Term
Anticipated rate of inflation
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Definition
| The expected rate of inflation that is included in the risk-free rate of return. |
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Term
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| A measurement of the volatility of a security with the market in general. A greater beta coefficient than 1 indicates systematic risk greater than the market, while a beta of less than 1 indicates systematic risk less than the market. |
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Term
| Capital Asset Pricing Model |
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Definition
| A model that relates the return on an asset to the risk-free rate of a U.S. government treasury security adjusted for the risk adjusted for the risk of the asset and the risk of the market. The model reflects that the higher the risk the higher required rate of return. |
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| A contract to buy or sell a commodity in the future at a given price. |
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| Claims represented by debt instruments offered by financial institutions, industrial corporations, or the government. |
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| A defined benefit plan specifies the amount of the retirement benefit based on income and years of service. |
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Term
| Defined contribution plan |
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Definition
| A defined contribution plan transfers the risk of money management from employers to employees with the ending balance in the account. The retirement benefit is based on the employee's investment choices and performance over the life of the accumulated period. |
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Representation of ownership interests through common stock or other instruments to purchase common stock, such as warrants and options.
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Term
| Equity risk premium (ERP) |
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Definition
| The extra return investors require for investing in common stock rather than in risk-free U.S. government securities. The extra return is a function of the historical returns of stocks versus U.S. government securities. |
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A financial claim on an asset (rather than physical possession of a tangible asset) usually documented by a legal instrument, such as a stock certificate. |
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| Financial risk occurs when a firm uses too much financial leverage (high debt to asset ratio) and risk bankruptcy. |
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An indirect claim on common stock such as that achieved by placing funds in investment companies. |
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The commitment of current funds in anticipation of the receipt of an increased return of funds at some point. |
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Definition
The capacity of an investment to be retired for cash in a short period with a minimum capital loss. |
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| Professional money managers may be good, bad, or neutral. The risk is that your funds are managed by a poor money manager or the fund manager cannot consistently outpreform the market. |
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| Operating risk focuses on the volatility of operating earnings. Given the cyclical nature of the economy and the stability of the industry, this risk can be measured by the standard deviation of operating earnings. |
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The term applied to a collection of securities or investments. |
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A hybrid security that generally provides fixed returns. Preferred stockholders are paid returns after bondholder claims are satisfied but before any returns are paid to common stockholders. Though preferred stock returns are fixed in amount, they are classified as dividends (not interest) and are not tax deductible to the issuing firm. |
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Definition
A tangible piece of property that may be seen, felt, held, or collected, such as real estate, gold, diamonds, and so on. |
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Definition
The return that investors require for allowing others to use their money for a given period. This is the value that investors demand for passing up immediate consumption and allowing others to use their savings until the funds are returned. Because the term real is employed, this means it is a value determined before inflation is added.
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Term
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Definition
The required rate of return before risk is explicitly considered. It is composed of the real rate of return plus a rate equivalent to inflationary expectations. It is referred to as RF.
AND/OR
(1+Real rate of return)*(1+inflation rate) |
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Definition
A premium assumed to be paid to an investor for the risk inherent in an investment. It is added to the risk-free rate to get the overall required return on an investment. |
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Definition
Risk inherent in an investment related to movements in the market that cannot be diversified away. |
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Definition
| Tax risk arises when investors in tax free retirement accounts retire in higher marginal income tax brackets than they had while working and sheltering retirement income. Usually the tax free compounding will overcome some of this risk. But there is the risk that you will pay higher taxes in retirement than you did while working. |
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