Chapter 10: Stock Markets and Personal Finance Flashcards
What does a mutual fund do?
It pools money from many customers and invests the money in many firms in return for a management fee
What are the two types of mutual funds?
- Active funds
2. Passive funds
What are active funds?
Funds where managers try to pick individual stocks in an attempt to beat the market
What are passive funds?
Funds that attempt to mimic a broad stock market index
For every buyer there is a ______.
seller
What is the efficient markets hypothesis?
The claim that the prices of traded assets reflect all publicly available information
What is weak form?
Prices of traded assets (stocks and bonds) reflect all past pricing information
What is semi strong form?
Prices reflect all public info
What is strong form?
Prices reflect all public and private info
What does diversification in your portfolio do?
It lowers the overall risk of your portfolio
What is buy and hold?
The practice of buying stocks and then holding them for the long run regardless of what prices do in the short term
What are the least risky assets for your portfolio?
Assets that are negatively correlated with your portfolio
What are the riskiest stocks according to finance economists?
Those that move up and down in harmony with the market
What does it mean to buy assets that are negatively correlated to the rest of your portfolio?
It means that you should try to buy assets that rise in value when the rest of your portfolio is falling in value
What is the DOW Jones Industrial Average?
It is composed of 30 leading American stocks
What is the S&P 500?
A broader index than the DOW composed of 500 stocks
What is the NASDAQ?
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
What is the rule of 70?
if the rate of return is x%, the time to double the investment value is 70/x years
In the long run what type of investment offers better returns?
Stocks
What is risk-return tradeoff?
Higher returns come at the price of higher risk
New stock and bond issues are an important means of raising _______.
capital for new investment
The stock price signals the ______ of a firm.
value
Stock markets are a way of tramsferring company control from less competent people to more competent people.
True or false?
True
When does a speculative bubble arise?
When stock prices rise far higher and more rapidly than can be accounted for by the fundamental prospects of the companies at hand
