Chapter 15 Flashcards
what does ‘portfolio management’ focus on?
risk
return
What do ‘financial decisions’ revolve around?
risk-return tradeoff
There are two types of investors what are they
- Those who prefer investments that generate a return for a given level of risk
- Some investors who are more risk averse and choose to own safe assets
What are examples of ‘safe’ assets
GICs,
Canada’s Savings Bonds
(both low risk, low return assets)
What are some ‘riskier assets’
Google
Amazon
Tesla
List assets from ‘less risk/less return’ to ‘greater risk/greater return’
Treasury bills
Bonds
Debentures
Preferred shares
Common shares
Derivatives
What is ‘total return’?
Its the sum of
1. Intrest & dividends paid (cash flow) you receive when you own the security
- Capital gain (price change)
How would you calculate % return?
Cash flow + (Ending value – beginning value)/ Beginning value
“Cash flow” = interest / dividends received
“(Ending value – beginning value)” = capital gain
What is the real rate of return?
+ is how much an investment has increased due to adjustments made after inflation
How do you calculate real rate of return?
Real rate of return (approximate) = Nominal rate – inflation rate
What is nominal rate
Its your actual rate of return
What are the four types of risk?
Inflation risk
Political risk
Business risk
Liquidity risk
What is ‘inflation risk”?
It reduces the future value of a securities csh flow and with this increase in inflation prices of securities tend to fall
What is business risk?
Its risk associated with a specific business or industry
What is a political risk?
Risk associated doing business in a country due to government policies and political instability
What is liquidity risk?
Its the risk associated with how quickly and easily an investment can be converted to cash without significant loss
What is intrest risk?
This is basically how a secuties return tend to change based on interest rates
If intrest rate rises, what happens?
Securities value tends to fall and vise versa
What is foreign exchange risk?
The risk of the fluctuations in the Canadian dollar can affect investment returns
What is defualt risk
Its risk associated ith a company going bankrupt or failing to meet debt obligatios
What is systemtaic risk?
risk associated with an overall market or economy and cannot be diversified or eliminated
What is non-systematic risk?
Its risk is associated with a specific firm or instruct and can be diversified away by spreading our investments
How do we diversify our baskets.
Buy different stocks in different industries in different countries
What is beta
Measures a securities return relative to the overall market
