US RPA 2 Module 2 Practice Flashcards

This set of vocabulary flashcards covers key financial return metrics, risk types, and market performance concepts from Module 2.

Yield

Periodic cash flows from an investment (dividends, interest)

Capital gains and losses

Change in value of an asset

Total return

$$\frac{\text{Yield} + \text{capital gain or loss}}{\text{purchase price}}$$

Return relative

Adds $1.0$ to "total return" to avoid negative numbers in calculation of geometric mean

Cumulative wealth index

Measures aggregate effect of returns over time

International returns

Returns from investments in foreign markets

Arithmetic mean

Used for typical performance for a single period

Geometric mean

Measures compound growth over time for multiple periods

Inflation-adjusted returns

$$\frac{1 + \text{real return}}{1 + \text{inflation rate}} - 1$$

Interest rate risk

Variability due to changes in interest rates

Market risk

Variability due to market fluctuations

Inflation risk

Risk that purchasing power of an invested dollar will decline

Business risk

Industry-specific risks

Financial risk

Uncertainty due to debt

Liquidity risk

Uncertainty about ability to sell an asset quickly without a price concession

Currency risk (exchange rate risk)

Variability due to currency fluctuations

Country risk

Political/economic stability risks

Variance

Measure of dispersion

Standard deviation

Square root of variance

Risk premiums

Additional return expected for taking increased risk

Asset classes

Categories of investments

Historical returns and risks

Riskier assets perform better on average but have more volatile returns. Large stocks have higher returns than bonds; smaller stocks have greater returns and risks (larger standard deviation) vs. large stocks.

Logarithmic scale

Facilitates comparisons of returns across time