Chapter 10: Stock Markets and Personal Finance

Question 1

What does a mutual fund do?

Answer 1

It pools money from many customers and invests the money in many firms in return for a management fee

Question 2

What are the two types of mutual funds?

Answer 2

1. Active funds

2. Passive funds

Question 3

What are active funds?

Answer 3

Funds where managers try to pick individual stocks in an attempt to beat the market

Question 4

What are passive funds?

Answer 4

Funds that attempt to mimic a broad stock market index

Question 5

For every buyer there is a ______.

Answer 5

seller

Question 6

What is the efficient markets hypothesis?

Answer 6

The claim that the prices of traded assets reflect all publicly available information

Question 7

What is weak form?

Answer 7

Prices of traded assets (stocks and bonds) reflect all past pricing information

Question 8

What is semi strong form?

Answer 8

Prices reflect all public info

Question 9

What is strong form?

Answer 9

Prices reflect all public and private info

Question 10

What does diversification in your portfolio do?

Answer 10

It lowers the overall risk of your portfolio

Question 11

What is buy and hold?

Answer 11

The practice of buying stocks and then holding them for the long run regardless of what prices do in the short term

Question 12

What are the least risky assets for your portfolio?

Answer 12

Assets that are negatively correlated with your portfolio

Question 13

What are the riskiest stocks according to finance economists?

Answer 13

Those that move up and down in harmony with the market

Question 14

What does it mean to buy assets that are negatively correlated to the rest of your portfolio?

Answer 14

It means that you should try to buy assets that rise in value when the rest of your portfolio is falling in value

Question 15

What is the DOW Jones Industrial Average?

Answer 15

It is composed of 30 leading American stocks

Question 16

What is the S&P 500?

Answer 16

A broader index than the DOW composed of 500 stocks

Question 17

What is the NASDAQ?

Answer 17

It averages the prices of over 3000 securities. Its contains more small stocks and high tech stocks relative to the DOW or the S&P

Question 18

What is the rule of 70?

Answer 18

if the rate of return is x%, the time to double the investment value is 70/x years

Question 19

In the long run what type of investment offers better returns?

Answer 19

Stocks

Question 20

What is risk-return tradeoff?

Answer 20

Higher returns come at the price of higher risk

Question 21

New stock and bond issues are an important means of raising _______.

Answer 21

capital for new investment

Question 22

The stock price signals the ______ of a firm.

Answer 22

value

Question 23

Stock markets are a way of tramsferring company control from less competent people to more competent people.

True or false?

Answer 23

True

Question 24

When does a speculative bubble arise?

Answer 24

When stock prices rise far higher and more rapidly than can be accounted for by the fundamental prospects of the companies at hand