Fin 327 Test#1

Front 1

Finance Definition of "Investments"

Back 1

buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold as an investment, real estate, or collectibles

Front 2

Name the 3 categories of financial assets

Back 2

1. Fixed Income Securities

2.Equity Securities

3.Derivative Securities

Front 3

Investors make what two types of decisions regarding portfolios?

Back 3

Asset Allocation Decision: choice among broad asset classes.

Security Allocation: choice of specific securities within each asset class.

Front 4

Holding Period Return formula

Back 4

Pend! + Dividends - Pbeg
1 all divided by Pbeg!

Front 5

Arithematic Average

Back 5

the sum of returns in each period divided by the number of periods.

Front 6

Geometric Average

Back 6

single per period return that gives the same cumulative performance as the actual sequence of returns.

Front 7

Effective Annual Rate (aka APR) fomula

Back 7

F=P(1+r)^t

Front 8

Risk

Back 8

is the chance that the actual return from an investment may differ from what is expected.

Front 9

If the standard deviation were higher you would expect lower or higher volatility on returns?

Back 9

higher

Front 10

Risk Premium

Back 10

the difference between expected rate of return and risk free.

Front 11

Dominance

Back 11

an investment alternative shows dominance over another if it offers the same expected return for less risk, or if the security has a higher expected return than another security of comparable risk.

Front 12

Law of one price

Back 12

Equivalent assets should sell for the same price.

Front 13

Direct Search Market

Back 13

Buyers and sellers seek each other directly and transact directly.

Front 14

Brokered Market

Back 14

A market where an intermediary offers search services to buyers and sellers.

Front 15

Dealer Market

Back 15

a market where traders specializing in particular commodities buy and sell assets for their own accounts.

Front 16

Auction Market

Back 16

A market where all traders in a good meet to buy or sell an asset.

Front 17

Money markets

Back 17

Include short-term highly liquid and relatively low risk debt instruments.

Front 18

Capital markets

Back 18

Include longer term relatively riskier securities.

Front 19

NASDAQ stands for?

Back 19

National Association of Securities Dealer Automated Quotations stock market

Front 20

Third Market

Back 20

Trading of exchange-listed securities among institutional investors and broker/dealers for their own accounts (not as agents for buyers and sellers).

Front 21

Fourth Market

Back 21

The direct trading of large blocks of securities between institutional investors through a computer network.

Front 22

Indexes

Back 22

are indicators of the day’s market activity

Front 23

Price Weighted Index

Back 23

is composed of a single share of each of the index components, regardless of the price of the share or the size of the underlying company

Front 24

Higher priced stocks carry more weight than lower priced stocks in an index TorF

Back 24

True

Front 25

Bond Market (3)

Back 25

Treasury Notes and Bonds
Municipal Bonds
Corporate Bonds

Front 26

Indenture

Back 26

is a written agreement between the corporate debt issuer and the lender

Front 27

Price & Yield have what kind of relationship?

Back 27

(required rates of return) have an inverse relationship
When yields get very high the value of the bond will be very low

When yields approach zero, the value of the bond approaches the sum of the cash flows

Front 28

Approximate YTM Formula

Back 28

(Avg. Annual Income) / (Avg. Price)

Front 29

Current or Annual Yield Formula

Back 29

Annual coupon divided by bond price

Front 30

Bond Risks

Back 30

Price Risks
Default risk
Interest rate risk

Convenience Risks
Call risk
Reinvestment rate risk
Marketability risk

Front 31

Equity Market

Back 31

Common Stock
Preferred Stock

Front 32

Shareholder's Rights

Back 32

the right to vote – one vote for each share held

the right to maintain ownership percentage

Front 33

Types of Dividends

Back 33

gifts, cash, stock, or property

Front 34

Spin Offs

Back 34

a parent firm divests itself of a subsidiary, and all the shares in the subsidiary are distributed proportionally to the shareholders in the parent

Front 35

Split Offs

Back 35

a parent firm divests itself of a subsidiary, and the shareholders must make a choice between keeping shares in the parent, or exchanging them for shares in the separated subsidiary

Front 36

The difference between a stock split and a stock dividend is

Back 36

With a stock split, the par value of the stock changes by the split factor.

With a stock dividend, the par value is not affected

Front 37

Categories of stocks

Back 37

blue chip

Income stocks are those that historically have a higher-than-average payout ratio.

Cyclical stock is one whose fortune is directly tied to the state of the overall national economy.

Defensive stock is largely immune to changes in the economy.

Growth stocks reinvest most of their earnings rather than paying them out as dividends and may be good candidates for above-average returns.

Speculative stock has a high probability of a loss and a small probability of a large profit.

Penny stocks refer to unusually risky, especially inexpensive shares.