F: Chapter 27

Question 1

Finance

Answer 1

the management of large amounts of money

Question 2

Present value

Answer 2

amount of money today that would be needed to produce a future sum

Question 3

Present value formula

Answer 3

X/(1+r)^N
r= interest rate
n= years
x= amount to be received

Question 4

Future value

Answer 4

amount of money in the future that an amount of money today would produce

Question 5

rule of 70

Answer 5

is a variable grows at a rate of x percent per year then that variable doubles in approximately 70/x years

Question 6

risk averse

Answer 6

someone that does not like to be uncertain

Question 7

ways to reduce risk

Answer 7

1. buy insurance
2. diversify
3. accept a lower return on investments

Question 8

diversification

Answer 8

reduction of risk achieved by replacing a single risk with a large number of smaller unrelated risks

Question 9

idiosyncratic risk

Answer 9

risk only affects a single person/firm/project

Question 10

aggregate risk

Answer 10

risk that affects all economic actors at once

Question 11

fundamental analysis

Answer 11

the study of a company’s accounting statements and future prospects to determine its value
- can figure out if stock is undervalued, overvalued, or fairly valued

Question 12

efficient markets hypothesis

Answer 12

theory that asset prices reflect the available information about the value of an asset

Question 13

a market is informationally efficient when

Answer 13

it reflects all available information

Question 14

when is money more valuable?

Answer 14

today, because savings can earn interest

Question 15

the value of an asset equals

Answer 15

the present value of the cash flows the owner of the share will receive, including the stream of dividends and the final sale price