Spring 2026 - BUS F303 Investments Practice Quiz II

This set of flashcards covers key vocabulary and concepts related to investments as outlined in BUS F303 lecture notes.

Capital Market Line (CML)

The line from the risk-free rate through the market portfolio representing the risk-return trade-off of efficient portfolios.

Security Market Line (SML)

A line that represents the relationship between the expected return of a security and its systematic risk (beta).

Weighted Average Cost of Capital (WACC)

The average rate that a company is expected to pay to finance its assets, weighted by the proportion of each finance source.

Systematic Risk

Risk that cannot be diversifiable and is inherent to the entire market or market segment.

Unsystematic Risk

Risk that is unique to a particular company or industry; can be eliminated through diversification.

Correlation

A statistic that measures the degree to which two securities move in relation to each other.

Covariance

A measure of how two random variables change together, indicating the direction of their relationship.

Portfolio Diversification

A risk management strategy that mixes a wide variety of investments within a portfolio.

Market Portfolio

A theoretical portfolio that contains all assets in the market, each weighted by its market value.

Average Return

The mean value of a set of returns, typically used to gauge historical performance.

Standard Deviation (σ)

A statistic that measures the dispersion of a set of data from its mean, indicating its volatility.

Risk-Free Rate

The return on an investment with zero risk, often represented by government treasury yields.

Holding Period Return (HPR)

The total return of an investment over a specified period, including interest, dividends, and capital appreciation.

Alpha (α)

The measure of an investment's performance relative to a benchmark, indicating excess return.

Beta (β)

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

Fama-French Three-Factor Model

An asset pricing model that includes market risk, size effect, and value effect.

Sharpe Ratio

A measure to assess the risk-adjusted performance of an investment by comparing excess return to volatility.

Market Risk Premium

The additional return expected by investors for taking on the higher risk of investing in the stock market compared to risk-free assets.

Liquidity Risk

The risk that an asset cannot be traded quickly enough in the market to prevent a loss.

Efficient Market Hypothesis (EMH)

A theory suggesting that asset prices fully reflect all available information.

Expected Return

The anticipated return on an investment based on historical data or projections.

Overpriced Security

A security that is trading above its intrinsic value, expected to underperform in the future.

Underpriced Security

A security that is trading below its intrinsic value, expected to outperform in the future.

Arbitrage

The practice of taking advantage of price differences between markets.

Treasury Bill

A short-term government debt obligation with a maturity of less than one year.

Coupon Rate

The interest rate that the issuer of the bond pays to bondholders.

Yield to Maturity (YTM)

The total return anticipated on a bond if held until it matures.

Current Yield

The annual income (interest or dividends) divided by the current price of the security.

Present Value of Annuity

The current worth of a stream of future payments, given a specified rate of return.

Discount Rate

The interest rate used to discount future cash flows to their present value.

Investment Risk

The potential for losing money or decreasing the value of investments.

Credit Risk

The risk that a borrower will default on any type of debt by failing to make required payments.

Price to Earnings Ratio (P/E)

A ratio for valuing a company that measures its current share price relative to its per-share earnings.

Face Value

The nominal value of a bond, typically the amount paid back to the bondholder at maturity.

Annualized Return

The geometric average amount of money earned by an investment each year over a given time period.

Income Statement

A financial report that shows the company's revenues and expenses during a specific period.

Balance Sheet

A financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time.

Bottom-Up Analysis

An investment strategy that focuses on the analysis of individual stocks rather than the overall market.

Top-Down Analysis

An investment strategy that starts with the analysis of the overall economy before focusing on specific industries or stocks.

Portfolio Management

The art and science of making decisions about investment mix and policy to manage an investment portfolio.

Value Investing

An investment strategy that focuses on buying stocks that appear underpriced relative to their fundamental value.

Growth Investing

An investment strategy that involves investing in companies with potential for substantial growth.

Market Timing

The strategy of making buy or sell decisions of financial assets by predicting future market price movements.

Technical Analysis

An investment methodology used to evaluate and forecast the direction of prices through the study of past market data.

Fundamental Analysis

A method of evaluating a security's intrinsic value by examining related economic, financial, and other qualitative and quantitative factors.

Diversifiable Risk

Risk that can be eliminated through diversification.

Non-Diversifiable Risk

Risk that cannot be eliminated through diversification, closely related to market risk.

Trend Analysis

A technique that uses historical data to predict future movements.