Return and Risk Flashcards
CH 4 (34 cards)
What is business risk?
The degree of uncertainty associated with an investment’s earnings and the investment’s ability to pay the returns owed to investors.
Chapter 4
Define deflation.
A period of generally declining prices.
Chapter 4
What is the discount rate?
The annual rate of return that could be earned currently on a similar investment; used when finding present value; also called opportunity cost.
Chapters 4 and 4A
What is event risk?
Risk that comes from an unexpected event that has a significant and usually immediate effect on the underlying value of an investment.
Chapter 4
What is the expected inflation premium?
The average rate of inflation expected in the future.
Chapter 4
What is expected return?
The return an investor thinks an investment will earn in the future.
Chapters 4 and 11
Define financial risk.
The degree of uncertainty of payment resulting from a firm’s mix of debt and equity; the larger the proportion of debt financing, the greater this risk.
Chapter 4
What is the holding period?
The period of time over which one wishes to measure the return on an investment vehicle.
Chapter 4
Define holding period return (HPR).
The total return earned from holding an investment for a specified holding period (usually one year or less).
Chapter 4
What does income refer to in investment terms?
Usually cash or near-cash that is periodically received as a result of owning an investment.
Chapter 4
Define inflation.
A period of generally rising prices.
Chapter 4
What is interest rate risk?
The chance that changes in interest rates will adversely affect a security’s value.
Chapter 4
What is the internal rate of return?
The discount rate that equates an investment’s cost to the present value of benefits that it provides the investors.
Chapter 4
Define liquidity risk.
The risk of not being able to liquidate an investment quickly and at a reasonable price.
Chapter 4
What is market risk?
Risk of decline in investment returns because of market factors independent of the given investment.
Chapters 4 and 5
Define nominal rate of return.
The actual return earned on an investment expressed in current dollars.
Chapter 4
What is a paper return?
A return that has been achieved but not yet realized by an investor during a given period.
Chapter 4
Define present value.
The value today of a sum to be received at some future date; the inverse of future value.
Chapters 4 and 4A
What is purchasing power risk?
The chance that unanticipated changes in price levels (inflation or deflation) will adversely affect investment returns.
Chapter 4
Define rate of growth.
The compound annual rate of change in the value of a stream of income.
Chapter 4
What is the real rate of return?
The nominal return minus the inflation rate; a measure of the increase in purchasing power that an investment provides.
Chapter 4
Define realized return.
Current income actually received by an investor during a given period.
Chapter 4
What is required return?
The rate of return an investor must earn on an investment to be fully compensated for its risk.
Chapter 4
Define return.
The profit from an investment.
Chapter 4
