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Unformatted text preview: FINC 314 Exam 1 Review Chapter 1 There is a return for bearing risk. More r isk leads to more return. Return: o Total Dollar Return = End Price Beginning Price + Dividends Calculates your profit/loss per share measured in dollars o Total Percentage Return = Total Dollar Return / Beginning Price Calculates the percentage you gain/lose on your original investment Use total percentage return to compare stocks o Return = (Current Price Last Price) / Last Price Risk o Short term government debt is risk free (T-Bills) o Risk Premium = Average Risk Risk free rate o Standard Deviation = square root of variance Know 68, 95, 99.7 Rule o Variance = (actual observation average of all observations) 2 /(number of observations 1) o Range of returns for a stock is +/- 3 standard deviations from the mean (99.7%) Averages o Arithmetic: the simple average, sum of observations divided by the number of observations o Geometric: the average compound rate of the return; the product of 1 plus each observation raised to the 1/N power, less one Chapter 2 SIPC Protection: $500,000 total, and$100,000 cash maximum Cash Account o Brokerage account in which securities are paid for in full, 100% funded by investor Margin Account o Brokerage account in which securities can be bought and sold short on credit. Margin trading exaggerates both profits and losses o Some cash from investor and some from broker, $2,000 minimum o Borrowed portion incurs interest based on the call money rate (interest...
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- Spring '08