the return on an investment measured in dollars, accounting for all interim cash flows and capital gains or losses:
dollar return
the return on an investment measured as a percentage of the original investment:
percent returns (return for each dollar invested)
The return on an investment expressed on an "annualized" basis:
effective annual return
The rate of return on a riskless, i.e., certain investment:
risk-free rate
The extra return on a risky asset over the risk-free rate; i.e., the reward for bearing risk:
risk premium
a common measure of return dispersion:
variance
the square root of the variance:
standard deviation
A symmetric, bell-shaped frequency distribution that can be described with only an average and a standard deviation:
normal distribution
If we are willing to bear risk, then we can expect to earn a ________ ___________, at least on average.
risk premium
The more risk we are willing to bear, the greater the __________ _______ premium.
expected risk
The ________ average tells you what you earned in a typical year
arithmetic (When we talk about average returns, we generally are talking about arithmetic average returns)
The _____________ average tells you what you actually earned per year on average, compounded annually
geometric
expected rate of return on this stock for the next year:
avg. historical risk premium + expected risk-free rate
4 investment constraints:
-resources
-horizon
-liquidity
-taxes
-special circumstances
4 investment strategies & policies:
-investment management
-market riming
-asset allocation
-security selection
asset allocation or security selection more important to the success of a portfolio?
asset allocation
two parts of the investment policy statement:
objectives and constraints
3 types of brokers
full-service brokers
discount brokers
deep-discount brokers
Insurance fund covering investors' brokerage accounts when member firms go bankrupt or experience financial difficulties:
Securities Investor Protection Corporation (SIPC):
Important: The ______ does not guarantee the value of any security (unlike FDIC coverage).
protects whatever amount of cash and securities that were in your account, in the event of fraud or other failure.
SIPC
protects whatever amount of cash and securities that were in your account, in the event of fraud or other failure:
SIPC
2 Types of Brokerage Accounts
1. Cash Account
2. Margin Account
a brokerage account in which securities are paid for in full:
cash account
a brokerage account in which, subject to limits, securities can be bought and sold short on credit:
margin account
the act of pledging securities as a collateral against a loan:
hypothecation
an arrangement under which a broker is the registered owner of a security. (You, as the account holder are the "beneficial owner."):
street name registration
a sale in which the seller does not actually own the security that is sold:
short sale
short-term debt obligations of large corporations and governments:
money market instruments
longer-term debt obligations of corporations and governments:
fixed-income securities
These securities promise to make fixed payments according to a pre-set schedule:
fixed-income securities (When they are issued, their lives exceed one year)
These securities promise to make one future payment:
money market securities (when they are issued, their lives are less than one year)
U.S. Treasury bills (T-bills), bank certificates of deposit (CDs), corporate and municipal money market instruments. Examples of what?
money market instruments
Usually, the instruments are sold on a discount basis, and only the interest rates are quoted:
money marker
U.S. Treasury notes, corporate bonds, car loans, student loans. Examples of what?
fixed-income securities
Represents ownership in a corporation. A part owner receives a pro rated share of whatever is left over after all obligations have been met in the event of a liquidation:
common stock
The dividend is usually fixed and must be paid before any dividends for the common shareholders. In the event of a liquidation, preferred shares have a particular face value:
preferred stock
IBM shares, Microsoft shares, Intel shares, Dell shares, etc. Examples of what?
common stock
Bank of America (BAC) preferred stock. examples of what?
preferred stock
4 derivatives:
-primary asset
-derivative asset
-future contract
-option contract
Security originally sold by a business or government to raise money:
primary asset
A financial asset that is derived from an existing traded asset, rather than issued by a business or government to raise capital. More generally, any financial asset that is not a primary asset:
derivative asset
An agreement made today regarding the terms of a trade that will take place later:
futures contract
An agreement that gives the owner the right, but not the obligation, to buy or sell a specific asset at a specified price for a set period of time:
option contract
financial futures (i.e., S&P 500, T-bonds, foreign currencies, and others), commodity futures (i.e., wheat, crude oil, cattle, and others). Examples of what?
future contracts
A ______ option gives the owner the right, but not the obligation, to buy something
call
a _________ option gives the owner the right, but not the obligation, to sell something.
put
The price you pay today to buy an option is called the _______ premium.
option
The specified price at which the underlying asset can be bought or sold is called the _________- price, or exercise price.
strike
An American option can be exercised ________ up to and including the expiration date, while a ___________ option can be exercised only on the expiration date.
-anytime
-European
simply a means of combining or pooling the funds of a large group of investors:
mutual funds
Like commercial banks and life insurance companies, mutual funds are a form of :
financial intermediary
3 advantages of mutual fund investing:
-diversification
-professional management
-minimum initial investment
3 drawbacks of mutual fund investing:
-risk
-costs
-taxes
business that specializes in pooling funds from individual investors and making investments:
investment company
an investment company that stands ready to buy and sell shares in itself to investors, at any time:
open-end fund
investment company with a fixed number of shares that are bought and sold by investors, only in the open market:
closed-end fund
the value of the assets held by a mutual fund, divided by the number of shares:
net asset value
Shares in an ______-end fund are worth their NAV, because the fund stands ready to redeem their shares at any time.
open
share value of ________-end funds may differ from their NAV.
closed
____________ _____-----_ firms earn fees for managing mutual funds.
investment advisory
A "regulated investment company" ________ have to pay taxes on its investment income.
does not
Mutual Fund Costs and Fees,
4 Types of Expenses and Fees:
-sales charges or "loads"
-12b-1 fees
-management fees
-trading costs
A ________-end fund has a fixed number of shares
closed
Most _________-end funds sell at a discount relative to their net asset values.
closed
Is basically an index fund.
Trades like a closed-end fund (without the discount phenomenon).
ETF (exchange traded fund)
Like mutual funds, hedge funds collect pools of money from ___________.
investors
-__________ funds are not required to maintain any particular degree of diversification or liquidity.
-________ fund managers have considerably more freedom to follow various investment strategies, or styles.
hedge