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21 Cards in this Set
- Front
- Back
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Time value of money
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The value of a dollar today will be higher than the value of than same dollar in the future
Ex:it is better to take lottery winnings NOW instead of a lump some bc of: 1.Inflation 2.The potential appreciation or income received from investing that dollar |
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Future Value
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Used to determine the value of a fixed sum of $ inv today at a specific int rate will be worth at a future rate taking COMPOUNDING into consideration
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Present Value
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Tells how much $ would have to be invested TODAY at a specific int rate to equal a fixed amt of $ needed in the future
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Discounted cash flow methedology
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-Is a means of evaluating the profitability/attractiveness of an inv
-Used to evaluate all types of sec, but it is MOST effective in comparing fixed-income securities, bc the inflows from the sec are known |
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IRR
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A means of calculating an inv PROJECTED ror to see if it will meet or exceed and investors min desired ror
-Rate is expressed as a PERCENTAGE -Considers the inflows and outflows of cash -Inflows are assumed to be reinvested at the inv IRR |
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NPV
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NPV=PV of future inflows - PV of future outflows
-Used to evaluate LT inv -Discount rate is the cost of capital(int rate paid to borrow the $) |
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T or F
IRR and NPV are similar, but IRR is expressed as a percentage rate, whereas NPV is a number |
T
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Standard deviation
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The margin of error of the projection
-Higher the SD,the less reliable the projection will be -Lower the SD, the MORE reliable the projection |
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Total return
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AKA Annualized return
-best measure of total return |
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Holding period rate of return(HPR)
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Similiar to total/annual return, but calculates specifically for the time period that the inv held an inv (CDs)`
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Risk free rate of return
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Return on a 3 month t-bill
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Risk premium
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The additional return an inv can expect for taking risk above and beyond risk-free inv
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Risk adjusted ROR
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Total Return - the risk free rate
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Realized ROR
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AKA realized profit or loss
-amount of profit or loss as a result of the sale of a security |
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Inflation adjusted
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AKA real return/real int rate
-Total return - Inflation rate |
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Expected return
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AKA mean return or expected annual return
-The weighted avg of the expected annual return for all components of the portfolio |
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Sharpe ratio
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ROR-Risk free return/SD
-Used to distinguigh how well the return of an asset compensates the inv for the amount of risk taken *The higher the ratio, the SAFER the strategy |
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Time weighted return
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Inflow and outflow are ELIMINATED
-used to compare a portfolio managers performance agaisnt a benchmark |
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Dolloar weighted return
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Measures the changes in the TOTAL DOLLAR VALUE of the portfolio to itrs return
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CAPM
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Measures the relationship between the expected risk and expected return
-says the reurn of an asset is equal to the risk free return + a risk premium |
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Modern Portolio theory
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Attempts to optimize expected return for the OVERALL portfolio for a given level of risk thru:
1.Security valuation 2.Asset allocation 3.Portfolio optimization 4.Performance Measurement |
