Final Flashcards
(45 cards)
Money Markets
The market where short-term
securities are bought and sold.
Capital Market
The market where long-term
securities such as stocks and bonds are bought and sold
Primary Market
The market in which new issues
of securities are sold to the public
Secondary Market
The market in which
securities are traded after they have been
issued.
Secondary Market
The market in which
securities are traded after they have been issued
When you buy, which price do you use?
Offer price
When you sell, which price do you use?
Bid price
The single most important issue in the stock
valuation process is…
What a stock will do in
the future
Value of a stock depends upon…
Its future returns
from dividends and capital gains/losses
The price of any stock is equal to…
The present value of the expected future dividends it will pay.
Dividend Payout Ratio
The fraction of earnings paid as dividends each year
We cannot use the constant dividend
growth model to value a stock if…
The growth rate is not constant.
Prices are set in
competitive markets as…
The price set by the
buyer willing to pay the most for an item
In finance, the standard deviation of a return is also referred to as
its…
Volatility
Variance
Summatory of (Expected return minus mean of expected return)^2 times the probability
Empirical Distribution
When the probability distribution is plotted using
historical data
Excess Returns
• The difference between the average return for an
investment and the average return for T-Bills
Is there a positive relationship between
volatility and average returns for individual
stocks?
there is no precise
relationship between volatility and average
return for individual stocks.
Common Risk
– Risk that is perfectly correlated
Independent Risk
– Risk that is uncorrelated
Diversification
– The averaging out of independent risks in a
large portfolio
Independent Risks are due to…
firm-specific news
Common risks are due to
Market wide news
Firm-Specific Versus Systematic Risk
When many stocks are combined in a large
portfolio, the firm-specific risks for each stock
will average out and be diversified.
– The systematic risk, however, will affect all firms
and will not be diversified.
