2181 - Chapter 5 - Key terms

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effective annual rate (EAR)

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Interest rate annualized using compound rather than simple interest.

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annual percentage rate (APR)

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Interest rate is annualized using simple rather than compound interest.

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nominal interest rate

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The interest rate in terms of dollars that have not been adjusted for purchasing power.

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real interest rate

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The excess of the interest rate over the inflation rate. The growth rate of purchasing power derived from an investment.

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dividend yield

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The percent rate of return provided by a stock’s dividend payments.

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mean return

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Another term for expected return.

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variance

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A measure of the dispersion of a random variable. Equals the expected value of the squared deviation from the mean.

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standard deviation

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Square root of the variance.

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risk-free rate

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The interest rate that can be earned with certainty.

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risk premium

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An expected return in excess of that on risk-free securities; provides compensation for the risk of an investment.