Session:15 How to Think about Investing
Key Terms
Principles of Finance | Leadership Development – Micro-Learning Session
Rice University 2020 | Michael Laverty, Colorado State University Global Chris Littel, North Carolina State University| https://openstax.org/details/books/principles-finance
- arithmetic average return
- the sum of an asset’s annual returns over a number of years divided by the number of years
- beta
- a measure of how a stock moves relative to the market
- capital asset pricing model (CAPM)
- the expected return of a security, equal to the risk-free rate plus a premium for the amount of risk taken
- capital gain yield
- the difference between the price a stock is sold for and the price that was originally paid for it divided by the price originally paid
- diversification
- holding a variety of assets in a portfolio
- dividend yield
- the total dividends received by the owner of a share of stock divided by the price originally paid for the stock
- effective annual rate (EAR)
- returns expressed on an annualized or yearly basis; allows for the comparison of various investments
- firm-specific risk
- the risk that an event may impact the expected revenue or costs of a firm, thereby impacting the returns to investors; also known as diversifiable risk
- geometric average return
- the compound annual return derived from the effective annual rate and time value of money formulas
- holding period percentage return
- the gain received from holding a stock, calculated by adding the amount received when the stock is sold to any dividends earned while holding the stock, subtracting the price originally paid for the stock, then dividing the difference by the price originally paid
- Jensen’s alpha
- a measure of portfolio performance, calculated as the raw portfolio return minus the expected portfolio return predicted by the CAPM
- market risk premium
- the reward for taking on the average amount of market risk
- portfolio
- a collection of owned stocks
- realized return
- the total return of an investment that occurs over a particular time period
- risk premium
- the extra return earned by taking on risk
- risk-free rate
- the reward for lending money when there is no risk of not receiving the principal and interest as promised
- Sharpe ratio
- a reward-to-risk measure of portfolio performance, calculated by subtracting the risk-free rate from the average portfolio return and then dividing by the standard deviation of the portfolio
- systematic risk
- risk that impacts the entire market and cannot be diversified away; also known as market risk
- Treynor ratio
- a reward-to-risk measure of portfolio performance, calculated by subtracting the risk-free rate from the average portfolio return and then dividing by the beta of the portfolio