Ch 17 Flashcards
(32 cards)
Economic Investment
Either paying for new additions to the capital stock or new replacements for capital stock that has worn out
Financial Investment
Refers to either buying an asset or building an asset in the expectation of financial gain
Present Value
the present day value, or worth, of returns, or costs that are expected to arrive in the future
Compound Interest
describes how quickly an investment increases in value when interest is paid, or compounded, not only on the original amount invested buy also on all interest payments that have been previously paid
Stocks
ownership shares in a corporation
Limited Liability Rule
limits the risks involved in investing in corporations and encourage investors to invest in stocks by capping their potential losses at the amount they paid for their shares
Capital Gains
Selling shares in the corporation for more money than they paid
Dividends
equal shares of the corporations profits
Bankrupt
they are unable to make timely payments on their debts
Bonds
Debt contracts that are issued most frequently governments and corporations
Default
Fail to make the bonds promised payments
Mutual Funds
A company that maintains professionally managed collects of either stocks or bonds
Portfolio
a collection of stocks or bonds
Actively Managed Funds
Have portfolio managers who constantly buy and sell assets in attempt to generate high returns
Index Funds
portfolios are selected to exactly match a stock or bond index
Passively Managed Funds
Index funds, chosen exactly to match whatever stocks or bonds are contained in their respective underlying indexes
Percentage Rate of Return
percentage gain or loss over a given period of time
Arbitrage
the name financial economists give to the buying and selling process that leads profit-seeking investors to equalize the average expected rate of return generated by identical or nearly identical assets
Risk
The fact that investors never know with total certainty what those future payments turn out to be
Diversification
Strategy of investing in a large number of investments to reduce the overall risk of the entire portfolio
Diversifiable Risk
the risk that is specific to a given investment and that can be eliminated by diversification
Nondiversifiable Risk
pushes all investments in the same direction at the same time so that there is no possibility of using good effects to offset bad effects
Average Expected Rate of Return
the probability-weighted average of the investment’s possible future rates of return
Probability-Weighted Average
each of the possible future rates or return is multiplied by its probability expressed as a decimal
