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29 Cards in this Set
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 Back
What is the single most important fact to remember about investments?

The fact that risk and return go together.


Return on investment is....

the gain or loss on an investment of any asset.


What are two componets to return on investment?

1. you may receive some cash while you own the investment
2. The value of the asset may change. 

What is a Capital gain or loss?

When the value of the asset you purchased changes.


What is another term for capital loss?

negative capital gain


What is the total dollar return?

total dollar return= dividen income + capital gain (or loss)


What does "realize" the gain refer to....

you hold onto the stock and don't sell it when the value changed.


If you don't realize the capital gain on a stock do you include it as part of your return? Why?

Yes, because you could have converted it to cash.


Why is it more convienient to summarize information about returns in percentages than in dollars?

your return doesn't depend on how much you invested.
How much you get for each dollar you invest! 

What is the dividend yield? Formula...?

The annual stock dividend as a % of the initial stock price.
Dividend yield= Dt+1/Pt 

What is the capital gains yield?

The change in stock price as a percentage of the initial stock price.


Capital Gains yield formula....

=(Pt+1Pt)/Pt
=capital gain / begginning price 

what is the Total percent return?

The return on investment as a percentage that accounts for all cash flows and capital gains or losses.


Total percent return formula....

=dividend yield + capital gains yield


What is a company's total market capitalization equal to....

to its stock price multiplied by the number of shares of stock. The total value of the company's stock. often called market "cap"


"largecap" stocks...

the stocks of large companies


"smallcap" stocks....

the stocks of small companies


What is the CPI?

The Consumer Price Index is a standard measure of consumer goods price inflation


How do we calculate average returns on different investments?

add up the yearly returns and divide by the number of years.


Why do we use the rate on US Treasury Bills as the benchmark for the risk free rate?

They have ashort investment life and because the government can always raise taxes or print money to pay its bills, there is essentially no risk with buying them.


What is risk free rate?

the rate of return on a riskless investment.


What is risk premium?

The extra return on a risky asset over the riskfree rate; the reward for bearing risk.


_____ assets, on average, earn a ______ premium.

risky assets, on average, earn a risk premium.


What is the first lesson from financial market history?

risky assets, on average, earn a risk premium.


What is returns volatility?

how much the return differs from this average in a typical year.


Variance?

a common measure of volatility


Standard deviation?

the square root of the variance


How do we calculate Variance (sigma squared)?

VAR(R)=[(r1+R)^2 + (r2+R)^2 + ...+ (rn+R)^2] / (N1)
R=average return rn=yearly return 

How do we calculate the standard deviation (sigma)?

SD(R)= √Variance
