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24 Cards in this Set
- Front
- Back
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Are reflected in the risk premium when determining a rate of return
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business risk, market risk, financial risk, liquidity
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is the degree of uncertainty associated with an investment’s earnings and the investment’s ability to pay the returns owed to investors.
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business risk
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Types of Investments Affected by business risk
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Common stocks
Preferred stocks |
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Examples of Business Risk
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Decline in company profits or market share
Bad management decisions |
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is the degree of uncertainty of payment resulting from a firm’s mix of debt and equity; the larger the proportion of debt financing, the greater this risk.
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financial risk
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Types of Investments Affected by financial risk
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Common stocks
Corporate bonds |
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examples of financial risk
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Company can’t get additional loans for growth or to fund operations
Company defaults on bonds |
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is the risk of not being able to liquidate an investment conveniently and at a reasonable price.
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liquidity risk
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Types of Investments Affected by liquidity risk
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Some small company stocks
Real estate |
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Examples of Liquidity Risk
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The price of a house has to be lowered for a quick sale
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is the risk of decline in investment returns because of market factors independent of the given investment.
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market risk
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Types of Investments Affected by market risk
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all investments
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examples of market risk
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Stock market decline on bad news
Political upheaval Changes in economic conditions |
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Market risk embodies what other types of risk?
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purchasing power risk, interest rate risk, and tax risk
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a drop of 5% or more in one of the major market indexes, like the Dow Jones Industrial Average (DJIA)
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routine decline
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a drop of 10% or more in one of the major market indexes
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correction
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a drop of 20% or more in one of the major market indexes
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bear market
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an offering of a new issue of stock to existing stockholders, who may purchase new shares in proportion to their current ownership
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rights offering
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when a company increases the number of shares outstanding by exchanging a specified number of new shares of stock for each outstanding share
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stock split
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-Usually done to lower the stock price to make it more attractive to investors
-Stockholders end up with more shares of stock that sells for a lower price -Investor with 200 shares in a 2-for-1 stock split would have 400 shares after the stock split -If the stock price was $100 before the split, the price would be near $50 after the split |
stock splits
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shares of stock that were originally sold by the company and have been repurchased by the company. Share repurchases are often called “buybacks.”
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treasury stock
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-Reduces the number of shares outstanding to public
-Companies buyback when they believe stock is undervalued and a good buy -Companies may try to raise undervalued stock price or prop up overvalued stock price -May be used for mergers, acquisitions or employee stock option plans |
treasury stock
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common stock issued in different classes, each of which offers different privileges and benefits to its holders
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classified common stock
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-Different shares may have different voting rights
-Often used to allow a relatively small group to control the voting of a publicly-trade company -Ford family owns “B” shares and other investors own “A” shares; Ford family controls 40% of Ford Motor Company -May have different dividend payout schedules |
classified common stock
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