AFC Module 26 - Investments

Question 1

BEAR MARKET

Answer 1

Market in which securities prices have declined in value by 20 percent or more from previous highs.

Question 2

BULL MARKET

Answer 2

MARKET IN WHICH SECURITIES PRICES HAVE RISEN 20 PERCENT OR MORE OVER TIME.

Question 3

BUSINESS-CYCLE RISK

Answer 3

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

Question 4

CAPITAL GAIN

Answer 4

INCREASE IN TEH VALUE OF AN INITIAL INVETMENT REALIZED UPON THE SALE OF THE INVESTMENT

Question 5

CAPITAL LOSS

Answer 5

DECREASE IN PAPER VALUE OF AN INITIAL INVESTMENT

Question 6

CURRENT INCOME

Answer 6

MONEY RECEIVED WHILE YOU OWN AN INVESTMENT

Question 7

FINANCIAL RISK

Answer 7

POSSIBILITY THAT AN INVESTMENT WILL FAIL TO PAY A RETURN TO THE INVESTOR

Question 8

FIXED INCOME

Answer 8

SPECIFIC RATE OF RETURN THAT A BORROWER AGREES TO PAY THE INVESTOR FOR USE OF THE PRINCIPAL

Question 9

FIXED MATURITY

Answer 9

SPECIFIC DATE ON WHICH A BORROWER AGREES TO REPAY THE PRINCIPAL TO THE INVESTOR

Question 10

HERD BEHAVIOR

Answer 10

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

Question 11

INTEREST

Answer 11

CHARGE FOR BORROWING MONEY

Question 12

INVESTMENT RISK

Answer 12

THE POSSIBILITY THAT THE YIELD ON AN INVESTMENT WILL DEVIATE FROM ITS EXPECTED RETURN

Question 13

LEVERAGE

Answer 13

USING BORROWED FUNDS TO INVEST WITH THE GOAL OF EARNING A RATE OF RETURN IN EXCESS OF THE AFTER-TAX COSTS OF BORROWING

Question 14

LIMITED MANAGED ACCOUNT

Answer 14

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

Question 15

LIQUIDITY

Answer 15

THE SPEED AND EASE WITH WHICH AN ASSET CAN BE CONVERTED TO CASH

Question 16

LIQUIDITY RISK

Answer 16

THE RISK THAT A GIVEN SECURITY OR ASSET CANNOT BE TRADED QUICKLY ENOUGH IN THE MARKET TO PREVENT A LOSS

Question 17

MARKET CORRECTION

Answer 17

A SHORT-TERM PRICE DECLINE IN THE STOCK MARKETS OF AT LEAST 10 % IN A STOCK, BOND, COMMODITY, OR INDEX TO ADJUST FOR RECENT PRICE INCREASES

Question 18

MARKET EFFICIENCY

Answer 18

THE SPEED AT WHICH NEW INFORMATION IS REFLECTED IN INVESTMENT PRICES SUGGETING THAT SECURITY PRICES ARE REFLECTIVE OF THEIR TRUE VALUE AT ALL TIMES BECAUSE PUBLICLY AVAILABLE INFORMATION HAS DRIVEN MARKET PRICES TO THE CORRECT LEVEL

Question 19

MARKET TIMERS

Answer 19

INVESTORS WHO ATTEMPT TO PREDICT THE SHORT-TERM MOVEMENTS OF VARIOUS MARKETS AND, BASED ON THOSE PREDICTIONS, MOVE CAPITAL FROM ONE SEGMENT TO ANOTHER IN ORDER TO CAPTURE MARKET GAINS AND AVOID MARKET LOSSES

Question 20

MARKET VOLATILITY

Answer 20

THE LIKELIHOOD OF LARGE PRICE SWINGS IN SECURITIES DUE TO A COMPNAY’S SUCCESS AND VARIOUS MARKET CONDITIONS

Question 21

MARKET VOLATILITY RISK

Answer 21

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 FOR SIMILAR INVESTMENTS

Question 22

MONTE CARLO ANALYSIS

Answer 22

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

Question 23

RATE OF RETURN (YIELD)

Answer 23

TOTAL RETURN OF AN INVESTMENT EXPRESSED AS A % OF ITS PRICE

Question 24

REAL RATE OF RETURN

Answer 24

RETURN ON AN INVESTMENT AFTER SUBTRACTING THE EFFECTS OF INFLATION AND INCOME TAXES

Question 25

RISK PREMIUM

Answer 25

THE DIFFERENCE BETWEEN A RISKIER INVESTMENT’S EXPECTED RETURN AND THE TOTALLY SAFE RETURN ON THE T-BILL

Question 26

SECURITIES MARKET

Answer 26

PLACES WHERE STOCKS AND BONDS ARE TRADED

Question 27

SPECULATIVE RISK

Answer 27

INVOLVES THE POTENTIAL FOR EITHER GAIN OR LOSS

Question 28

SYSTEMATIC (MARKET OR UNDIVERSIFIABLE) RISK

Answer 28

THE POSSIBILITY FOR AN INVESTOR TO EXPERIENCE LOSSES DUE TO UNKNOWN FACTORS THAT AFFECT THE OVERALL PERFORMANCE OF THE FINANCIAL MARKETS

Question 29

TOTAL RETURN

Answer 29

INCOME AN INVESTMENT GENERATES FROM CURRENT INCOME AND CAPITAL GAINS

Question 30

UNSYSTEMATIC (RANDOM) RISK

Answer 30

RISK ASSOCIATED WITH OWNING ONLY ONE INVESTMENT OF A PARTICULAR TYPE