FIN 310 Final Study Guide UPDATED ACTUAL Questions And Correct Answers
C
Terms in this set (51)
Investment and possible options Investment - put money in an asset that generates value or a return
Call option - gives you the option to buy the underlying asset at a set price on or
before the option's maturity date
Put option - gives you the option to sell the underlying asset at a set price on or
before the option's maturity date
Total return on stock investment Capital gain or loss - an investment can go up or down in value
Calculating returns on an investment Rate of return = (ending value - beginning value) + income return / (beginning
value)
ex. If a stock climbs from $55 to $45 per share over 1 year, while paying $3 in
dividends.. (55-45) +
Annual rate of return = ((ending value - beginning value) + income return /
(beginning value)) * (1/N)
ex. If over a 3-year period a stock climbs from $45-$68 per share and pays a total
of $7 in dividends over 3 years, its average annual rate of return is..
((68-45) +)) * (⅓) = 22.2%
Nominal rate of return rate of return earned on an investment without any adjustment for inflation
Real rate of return simply the nominal rate of return after you've taken out inflation
Source of risk in the risk-return trade off Interest rate risk - higher the interest, the less value of bond,
Inflation risk - rising prices changes anticipated inflation
Business risk - good and bad management
Financial risk - use of debt by firms
Liquidity risk - inability to liquidate quickly
Market risk - movement of market (bull - up and bear - down)
Political and regulatory risk - tax or legal changes
Exchange rate risk - variability in earnings resulting from changes in exchange
rates
Call risk - callable bondholders that a bond may be called away from them
before maturity
, Diversification works by allowing the extremely good and bad returns to cancel each other out,
resulting in a reduction of the total variability or risk without affecting expected
return
Risk diversification portfolio - combined holdings of all your investments
Systematic risk - risk that can't be eliminated
Unsystematic risk - risk that can be eliminated
asset allocation strategy Asset allocation - an investment term that deals with how your money should be
divided among stocks, bonds, and other investments
Investors should be well diversified with holding in several different classes of
investments
holdings should be diversified with different classes of investments
no two investors should allocate the same way - risks treated different
investing in common stock is more appropriate the longer the time horizon is
The less you have saved, the less secure your job is, the less risk you should take
when you make your asset allocation decision
factors impacting your asset allocation decision time horizon - more time until you need the money, the more risk you can afford
to take
capacity for risk and financial situation
risk tolerance
efficient markets concerns the speed at which new information is reflected in prices
The more the efficient the market, the faster prices react to new information
If the stock market were a perfectly efficient market, security prices would equal
their true value at all times
Security market a place where you can buy or sell securities
Securities - stocks and bonds - are first bought when they are issued by
corporations as a means of raising money
Primary market market in which new, as opposed to previously issued, securities (stocks and
bonds) are traded
two types: initial public offerings and seasoned new issues
C
Terms in this set (51)
Investment and possible options Investment - put money in an asset that generates value or a return
Call option - gives you the option to buy the underlying asset at a set price on or
before the option's maturity date
Put option - gives you the option to sell the underlying asset at a set price on or
before the option's maturity date
Total return on stock investment Capital gain or loss - an investment can go up or down in value
Calculating returns on an investment Rate of return = (ending value - beginning value) + income return / (beginning
value)
ex. If a stock climbs from $55 to $45 per share over 1 year, while paying $3 in
dividends.. (55-45) +
Annual rate of return = ((ending value - beginning value) + income return /
(beginning value)) * (1/N)
ex. If over a 3-year period a stock climbs from $45-$68 per share and pays a total
of $7 in dividends over 3 years, its average annual rate of return is..
((68-45) +)) * (⅓) = 22.2%
Nominal rate of return rate of return earned on an investment without any adjustment for inflation
Real rate of return simply the nominal rate of return after you've taken out inflation
Source of risk in the risk-return trade off Interest rate risk - higher the interest, the less value of bond,
Inflation risk - rising prices changes anticipated inflation
Business risk - good and bad management
Financial risk - use of debt by firms
Liquidity risk - inability to liquidate quickly
Market risk - movement of market (bull - up and bear - down)
Political and regulatory risk - tax or legal changes
Exchange rate risk - variability in earnings resulting from changes in exchange
rates
Call risk - callable bondholders that a bond may be called away from them
before maturity
, Diversification works by allowing the extremely good and bad returns to cancel each other out,
resulting in a reduction of the total variability or risk without affecting expected
return
Risk diversification portfolio - combined holdings of all your investments
Systematic risk - risk that can't be eliminated
Unsystematic risk - risk that can be eliminated
asset allocation strategy Asset allocation - an investment term that deals with how your money should be
divided among stocks, bonds, and other investments
Investors should be well diversified with holding in several different classes of
investments
holdings should be diversified with different classes of investments
no two investors should allocate the same way - risks treated different
investing in common stock is more appropriate the longer the time horizon is
The less you have saved, the less secure your job is, the less risk you should take
when you make your asset allocation decision
factors impacting your asset allocation decision time horizon - more time until you need the money, the more risk you can afford
to take
capacity for risk and financial situation
risk tolerance
efficient markets concerns the speed at which new information is reflected in prices
The more the efficient the market, the faster prices react to new information
If the stock market were a perfectly efficient market, security prices would equal
their true value at all times
Security market a place where you can buy or sell securities
Securities - stocks and bonds - are first bought when they are issued by
corporations as a means of raising money
Primary market market in which new, as opposed to previously issued, securities (stocks and
bonds) are traded
two types: initial public offerings and seasoned new issues
