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Terms in this set (19)
Taxable when earned
-Semi-annual interest is paid to bondholders
-Quarterly dividends may be paid to stockholders
-taxable when realized
- to realize a gain means to sell the asset
Capital gain: When the value of an asset rises above the price you paid for it
Capital loss: When the value of an asset falls below the price you paid for it
Yield on an asset
The percent return expressed as an annual figure; used for holding periods of less than 1 year
Average annual return
The geometric average annual compounded return; used for holding periods of more than one year
The weighted average return of all assets in the portfolio
Percent Return (yield formula
=investments total earnings expressed as a percentage
Yield= Dollar Return/ Beginning Value
After calculating the yield (return) on an investment, compare it to an index
An index is a collection stocks, bonds, or consumer goods; as the prices rise or fall, the index rises and falls commensurately
An index is used to gauge overall performance in a market or economy
DJIA (oldest stock index)
Dow Jones Industrial average
-measure of the stock prices of the 30 largest firms in the US
-price weighted index
low stock prices have little weight in the index
measures the performance of the 500 largest US firms (large caps) 10B or more
NASDAQ composite index
Index measures the performance of the 3,000+ stocks traded on the Nasdaq
measures the performance of US small firms (small caps) 2B or less
MSCI EAFE Index
tracks the stocks of companies in the developed economies of Europe, Asia and the Far East. It is considered to be the best gauge of international stocks.
MSCI Emerging Markets index
tracks the stocks of companies in developing economies, such as the BRICS (Brazil, Russia, China and India) and others.
Annualized Return formula
The annualized return is used to compare returns on assets held for unequal time periods of less than one year
T= time of ownership in days
Average annual return formula
Used for assets held more than one year
= [(1+ r1) x (1 + r2) x (1+ rn)]1/n - 1
Where 1...n = number of years
Portfolio Return Formula
The portfolio return is a weighted average of the returns of the assets in the portfolio
rPORTFOLIO = w1r1 + w2r2 + ... + wnrn
w = The weight, or proportion, of each component relative to the whole
value/total port. val.
r = The return on each component in the portfolio
blue chip company
that a blue chip is "a nationally recognized, well-established and financially sound company" that sells "high-quality, widely accepted products and services." In addition, blue-chip companies exhibit a "long record of stable and reliable growth."
All 30 companies measured by the DJIA are blue-chip companies; thus the index is sometimes referred to as an index of blue-chips.
price-weighted index vs. market value weighted index
In a price-weighted index, the value of the index is determined by summing the price of each stock in the index and dividing the sum by the total number of stocks. Stocks with a higher price will be given more weight and, therefore, will have a greater influence over the performance of the index. In a market value-weighted index, the value of the index is determined by summing the market capitalization of each stock in the index and dividing the sum by the total number of stocks. In such a weighting scheme, larger companies account for a greater portion of the index.
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