Chapter 1 and Notes: Lecture 1 Slides 1-14

Question 1

What is an Investment?

Answer 1

An investment is any vehicle into which resources can be placed with the expectation that it will generate positive income, or that its value will be preserved or increased, or both.

Question 2

What are investment returns (a.k.a. investment rewards)?

Answer 2

Income – interest, dividends, rent 
a.k.a. cash flows
Increased value / Decreased value 
a.k.a. capital gains, capital appreciation (Yippee!)
a.k.a. capital losses (Boo! Hiss!)

Question 3

What type of investments are securities?

Answer 3

Securities
Investments that represent debt or ownership or the legal right to acquire or sell an ownership interest
(a.k.a. financial investments)

Question 4

What type of investments are property?

Answer 4

Property
Real property (land, buildings) and personal property (precious metals, autos, art, collectibles, etc.)
(a.k.a. real estate, hard assets, tangible assets, commodities)

Question 5

What type of investments are personal?

Answer 5

Personal
Examples: Education and Training, Travel
College is often the best investment a person will ever make – Why?

Question 6

What type of investments are categorized as primary assets?

Answer 6

Debt
Funds lent in exchange for interest income and the promised repayment of the loan at a given future date
Examples: Bonds, Short-term investments (savings accts, etc.)
Equity
Ownership in a business or a property
Examples: Stocks (corporations), Partnerships, Sole Proprietorships, Real Estate, Real Estate Investment Trusts (REIT)s

Question 7

What type of investments are categorized as derivative assets?

Answer 7

Securities that derive their value from an underlying security or asset – normally highly speculative
Examples: Options, Futures

Question 8

What are the characteristics of direct investments?

Answer 8

Your name is on the investment and you control the investment – can buy or sell as you wish
Examples: Real Estate, Stocks, Bonds

Question 9

What are the characteristics of indirect investments?

Answer 9

Someone else is in control of the investment
You have limited control, or more likely, no control over the underlying investment
Examples: Mutual Funds, REIT (Real Estate Investment Trust) Limited Partnership*

*You can buy or sell your shares in the mutual fund, REIT, or limited partnership, but you do not control the underlying investment

Question 10

What makes an investment domestic?

Answer 10

It is based in the United States.

Question 11

What makes an investment international (a.k.a. foreign)?

Answer 11

It is based outside the United States.

Question 12

What makes an investment global?

Answer 12

Global = domestic and international

Be careful of this subtle distinction
International (a.k.a. Foreign) ≠ Global

Question 13

What investments are considered safer, domestic or international/foreign?

Answer 13

“The world is a very small place these days economically.”
Sixty-five percent (by value) of the parts in the Ford Mustang come from the U.S. and Canada. Ninety percent of the parts in the Toyota Sienna – which is built in Indiana – come from the U.S. and Canada. Which is the more American car? (Forbes)

It does not matter where the mail goes!

Question 14

How long is a short term investment?

Answer 14

1 to 2 years.

Question 15

How long is an intermediate term investment?

Answer 15

2 to 5 years.

Question 16

How long is a long term investment?

Answer 16

5 to 7+ years

Question 17

What determines liquid investments?

Answer 17

Easily and quickly converted into cash
There is a ready market to purchase the investment and change of ownership happens quickly
Examples: Stocks, Bonds, Mutual Funds, REITs (Real Estate Investment Trust)s

Question 18

What determines illiquid investments?

Answer 18

May be difficult to convert into cash
Market for investment is small or change of ownership happens slowly or both
Examples: Real Estate, Partnerships, Collectibles

Question 19

What is risk in the investment world?

Answer 19

Risk is the chance that actual investment returns will differ from the expected returns.

What is the typical definition of risk?
“The possibility of suffering harm or loss; danger”

In general, the higher the expectation of investment returns, the higher the risk level

Question 20

Describe the Risk / Return Spectrum?

Answer 20

Low-risk – 3% to 5%
Moderate-risk – 5% to 8%
High-risk – 8% to 12%
Speculative-risk – Greater than 12%
Speculation is often not considered investing