# Final Exam Flashcards

liquidity ratios

measures of company’s ability to meet short term obligations

activity/efficiency ratios

how well the company utilizes and manages assets

leverage/coverage/debt ratios

how well company uses liabilities and ability to cover fixed financial charges

profitability ratios

how well the company produces earnings/returns

market ratios

based on market values

ROE breakdown

identify key drivers of profitability and not how they’ve changed over time for company

return

total gain/loss experienced on an investment over a given period of time

risk

measure of uncertainty surrounding return of investment

risk averse

investors require increased return as compensation for increase in risk

risk neutral

investors choose investment with higher return regardless of risk

risk seeking

investors prefer riskier investments even with lower expected returns

portfolio performance determinants

expected return and standard deviation of each asset and how they are correlated

capital asset pricing model (capm)

measures how much additional return an investor should expect from taking a little extra risk; based on historical data so betas may not actually reflect future variability

total risk

combination of a security’s nondiversifiable and diversifiable risk

diversifiable/unsystemic risk

portion of an asset’s risk that is attributable to firm-specific, random causes; can be eliminated through diversification

nondiversifiable/systemic risk

relevant portion of an asset’s risk attributable to market factors that affect all firms; cannot be eliminated through diversification

market risk (beta)

relative measure of nondiversifiable risk; beta coefficient for entire market = 0

market return

return on market portfolio of all traded securities

risk free rate of return

required return on risk-free asset, typically 3-month US treasury bill