of securities, typically through investment bankers. Raising captial for firms

35
Q

Secondary market

A

Buying and selling exisiting assets. Such as LSE and NYSE

Investment Analysis (3 decks)

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