Finance Vocabs.docx

# 2 variance the average squared deviation between the

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2. Variance: The average squared deviation between the actual return and the average return. 3. Standard deviation: The positive square root of the variance. 4. Normal distribution: A symmetric, bell-shaped frequency distribution that can be defined by its mean and standard deviation. 5. Value at risk (VaR): Statistical measure of maximum loss used by banks and other financial institutions to manage risk exposures. 6. Geometric average return : The average compound return earned per year over a multi-year period. 7. Arithmetic average return: The return earned in an average year over a multi-year period. 8. Efficient capital market: Market in which security prices reflect available information. 9. Efficient markets hypothesis (EMH): The hypothesis is that actual capital markets, such as the TSX, are efficient. Ch13: Return, Risk, and the Security Market Line (34% of exam) 1. Expected return: Return on a risky asset expected in the future. 2. Portfolio: Group of assets such as stocks and bonds held by an investor. 3. Portfolio weights: Percentage of a portfolio’s total value in a particular asset. 4. Systematic risk: A risk that influences a large number of assets. Also called market risk. 5. Unsystematic risk: A risk that affects, at most, a small number of assets. Also called unique or asset- specific risks. 6. Principle of diversification: Spreading an investment across a number of assets eliminates some, but not all, of the risk. 7. Systematic risk principle: Principle stating that the expected return on a risky asset depends only on that asset’s systematic risk. 8. Beta coefficient: Amount of systematic risk present in a particular risky asset relative to an average risky asset. 9. Security market line (SML): Positively sloped straight line displaying the relationship between expected return and beta. 10. Market risk premium: Slope of the SML; the difference between the expected return on a market portfolio and the risk-free rate. 11. Capital asset pricing model (CAPM): Equation of the SML showing the relationship between expected return and beta.

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12. Arbitrage pricing theory (APT): An equilibrium asset pricing theory that is derived from a factor model by using diversification and arbitrage. It 13. shows that the expected return on any risky asset is a linear combination of various factors. Ch14: Cost of Capital and Long-Term Financial Policy (10% of exam) 1. Cost of equity: The return that equity investors require on their investment in the firm. 2. Retention ratio: Retained earnings divided by net income. 3. Return on equity (ROE): Net income after interest and taxes divided by average common shareholders’ equity. 4. Cost of debt: The return that lenders require on the firm’s debt. 5. Weighted average cost of capital (WACC): The weighted average of the costs of debt and equity. 6. Economic value added (EVA): Performance measure based on WACC. 7. Pure play approach: Use of a WACC that is unique to a particular project. 8. Flotation costs: The costs associated with the issuance of new securities. Ch15: Raising Capital (2% of exam) 1. Venture capital: Financing for new, often high-risk ventures.
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