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29 Cards in this Set
- Front
- Back
What is the single most important fact to remember about investments?
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The fact that risk and return go together.
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Return on investment is....
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the gain or loss on an investment of any asset.
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What are two componets to return on investment?
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1. you may receive some cash while you own the investment
2. The value of the asset may change. |
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What is a Capital gain or loss?
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When the value of the asset you purchased changes.
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What is another term for capital loss?
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negative capital gain
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What is the total dollar return?
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total dollar return= dividen income + capital gain (or loss)
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What does "realize" the gain refer to....
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you hold onto the stock and don't sell it when the value changed.
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If you don't realize the capital gain on a stock do you include it as part of your return? Why?
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Yes, because you could have converted it to cash.
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Why is it more convienient to summarize information about returns in percentages than in dollars?
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your return doesn't depend on how much you invested.
How much you get for each dollar you invest! |
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What is the dividend yield? Formula...?
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The annual stock dividend as a % of the initial stock price.
Dividend yield= Dt+1/Pt |
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What is the capital gains yield?
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The change in stock price as a percentage of the initial stock price.
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Capital Gains yield formula....
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=(Pt+1-Pt)/Pt
=capital gain / begginning price |
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what is the Total percent return?
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The return on investment as a percentage that accounts for all cash flows and capital gains or losses.
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Total percent return formula....
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=dividend yield + capital gains yield
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What is a company's total market capitalization equal to....
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to its stock price multiplied by the number of shares of stock. The total value of the company's stock. often called market "cap"
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"large-cap" stocks...
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the stocks of large companies
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"small-cap" stocks....
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the stocks of small companies
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What is the CPI?
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The Consumer Price Index is a standard measure of consumer goods price inflation
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How do we calculate average returns on different investments?
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add up the yearly returns and divide by the number of years.
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Why do we use the rate on US Treasury Bills as the benchmark for the risk free rate?
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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.
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What is risk free rate?
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the rate of return on a riskless investment.
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What is risk premium?
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The extra return on a risky asset over the risk-free rate; the reward for bearing risk.
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_____ assets, on average, earn a ______ premium.
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risky assets, on average, earn a risk premium.
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What is the first lesson from financial market history?
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risky assets, on average, earn a risk premium.
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What is returns volatility?
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how much the return differs from this average in a typical year.
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Variance?
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a common measure of volatility
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Standard deviation?
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the square root of the variance
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How do we calculate Variance (sigma squared)?
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VAR(R)=[(r1+R)^2 + (r2+R)^2 + ...+ (rn+R)^2] / (N-1)
R=average return rn=yearly return |
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How do we calculate the standard deviation (sigma)?
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SD(R)= √Variance
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