Define the following terms briefly and concisely. a. stock b. bond c. portfolio diversification d. mutual fund e. random walk

Question

What will be an ideal response?

Answer 1

a. A stock of a corporation is a piece of paper that gives the holder of the stock, or share, part ownership of the company. Income from stock is a “residual,” and shareholders are paid last, if at all, when the company makes profits. Because income from stock is riskier than income from bonds, stock generally has a higher expected rate of return than bonds.b. A bond is simply an IOU by a corporation that promises to pay the holder of the piece of paper a fixed sum of money at the specified maturity date and some other fixed amount of money (the coupon or interest payment) every year up to the date of maturity. Bondholders have a prior claim on the income of the corporation and generally earn a lower rate of return than do stockholders.c. Diversification means including a number and variety of stocks, bonds, and other such items in an individual or institution’s portfolio. Diversification can reduce the risk which the owner bears so that the risk of the portfolio can be less than the risk of any single item in it.d. A mutual fund is a private investment firm that purchases a portfolio of stocks and other financial assets and sells them to individual investors. Mutual funds provide a way for small investors to diversify their portfolio, reducing the risks associated with stock ownership.e. Random walk refers to the time pattern of prices. The path of a variable is said to constitute a random walk if its magnitude in one period is equal to its value in the preceding period plus a completely random number. Many economists believe that stock prices move in a random-walk fashion.