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what is margin?
The portion of the value of the investment that is not borrowed
Why do you invest?
- -to recieve a amount in the future
- -to recieve regular income
- -to preserve the buying power of money
Why invest in alternative assets?
- -potential higher gain
- -portfolio diversification
how is standard deviation used as a risk measure?
- -it measures the dispersion of a set of data from its mean
- -a measure of the volitility of an investement
why do you not invest?
- -enjoy your money now
- -current consumption
- -you dont need money in the future
- -investment risk
What are the basic types of securities?
- -interest bearing
What are the typres of interest bearing securities?
- -money market instruments
- -fixed income securities
What are the types of equites?
- -common stock
- -preferred stock
What are money market instruments?
- -short term obligations issued bu government and corporations
- -simplest form
What are fixed income securities?
- -longer term debt obligations that promise pixed payments
what is the risk free rate?
- -the rate of return of a riskless investment
- ex. t-bills becuase the government wont default
What is the risk premium?
- The extra return on a risky asst over the risk free rate
- -a reward for bearing risk
What are some alternative assets?
- -real estate
- -hedge funds
- -private equity
What is a margin account?
A brokerage account where securities can be bought and sold on credit
What is an open end mutual fund?
- an investment company that stands ready to
- buy and sell shares in itself to investors, at any time
What a closed end mutual fund?
an investment company with a fixed number of shares that are bought and sold by investors
What is mutual fund turnover?
its a measure of how much trading a fund does
What are the objectives and constraints in an investment policy statement?
- -return req.
- -risk tolerance
- -time horizon
What is prospect theory?
Investors are much more distressed by prospective losses than they are happy about prospective gains.
What are the 3 behavior errors consistant with prospect thoery?
- -mental accounting
- -frame dependence
- -house money effect
What is mental accounting?
- -people segament thier money into seperate buckets
- -will spend bonuses differently than regular income
What is frame dependence?
- how a problem is frame matters to people
- -they will answer differently to the same question asked differently
What is the house money effect?
people will take more risk with money they have won
What are the cyclical economic indicators?
- -GDP growth rate
- -Interest rates
- -home prices
What is the efficient market hypothysis?
- sucurities prices rapid change to new information and current prices reflect all availialbe information.
- -investors cant acheive higher return withour higher risk
What are the 3 forms of market effcientcy?
- -weak form- past prices are no use in beating market
- -semistrong- publicly availiable information is of no use in beating the market
- -strongform- information of any kind is no use including inside information.
What is the P/E anomolie?
companies with low price to earnigs ratios actually have higher returns
What is the january effect?
small stocks in particular have historically generated high returns in the month of january
What is the turn of the year effect?
there is a pattern of higher trading volume and higher stock prices in the last week of dec and first 2 weeks of january
What is the role of portfolio managers in an effcient market?
- investors need portfolio managers to provide diverification.
- - the market needs analyists to seek profit opportunities to ensure prices reflect all info.
What is residual income?
net income minus common shareholders opportunity cost
What is the difference between insider and informed trading?
- insider trading is acting on information gained in an illegal way
- informed trading in gaining all publically availiable information to form an investment strategy
What is systematic risk?
risk that influences a large number of assets or called market risk (cant diversify away)
What is unsystematic risk?
risk that influences a single company or called uniqued risk
What are the components of porters 5 forces model?
- -rivalry among competitors
- -threat of entrients
- -threat of substitute products
- -bragaining power of customers
- -bargaining power of suppliers
What are some cometitive strategies?
- -low cost producer
- -product differentiation
- -focus/niche postitioning
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