Investing Principles and Risk Management

These flashcards encompass key vocabulary and concepts related to investing principles, cash flow evaluation, risk management, and the relationship between risk and return.

Investment Projects

Can be classified into replacement, expansion, dispersion, and diversification.

NPV (Net Present Value)

A method to evaluate the profitability of an investment by calculating the difference between present value of cash inflows and outflows.

IRR (Internal Rate of Return)

The discount rate at which the net present value of an investment is zero.

Cash Flows

Evaluations include initial investment, operating cash flows, and termination cash flows.

Payback Period

The time taken to recover the cost of an investment, often compared against NPV and IRR.

Call Option

A financial contract that gives the buyer the right to purchase an asset at a specified price before a certain date.

Put Option

A financial contract that gives the buyer the right to sell an asset at a specified price before a certain date.

Stock Standard Deviation

A measure of the volatility of stock returns, indicating total risk.

Unique Risk

Business or industry-specific risk that can be eliminated through diversification.

Systematic Risk

Market risk that cannot be eliminated and affects all investments.

Diversified Stock Portfolio

A collection of stocks chosen to reduce risk through various investments.

Stock Correlation

A statistical measure that describes the degree to which two stocks move in relation to each other.

Beta

A measure of a stock's volatility in relation to the overall market.

CAPM (Capital Asset Pricing Model)

A model that describes the relationship between systematic risk and expected return.

Weighted Average Cost of Capital (WACC)

The average rate of return a company is expected to pay its security holders to finance its assets.