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Finance Basics Flashcards

(69 cards)

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1
Q

Return

A

The gain or loss on an investment over a period of time.

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2
Q

Absolute Return

A

The raw percentage gain or loss on an investment.

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3
Q

Relative Return

A

Return compared to a benchmark or index.

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4
Q

Risk

A

The uncertainty of returns; possibility of losing money.

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5
Q

Risk-Adjusted Return

A

Return after accounting for the amount of risk taken.

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6
Q

Volatility

A

How much an asset’s price fluctuates over time; measured by standard deviation.

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7
Q

Diversification

A

Reducing risk by holding multiple assets that do not move together.

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8
Q

Correlation

A

A measure from -1 to 1 showing how two assets move relative to each other.

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9
Q

Covariance

A

A measure of how two variables move together; similar to correlation but not scaled.

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10
Q

Beta

A

Measures an asset’s sensitivity to market movements.

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11
Q

Alpha

A

Excess return generated above what a model (like CAPM) predicts based on risk.

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12
Q

Sharpe Ratio

A

(Return – Risk-Free Rate) ÷ Volatility; measures risk-adjusted performance.

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13
Q

Time Value of Money

A

The idea that money today is worth more than the same amount in the future.

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14
Q

Present Value (PV)

A

The current value of future cash flows discounted at an interest rate.

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15
Q

Future Value (FV)

A

The value of an investment at a future date given growth/interest.

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16
Q

Discount Rate

A

The interest rate used to convert future cash flows to present value.

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17
Q

Compounding

A

Earning interest on principal plus previously earned interest.

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18
Q

Annuity

A

A series of equal payments made at regular intervals.

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19
Q

Perpetuity

A

A series of equal payments that lasts forever.

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20
Q

Yield

A

The income return on an investment, usually expressed as a percentage.

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21
Q

Yield to Maturity (YTM)

A

Expected total return of a bond if held to maturity.

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22
Q

Bond

A

A debt instrument where investors lend money to an issuer in exchange for interest payments and principal repayment.

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23
Q

Coupon

A

The periodic interest payment made by a bond.

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24
Q

Face Value

A

The amount repaid to the investor at the bond’s maturity.

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25
Duration
A measure of a bond's price sensitivity to interest rate changes.
26
Convexity
Measures how a bond’s duration changes as interest rates change.
27
Credit Risk
The risk that a bond issuer will default.
28
Derivative
A financial contract whose value is based on an underlying asset.
29
Underlying Asset
The asset from which a derivative derives its value (e.g., stock, index, rate).
30
Option
A contract giving the right, but not the obligation, to buy or sell an asset at a preset price.
31
Call Option
Gives the holder the right to buy the underlying asset at the strike price.
32
Put Option
Gives the holder the right to sell the underlying asset at the strike price.
33
Strike Price
The price at which an option can be exercised.
34
Expiration Date
The date on which an option contract ends.
35
Premium
The price paid to buy an option.
36
Intrinsic Value
The amount an option is in the money.
37
Time Value
The extra premium above intrinsic value due to time and volatility.
38
Delta
How much an option’s price changes for a $1 move in the underlying.
39
Gamma
How quickly delta changes as the underlying asset moves.
40
Theta
How much an option loses per day from time decay.
41
Vega
How sensitive an option’s price is to changes in volatility.
42
Rho
How sensitive an option’s price is to changes in interest rates.
43
Future
A standardized contract to buy or sell an asset at a set price in the future.
44
Forward
A customized contract to buy or sell an asset at a set price in the future (OTC).
45
Swap
A contract where two parties exchange cash flows (commonly interest rate swaps).
46
Portfolio
A collection of investments held by an individual or institution.
47
Efficient Frontier
The set of portfolios that maximize return for a given level of risk.
48
Capital Market Line (CML)
Shows the best possible risk-return combinations using a risk-free asset and the market portfolio.
49
Capital Asset Pricing Model (CAPM)
Model linking expected return to beta (systematic risk).
50
Systematic Risk
Market-wide risk that cannot be diversified away.
51
Unsystematic Risk
Company-specific risk that can be diversified away.
52
Bid Price
The highest price a buyer is willing to pay.
53
Ask Price
The lowest price a seller is willing to accept.
54
Bid-Ask Spread
The difference between the bid and ask prices; measures liquidity and transaction cost.
55
Market Order
Order to buy or sell immediately at the best available price.
56
Limit Order
Order to buy or sell only at a specified price or better.
57
Stop Order
An order that becomes a market order once a set price level is hit.
58
Slippage
The difference between the expected trade price and the actual execution price.
59
Liquidity
How easily and cheaply an asset can be bought or sold.
60
Order Book
A list of buy and sell orders at different prices.
61
Long Position
Buying an asset expecting the price to rise.
62
Short Position
Borrowing and selling an asset expecting the price to fall.
63
Margin
Borrowing money from a broker to invest.
64
Leverage
Using borrowed funds to increase exposure to investments.
65
Arbitrage
Risk-free profit made from price differences in different markets.
66
Statistical Arbitrage (Stat Arb)
Quant strategy exploiting statistical patterns and price mispricings.
67
Momentum
Strategy that buys assets rising in price and sells those falling.
68
Mean Reversion
Strategy betting prices will return to their long-term average.
69
Market Maker
A trader/firm providing liquidity by posting continuous bid and ask prices.
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