Either buying an asset or building an asset in the expectation of financial gain
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Economic investment
Either to paying for new additions to the capital stock or new replacements for capital stock that has worn out
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Present value
The present-day value, or worth, of returns or costs that are expected to arrive in the future
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Compound interest
How quickly an investment increases in value when interest is paid, or compounded, not only on the original amount invested but also on all interest payments that have been previously made
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Stocks
Ownership shares in a corporation
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Bankrupt
Unable to make timely payments on their debts
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Limited liability rule
Limits the risks involved in investing in corporations and encourages investors to invest in stocks by capping their potential losses at the amount that they paid for their shares
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Capital gains
Investors sell their shares in the corporation for more money than they paid for them
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Dividends
Equal shares of the corporationâs profits
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Bonds
Debt contracts that are issued most frequently by governments and corporations
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Default
The corporation or government that issued the bond will fail to make the bondâs promised payments
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Popular investments
________ are stocks, bonds, and mutual funds.
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Mutual fund
A company that maintains a professionally managed portfolio
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Portfolio
A collection of either stocks or bonds
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Index funds
Portfolios are selected to exactly match a stock or bond index
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Actively managed funds
Have portfolio managers who constantly buy and sell assets in an attempt to generate high returns
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Passively managed funds
Assets in their portfolios are chosen to exactly match whatever stocks or bonds are contained in their respective underlying indexes
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Percentage rate of return
The percentage gain or loss (relative to the buying price) over a given period of time, typically a year
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Arbitrage
When investors try to take advantage and profit from situations where two identical or nearly identical assets have different rates of return
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Risk
The fact that investors never know with total certainty what those future payments will turn out to be
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Diversification
The strategy of investing in a large number of investments in order to reduce the overall risk to the entire portfolio
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Diversifiable risk
The risk that is specific to a given investment and that can be eliminated by diversification
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Non-diversifiable risk
Pushes all investments in the same direction at the same time so that there is no possibility of using good effects to offset bad effects
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Average expected rate of return
The probability weighted average of the investmentâs possible future rates of return
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Probability weighted average
Each of the possible future rates of return is multiplied by its probability expressed as a decimal (so that a 50 percent probability is .5 and a 23 percent probability is .23) before being added together to obtain the average
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Financial investment
Either buying an asset or building an asset in the expectation of financial gain
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Economic investment
Either to paying for new additions to the capital stock or new replacements for capital stock that has worn out
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28
Present value
The present-day value, or worth, of returns or costs that are expected to arrive in the future
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29
Compound interest
How quickly an investment increases in value when interest is paid, or compounded, not only on the original amount invested but also on all interest payments that have been previously made
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30
Stocks
Ownership shares in a corporation
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31
Bankrupt
Unable to make timely payments on their debts
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32
Limited liability rule
Limits the risks involved in investing in corporations and encourages investors to invest in stocks by capping their potential losses at the amount that they paid for their shares
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33
Capital gains
Investors sell their shares in the corporation for more money than they paid for them
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34
Dividends
Equal shares of the corporations profits
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35
Bonds
Debt contracts that are issued most frequently by governments and corporations
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36
Default
The corporation or government that issued the bond will fail to make the bonds promised payments
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37
Mutual fund
A company that maintains a professionally managed portfolio
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38
Portfolio
A collection of either stocks or bonds
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39
Index funds
Portfolios are selected to exactly match a stock or bond index
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40
Actively managed funds
Have portfolio managers who constantly buy and sell assets in an attempt to generate high returns
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41
Passively managed funds
Assets in their portfolios are chosen to exactly match whatever stocks or bonds are contained in their respective underlying indexes
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42
Percentage rate of return
The percentage gain or loss (relative to the buying price) over a given period of time, typically a year
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43
Arbitrage
When investors try to take advantage and profit from situations where two identical or nearly identical assets have different rates of return
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44
Risk
The fact that investors never know with total certainty what those future payments will turn out to be
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45
Diversification
The strategy of investing in a large number of investments in order to reduce the overall risk to the entire portfolio
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46
Diversifiable risk
The risk that is specific to a given investment and that can be eliminated by diversification
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Non-diversifiable risk
Pushes all investments in the same direction at the same time so that there is no possibility of using good effects to offset bad effects
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48
Average expected rate of return
The probability weighted average of the investments possible future rates of return
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Probability weighted average
Each of the possible future rates of return is multiplied by its probability expressed as a decimal (so that a 50 percent probability is .5 and a 23 percent probability is .23) before being added together to obtain the average
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Beta
Measures how the non-diversifiable risk of a given asset or portfolio of assets compares with that of the market portfolio
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Market portfolio
The name given to a portfolio that contains every asset available in the financial markets
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Time preference
Because people tend to be impatient, they typically prefer to consume things in the present rather than in the future
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Risk-free interest rate
The rate of return that they generate is not in any way a compensation for risk
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Security Market Line
Any investments average expected rate of return has to be the sum of two parts-one that compensates for time preference and another that compensates for risk
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Risk premium
The rate that compensates for risk
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Beta
Measures how the non-diversifiable risk of a given asset or portfolio of assets compares with that of the market portfolio
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Market portfolio
The name given to a portfolio that contains every asset available in the financial markets
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Time preference
Because people tend to be impatient, they typically prefer to consume things in the present rather than in the future
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Risk-free interest rate
The rate of return that they generate is not in any way a compensation for risk
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Security Market Line
Any investmentâs average expected rate of return has to be the sum of two partsâone that compensates for time preference and another that compensates for risk
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Flashcard (132)