Finals Flashcards
(62 cards)
Practice of spreading your investments around to reduce exposure to risk.
Diversification
Degree of risk that an investor is willing to endure given the volatility in the value of an investment.
Risk Tolerance
Exposure to danger, possibility of failure
Risk
Represents a combination of systematic risk and unsystematic risk, potential internal and external threats
Total Risk
- cannot be predicted
- cannoy be avoided
- undiversifiable risk
- the possibility that an event at the company level could trigger severe instabillity or collapse an entire industry or economy.
Systematic risk
Kinds of Systematic risk
(1) Natural disaster
(2) War & Terrorism
(3) Inflation
(4) Interest rates
(5) Exchange rates
(6) Political instability
(7) Death of the owner
- can be controlled
- can be mitigated
- diversificable risk
Unsystematic Risk
Aspects of Diversification
(1) Diversifying across sector and industries
(2) Diversifying across companies
(3) Diversifying across asset classes
(4) Diversifying across time frames
(5) Diversifying across borders
Investors tendency to favor companies fron their own country over those from other countries or regions
Home Country Bias
Refers to the total value or worth of a comopany. Tells us how much a company is valued at in the stock matket.
Capitalization
Two ways to measure capitalization
(1) Market capitalization
(2) Enterprise value
Determining the value or price of an asset and returns on financial assets, including stocks, bonds, currencies, and real estates.
Asset Pricing
Determining the value or price of an asset and returns on financial assets, including stocks, bonds, currencies, and real estates.
Asset Pricing
Two types of asset pricing
Two types of asset pricing
(1) equity
(2) bonds
Is an idealized portrayal of how financial markets price securities and thereby determine expected returns on capital investments.
Capital Asset Pricing Model
If the required return is less than the estinated return… then
Investors should buy (accept)
If the required return is greater than estimated return… then
Investors should sell (reject)
Are tangible assets with a useful life longer than a year.
Not intended for sale in the regular course of the business’s operation
Capital Assets
Classification of Capital Assets:
(1) Useful life of more than 1 year
(2) Acquisition cost exceeds the company’s designated minimum limit.
(3) Not intended to be sold as part of the business’ operation
Are any profit that you make when you dispose of capital assets.
Capital gains
When asset is sold for a price that is lower than the original purchase price.
Capital loss
If the company purchased an asset lower than the limit, then it is considered as an outright expense.
Not Capital Assets
Is Inventory considered as Capital Assets?
No, because Inventories are part of the business operation and can be sold as part of the operation.
