26 Investment Fundamentals Flashcards
What is asset allocation?
Form of diversification in which the investor decides on the proportions of an investment portfolio that will be devoted to various categories of assets.
How is average share cost calculated?
By dividing the total amount invested by the total shares purchased.
What does average share price represent?
Calculated by dividing the share price total by the number of investment periods.
Define bear market.
Market in which securities prices have declined in value by 20 percent or more from previous highs.
What are below-average costs?
Average costs of an investment if more shares are purchased when the price is down and fewer shares are purchased when the price is high.
What are bonds?
A debt instrument issued by an organization that promises repayment at a specific time and the right to receive regular interest payments during the life of the bond.
Define bull market.
Market in which securities prices have risen 20 percent or more over time.
What is business-cycle risk?
The fact that economic growth usually does not occur in a smooth and steady manner and that this impacts profits as well as investment returns.
What is the buy-and-hold investment strategy?
Investment strategy in which investors buy a widely diversified mix of stocks and/or mutual funds, reinvest the dividends, and hold onto those investments almost indefinitely.
What is a capital gain?
Increase in the value of an initial investment, realized upon the sale of the investment.
What is a capital loss?
Decrease in paper value of an initial investment.
What are commissions?
Fees or percentages of the selling price paid to salespeople, agents, and companies for their services in buying or selling an investment.
What is current income?
Money received while you owe an investment.
Define debts in the context of investments.
Lending investments that typically offer both a fixed maturity and a fixed income.
What is diversification?
Process of reducing risk by spreading investment money among several different investment opportunities.
What is dollar-cost averaging?
Systematic program of investing equal sums of money at regular intervals, regardless of the price of the investment.
What are equities?
Ownership equities such as common or preferred stocks, equity mutual funds, real estate, and so on that focus on capital gains more than on income.
Define financial risk.
Possibility that an investment will fail to pay a return to the investor.
What does fixed income refer to?
Specific rate of return that a borrower agrees to pay the investor for use of the principal.
What is fixed maturity?
Specific date on which a borrower agrees to repay the principal to the investor.
What is herd behavior in investing?
When emotion rules investing decisions and investors decide to copy the observed decisions of other investors or movements in the markets rather than follow their own beliefs and information.
What does interest refer to?
Charge for borrowing money.
Define investing.
Putting saved money to work so that it makes you even more money.
What is an investment philosophy?
Investor’s general approach to tolerance for risk in investments, whether it is conservative, moderate, or aggressive, given the investor’s financial goals.
What is an investment plan?
An explanation of your investment philosophy and your logic on investing to reach specific goals.
What is investment risk?
The possibility that the yield on an investment will deviate from its expected return.
What does leverage mean in investing?
Using borrowed funds to invest with the goal of earning a rate of return in excess of the after-tax costs of borrowing.
What is a limited managed account?
An account at an investment firm whereby they sell and buy mutual fund assets on the client’s behalf to automatically rebalance the portfolio back to the client’s specific standard.
Define liquidity.
The speed and ease with which an asset can be converted to cash.
What is liquidity risk?
The risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss.
What is a market correction?
A short-term price decline in the stock markets of at least 10 percent in a stock, bond, commodity or index to adjust for recent price increases.
What is market efficiency?
The speed at which new information is reflected in investment prices suggesting that security prices are reflective of their true value at all times.
Who are market timers?
Investors who attempt to predict the short-term movements of various markets and move capital based on those predictions.
What is market volatility?
The likelihood of large price swings in securities due to a company’s success and various market conditions.
What is market-volatility risk?
The fact that all investments are subject to occasional sharp changes in price as a result of events affecting a particular company or the overall market.
What is Monte Carlo analysis?
Technique that performs a large number of trial runs of a particular portfolio mix of investments to find an optimal allocation for a particular investor’s goals and risk tolerance.
Define portfolio.
Collection of investments assembled to meet investment goals.
What is portfolio diversification?
Practice of selecting a collection of different asset classes of investments chosen for their potential returns and dissimilar risk-return characteristics.
How is the rate of return (yield) expressed?
Total return of an investment expressed as a percentage of its price.
What is the real rate of return?
Return on an investment after subtracting the effects of inflation and income taxes.
What does risk averse mean?
One who tends to dislike risk and is unable to put money into investments that seem risky.
Define risk indifferent.
Investors who accept some risk as they seek capital gains through slow and steady growth in investment value along with current income.
What is a risk premium?
The difference between a riskier investment’s expected return and the totally safe return on the T-bill.
What does risk seeking mean?
Investors who primarily seek capital gains, often with a short time horizon.
What is risk tolerance?
An investor’s willingness to weather changes in the value of investments.
What are securities?
Assets suitable for investment.
What are securities markets?
Places where stocks and bonds are traded.
What is speculative risk?
Involves the potential for either gain or loss.
What are stocks?
Shares of ownership in a business corporation’s assets and earnings.
Define systematic (market or undiversifiable) risk.
The possibility for an investor to experience losses due to unknown factors that affect the overall performance of the financial markets.
What is total return?
Income an investment generates from current income and capital gains.
What is unsystematic (random) risk?
Risk associated with owning only one investment of a particular type.
