Chapter 10 Flashcards
(20 cards)
Risk and Market Returns
1) there is a reward for bearing risk
2) the greater the risk, the greater the return
Dollar Returns on Investments
1) cash that is earned while holding the investment, which is income based
2) value of the asset that is part of the investment often changes, this is considered either a “capital gain” or “capital loss”
Five types of Investments
- Large Company Stock
- Small Company Stock
- Long-term US Government Bonds
- Long-term Corporate Bonds
- US Treasury bills
Large Company Stock
portfolio that consists of S&P’s 500 index, which contains the 500 largest companies in the US
Small Company Stock
Portfolio consisting of smaller companies, the bottom 20% of companies listed in the NYSE (based on total market value of outstanding stock)
Long-term Corporate Bonds
Portfolio of US government bonds with 20+ years to maturity
Long-term US Government Bonds
Portfolio of US government bonds with 20+ years to maturity
US Treasury Bills
Treasury bills with a maturity of less than one year
Calculating Average Returns and Risk Premiums
take the return over every year for a specific period, and divide by the number of years
Capital Market
a financial system that connects people and institutions with money to invest with those looking to raise capital
Normal Distribution
symmetric, bell shaped distribution which show that values generally fall within a certain range historically
Stock Market Crashes of DIJA
EX) Canada, China, Russia had large decreases in their stock values. The largest hot was Iceland
-The alternative to this crash was Treasury bonds increased in value
Calculating Average Returns
1) Geometric Average Return
2) Arithmetic Average Return
Geometric Average Return
- the average compound return earned per year over a multiyear period
- tells what is actually earned on a year to year average
Arithmetic Average Return
- the return earned in an average year over a particular period
- tells what is earned in a specific year
Capital Market Efficiency
a market is efficient if information available to drive security prices is accurate, which indicates the price is not too low or too high
Types of Efficiency
1) Strong From Efficient
2) Semi Strong Efficient markets
3) Weak Form Efficient
Strong Form Efficient
all information of every kind is present in stock price
Semi Strong Efficient markets
implies that all public information is present in stock prices
Weak Form Efficient
suggests that, at a minimum, the current price of a stock contains information about all previous stock prices
