Degree of uncertainty of return on an asset; in business, the likelihood of loss or reduced profit.
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standard deviation
a computed measure of how much scores vary around the mean score
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Company-unique risk
the risk related to an investment return that can be eliminated through diversification (diversifiable)
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market risk
risk that affects all companies in the stock market (nondiversifiable)
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Diversification
Spreading out investments to reduce risk
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Holding period returns
the rate of return earned on an investment, which equals the dollar gain divided by the amount invested
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Beta
It is a measure of how an individual's stocks returns vary with market returns. Measure of the "sensitivity"
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Portfolio Beta
the relationship between a portfolio's returns and the market returns. It is a measure of the portfolio's nondiversifiable risk
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Asset allocation
allocation of an investment portfolio across broad asset classes
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risk-free rate of return
the rate of return on risk-free investments. The interest rates on short-term U.S. government securities are commonly used to measure this rate
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required rate of return
minimum rate of return necessary to attract an investor to purchase or hold a security
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expected rate of return
The increase in profit a firm anticipates it will obtain by purchasing capital (or engaging in research and development); expressed as a percentage of the total cost of the investment (or R&D) activity.
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risk premium
the excess return required from an investment in a risky asset over that required from a risk-free investment
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Capital Asset Pricing Model (CAPM)
a model that relates the required rate of return on a security to its systematic risk as measured by beta
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Security Market Line
a positively sloped straight line displaying the relationship between expected return and beta
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bond
A financial security that represents a promise to repay a fixed amount of funds
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Debenture
an unsecured debt, usually with a maturity of 10 years or more
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mortgage bond
A bond backed by fixed assets. First mortgage bonds are senior in priority to claims of second mortgage bonds.
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Eurobond
bond denominated in a currency other than that of the country in which it is sold
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convertible bonds
Bonds that can be converted into common stock at the bondholder's option
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par value
a value assigned to a share of stock and printed on the stock certificate
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coupon interest rate
the stated annual interest rate on a bond
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Fixed Rate Bond
a bond that pays a fixed amount of interest to the investor each year
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zero coupon bond
a bond that makes no coupon payments and is thus initially priced at a deep discount
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Maturity
the time at which payment to a bondholder is due
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callable bonds
bonds that the issuing company can redeem (buy back) at a stated dollar amount prior to maturity
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call protection period
a prespecified time period during which a company cannot recall a bond
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indenture
the written agreement between the corporation and the lender detailing the terms of the debt issue
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junk bonds
High-risk, high-interest bonds
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Bond Ratings
A rating assigned to a firm to measure the probability of default by a company like S&P or Moody's.
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Book Value
the difference between the cost of a depreciable asset and its related accumulated depreciation
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liquidation value
net amount that can be realized by selling the assets of a firm and paying off the debt
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Market Value
observed value of an asset, determined by S&D
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intrinsic value
An estimate of a stock's "true" value based on accurate risk and return data. Can be estimated but not measured precisely.
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efficient value
the accuracy of the predicted return on the investment.
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yield to maturity
the rate required in the market on a bond
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Current yield
a bond's annual coupon divided by its price
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3 bond value relationships
As interest rates increase, the value of the bond decreases. The market value of a bond will be less than the par value if the required rate of return of investor's is above the coupon interest rate. Long term bonds have greater interest rate risk than short term bonds.
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interest rate risk
the risk of capital losses to which investors are exposed because of changing interest rates
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discount bond
the difference between the face value of a bond and its selling price when a bond is sold for less than its face value
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premium bond
The difference between the selling price and the face value of a bond when a bond is sold for more than its face value.
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