Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
54 Cards in this Set
- Front
- Back
|
Two points for The Risk/Return Tradeoff |
There is a reward for bearing risk. The larger the risk, the larger the potential return |
|
|
Total Dollar Return = |
Income from investment + Capital gain (or loss) due to the change in price |
|
|
It is generally more intuitive to think in terms of... |
percentage rather than dollar returns |
|
|
Dividend Yield = |
income/beginning price |
|
|
Capital gain yield = |
(ending price - beginning price)/ending price |
|
|
Total percentage yield = |
dividend yield + capital gains yield |
|
|
Total percentage return is also equal to... |
total dollar return/beginning price |
|
|
Financial markets also provide us with information... |
about the returns that are required for various levels of risk |
|
|
Financial markets allow... |
companies, governments, and individuals to increase their utility/wealth. |
|
|
Savers have the ability to invest in financial assets so that they can... |
defer consumption and earn a return to compensate them for doing so. |
|
|
Borrowers have better access to available capital in the financial market so that... |
they can invest in productive assets |
|
|
Stock has... |
more risk than bonds. |
|
|
What are the least risky? |
U.S. Treasury Bill Returns (short-term government bonds) |
|
|
What is the downside to U.S. treasury bills? |
the average return is much lower. |
|
|
Small company stocks are... |
riskier |
|
|
What is the average return for large stocks? |
12.3% |
|
|
What is the average return for small stocks? |
17.1% |
|
|
What is the average return for long-term corporate bonds? |
6.2% |
|
|
What is the average return for long-term government bonds? |
5.8% |
|
|
What is the average return for U.S. treasury bills? |
3.8% |
|
|
the extra return earned for taking on risk |
risk premium |
|
|
Treasury bills are considered... |
to be risk free |
|
|
The risk premium is the... |
return over and above the risk-free rate |
|
|
What is the risk-free rate? |
the rate of a U.S. Treasury bill |
|
|
The mean always goes... |
at zero on the graph |
|
|
The variance and standard deviation measure the ___________ of asset returns |
volatility |
|
|
The greater the volatility... |
the greater the uncertainty. |
|
|
In finance, we use both variance and standard deviation to... |
measure RISK |
|
|
Historical Variance is a.. |
formula for looking back in time. |
|
|
Historical Variance = |
the sum of squared deviations from the mean/ (number of observations - 1) |
|
|
Standard deviation = |
the square root of the variance |
|
|
The sum of deviation from the mean should... |
equal to zero. |
|
|
Deviation from the mean |
actual return - average return |
|
|
Average return = |
the average of the 4 actual return numbers |
|
|
return earned in an average period over multiple periods |
arithmetic average |
|
|
average compound return per period over multiple periods |
geometric average |
|
|
How to calculate geometric average |
sum of (1+each mean) raised to the 1/t minus 1 |
|
|
An "efficient market" is where stock prices are... |
in equilibrium or are "fairly" priced |
|
|
If it is an efficient market, then you should not... |
be able to earn "abnormal" or "excess" returns |
|
|
Efficient markets __ ____ imply that investors cannot earn a positive return in the stock market. |
do not |
|
|
the price instantaneously adjusts to and fully reflects new information |
efficient market reaction |
|
|
the price partially adjusts to the new information |
delayed reaction |
|
|
the price over adjusts to the new information |
overreaction |
|
|
There are many investors... |
out there going research |
|
|
As new information comes to market, this information is... |
analyzed and trades are made based on this information |
|
|
Prices should reflect...
|
all available public information |
|
|
If investors stop researching stocks, then... |
the market will not be efficient |
|
|
There are three forms of the EMH: |
Strong-form efficiency Semi-strong Form efficiency Weak Form Efficiency |
|
|
Three points for strong-form efficiency |
prices reflect all information, including public and private investors could not earn abnormal returns regardless of the information they possessed empirical evidence indicates that markets are NOT strong form efficient and that insiders could earn abnormal rates |
|
|
Three points for semi-strong efficiency |
prices reflect all publicly available information, including trading information, annual reports, press releases, etc. investors cannot earn abnormal returns by trading on public information implies that fundamental analysis will not lead to abnormal returns |
|
|
Four points for weak form efficiency |
-prices reflect all past market information such as price and volume -investors cannot earn abnormal returns by trading on market information -implies that technical analysis will not lead to abnormal returns -Empirical evidence indicates that markets are generally weak form efficient |
|
|
Efficient markets do not mean... |
that you can't make money. |
|
|
They do mean that, on average, you will earn a return that is... |
appropriate for the risk undertaken and there is not a bias in prices that can be exploited to earn excess returns. |
|
|
Market efficiency will... |
not protect you from wrong choices if you do not diversify. |
