AAMS Module 2: Risk and Return Concepts, Exams of Manufacturing Systems Design

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AAMS Module 2

Total Risk Answer: Comprised of Systematic Risk & Unsystematic Risk Standard deviation Answer: Variability of an investment's returns around its average, or mean, return. Measures total risk (both systematic and unsystematic risk) Beta Answer: Measures volatility, systematic risk, and relative risk Systematic Risk Answer: Also called non diversifiable risk. Includes purchasing power risk, reinvestment risk, interest rate risk, market risk, and exchange rate risk Purchasing power (inflation) risk Answer: Risk of one's purchasing power decreasing as a result of inflation Reinvestment risk Answer: Risk that market interest rates have decreased at the time payments from an investment received. Investor is forced to reinvest his or her payment amount at a time when rates are not as favorable as they may have been previously. Market Risk Answer: Stems from factors independent of any particular security. Includes political events, broad economic and social changes, and the mood of the investing public.

2024/ Exchange rate risk Answer: Risk of having both their principal and return diminished by changes in the relative values of US and foreign currencies. Unsystematic Risk Answer: Risk directly associated with particular securities and risk involved can be reduced through diversification. Beta formula Answer: standard deviation of security/standard deviation of market X correlation coefficient CAPM Answer: Capital Asset pricing model. Calculates the required return for an individual stock or portfolio 68% of returns Answer: 1 standard deviation 95% of returns Answer: 2 standard deviations 99% of returns Answer: 3 standard deviations Capital market line Answer: Graphical representation of the relationship between risk and return, where risk is measured by standard deviation; the CML includes the concept of a risk free rate of return Common misinterpretation of the investment pyramid Answer: The idea that the larger base indicates that a larger proportion of the client's funds should be invested in the lower tier financial instruments and that other investment instruments should be funded in increasingly smaller proportions

2024/ correlation coefficient Answer: measures the degree to which an investment's return varies from (or moves in concert with) another investment's return Dollar cost averaging Answer: person invests a set dollar amount on a regular, ongoing basis Value averaging Answer: a person invests regularly and periodically an amount that will increase the account value by a set amount Excess return Answer: measure of the portfolio's return over and above what the client could have earned had he or she simply invested in risk free assets