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Personal Finance > Chapter 11 Investment Basics > Flashcards

Chapter 11 Investment Basics Flashcards

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1
Q

an asset that generates a return

A

investment

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2
Q

an asset whose value depends solely on supply and demand

A

speculation

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3
Q

value derived from value of other assets

A

derivative securities

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4
Q

right of owner to buy or sell an asset

A

option

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5
Q

When setting investment goals:

1) write down your goals and _________ them
2) attach _______ to them
3) figure out when the _________ for those goals will be needed
4) periodically __________ your goals

A

1) prioritize
2) costs
3) money
4) reevaluate

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6
Q

When setting investment goals:
goals should be realistic, so there’s _____________ if not accomplished
and you need to establish a _______ _______ for your goals:
short-term-within 1 year
intermediate-term- 1-10 years
long-term: over 10 years

A

consequences

time frame

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7
Q

How do you know if you’re ready to invest?
Have a grip on your financial affairs
Make sure you’re living within your ________
Have adequate __________
Keep ____________ funds

A

means
insurance
emergency

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8
Q

investment return received directly from the company or organization in which you’ve invested, usually in the form of dividends or interest payments

A

income return

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9
Q

When starting your investment program:
Pay _______ first
make _______ automatic with an employer program
Take advantage of Uncle Sam and your __________
If you receive windfalls (inheritance, salary bonus, gift, tax refund, or lottery) make sure you _________ it
Make ____ months a year investment months

A 
yourself
investing
employer
invest
two
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10
Q

In Fitting Taxes into investing:
the _______ tax rate is the rate you pay on the next dollar of earnings
Tax-free investment alternatives should be compared only on an ______ tax basis
You can make investments on a tax-deferred basis, which means that not only does your investment grow free of taxes, but the money you invest isn’t taxed until you ______ your investment.
When it comes to taxes, capital gains and dividend income are better than ordinary income. Recall that both the long-term capital gains tax rate and the tax rate on qualified dividends are reduced to 15 percent for taxpayers whose top tax bracket exceeds 15 percent, and for taxpayers in the 10 to 15 percent tax brackets, the tax rate is reduce to _______ percent

A

marginal
after
liquidate
zero

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11
Q

savings accounts and bonds, which are debt instruments issued by corporations and by the government, are examples of

A

lending investments

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12
Q

preferred stocks and common stocks, which represent an ownership position in a corporation, along with income-producing real estate, are examples of ownership investments.

A

ownership investments

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13
Q

the date at which the borrower must repay the loan or borrowed funds

A

maturity date

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14
Q

the stated amount on the face of a bond, which the firm is to repay the maturity date

A

par value of principal

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15
Q

the interest to be paid annually on a bond as a percentage of par value, which is specified in the contractual agreement

A

coupon interest rate

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16
Q

With lending investments, you usually know ahead of time exactly what your _______ will be

A

return

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17
Q

If issuer goes bankrupt, bondholder can ____ entire investment

A

lose

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18
Q

what are the two major forms of ownership investments

A

real estate and stocks

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19
Q

what is the major disadvantage of real estate

A

tends to be illiquid

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20
Q

a fractional ownership in a corporation

A

stock

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21
Q

a payment by a corporation to its shareholders

A

dividend

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22
Q

the gain or loss on the sale of a capital asset. for example, any return or loss form the appreciation or depreciation in value of a share of stock would be considered a _________ _________

A

capital gain

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23
Q

the rate of return earned on an investment, unadjusted for lost purchasing power

A

nominal rate of return

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24
Q

the current or nominal rate of return minus the inflation rate

A

real rate of return

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25
Q

can the real rate of return be negative?

A

yes

26
Q

Interest rates act as a “base” return. When interest rates go up, investors demand a _______ return on other investments

A

higher

27
Q

the more risk you assume, the greater the potential __________- but also the greater possibility of _________ you money

A

reward

losing

28
Q

You should balance the amount of _______ with amount of return needed

A

risk

29
Q

Investments that produce higher returns, they have higher levels of ________ associated with them.

A

risk

30
Q

the risk of fluctuations in security prices due to changes in the market interest rate

A

interest rate risk

31
Q

the risk that rising prices will eat way the purchasing power of your money an that changes in the anticipated level of inflation will result in interest rate changes, which will in turn cause security price fluctuations

A

inflation risk

32
Q

the risk of fluctuations in security prices resulting from good or bad management decisions, or how well or poorly the firm’s products are doing in the marketplace

A

business risk

33
Q

the risk associated with a company’s use of debt. If a company takes on too much debt and can’t meet it’s obligations, investors risk the company defaulting or dropping in stock value

A

financial risk

34
Q

risk associated with the inability to liquidate a security quickly and at a fair market price

A

liquidity risk

35
Q

risk associated with overall market movements

A

market risk

36
Q

risk resulting form unanticipated changes in the tax or legal environment

A

political and regulatory risk

37
Q

the risk of fluctuations in security prices from the variability in earnings resulting form changes in exchange rates

A

exchange rate risk

38
Q

the risk to bondholders that a bond may be called away from them before maturity

A

call risk

39
Q

the redeeming of a bond before its scheduled maturity. Many bonds are callable

A

calling a bond

40
Q

the elimination of risk by investing in different assets. It works by allowing the extreme good and bad returns to cancel each other out. The result is that total variability or risk is reduced without affecting expected return

A

diversification

41
Q

a group of investments held by an individual

A

portfolio

42
Q

that portion of a security’s risk or variability that can’t be eliminated through investor diversification. This type of variability or risk results form factors that affect all securities

A

systematic or market-related risk

43
Q

risk or variability that can be eliminated through investor diversification. Unsystematic risk results from factors that are unique to a particular firm

A

unsystematic or firm specific risk

44
Q

It’s important to understand your risk tolerance:
need to recognize your tolerance for risk and invest accordingly
take one of many _______-___________ test
review your past actions

A

risk-tolerance

45
Q

As the length of the investment horizon increases, you can afford to invest in riskier assets.
If investment horizon is longer, will probably end up with _____ if you invest in some risky assets

A

more

46
Q

With any long-term investments, there will be good and bad years. With time, ___________ of returns in these years converges toward the average. Investments in bonds will give you less _______________ over time but will give smaller ultimate value than investing in riskier assets like stocks.

A

variability

uncertainty

47
Q

an attempt to ensure that the investor’s strategy reflects his or her investment time horizon and is well diversified, generally with assets in several different classes of investments, such as domestic common stocks, international common stocks, and bonds

A

asset allocation

48
Q

what are the three most important factors impacting your asset allocation decision

A

time horizon
financial situation or capacity for risk
risk tolerance

49
Q

If your investment horizon is quite long, you should place the majority of your savings where?

A

80% common stock and 20% bonds

50
Q

when your in your golden ages (55-64) what should you change in your asset allocation?

A

start moving some of retirement portfolio into bonds
maintain a diversified portfolio
own 60% stocks and 40% bonds

51
Q

When your retiring or over the age of 65, you start to spend more than you can save because you’re unemployed. You can maintain safety through diversification and movement away from common stocks. How should you allocated your money?

A

40% stocks
40% bonds
20% tbills

52
Q

a market in which information about the stock is reflected in the stock price

A

efficient markets

53
Q

the more efficient the market, the faster prices react to new _________

A

information

54
Q

if the stock market were truly efficient, then there would be no benefit from __________ _______

A

stock analysts

55
Q

Half the time you should outperform the market, and half the time you should underperform. Keep your lan and invest for the long term. If you try to time the market, you are just as likely to miss an _________ as you are to avoid a __________.

A

upswing

downswing

56
Q

What are some of the behavioral quirks of investors?

A 
overconfidence
disposition effect
house money effect
loss then risk aversion effect
herd behavior
57
Q

which behavioral quirk is this?
involves the emotions of fearing regret and seeking pride resulting in selling winners too soon, and keeping losers too long

A

disposition

58
Q

which behavior quirk is this?
if a gambler enters a casino with $5,000 and immediately doubles it, winning $5,000, that gambler will act differently with the new $5,000, taking on risks that he or she wouldn’t normally undertake. This is hos investors acted during the dot com bubble

A

house money effect

59
Q

which behavior quirk is this?
related to the house money effect is the risk aversion effect where investors who lose money are more reluctant to take risks

A

loss then risk aversion effect

60
Q

which behavior quirk is this?
when investors see stocks moving one way or the other, they have a tendency to join in and follow the crowd. Investors are afraid that others know something about an individual stock or about the market that they don’t know or haven’t figure out yet

A

herd behavior

Personal Finance (3 decks)

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