Chapter 11 Investment Basics Flashcards
an asset that generates a return
investment
an asset whose value depends solely on supply and demand
speculation
value derived from value of other assets
derivative securities
right of owner to buy or sell an asset
option
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
1) prioritize
2) costs
3) money
4) reevaluate
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
consequences
time frame
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
means
insurance
emergency
investment return received directly from the company or organization in which you’ve invested, usually in the form of dividends or interest payments
income return
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
yourself investing employer invest two
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
marginal
after
liquidate
zero
savings accounts and bonds, which are debt instruments issued by corporations and by the government, are examples of
lending investments
preferred stocks and common stocks, which represent an ownership position in a corporation, along with income-producing real estate, are examples of ownership investments.
ownership investments
the date at which the borrower must repay the loan or borrowed funds
maturity date
the stated amount on the face of a bond, which the firm is to repay the maturity date
par value of principal
the interest to be paid annually on a bond as a percentage of par value, which is specified in the contractual agreement
coupon interest rate
With lending investments, you usually know ahead of time exactly what your _______ will be
return
If issuer goes bankrupt, bondholder can ____ entire investment
lose
what are the two major forms of ownership investments
real estate and stocks
what is the major disadvantage of real estate
tends to be illiquid
a fractional ownership in a corporation
stock
a payment by a corporation to its shareholders
dividend
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 _________ _________
capital gain
the rate of return earned on an investment, unadjusted for lost purchasing power
nominal rate of return
the current or nominal rate of return minus the inflation rate
real rate of return
can the real rate of return be negative?
yes
Interest rates act as a “base” return. When interest rates go up, investors demand a _______ return on other investments
higher
the more risk you assume, the greater the potential __________- but also the greater possibility of _________ you money
reward
losing
You should balance the amount of _______ with amount of return needed
risk
Investments that produce higher returns, they have higher levels of ________ associated with them.
risk
the risk of fluctuations in security prices due to changes in the market interest rate
interest rate risk
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
inflation risk
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
business risk
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
financial risk
risk associated with the inability to liquidate a security quickly and at a fair market price
liquidity risk
risk associated with overall market movements
market risk
risk resulting form unanticipated changes in the tax or legal environment
political and regulatory risk
the risk of fluctuations in security prices from the variability in earnings resulting form changes in exchange rates
exchange rate risk
the risk to bondholders that a bond may be called away from them before maturity
call risk
the redeeming of a bond before its scheduled maturity. Many bonds are callable
calling a bond
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
diversification
a group of investments held by an individual
portfolio
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
systematic or market-related risk
risk or variability that can be eliminated through investor diversification. Unsystematic risk results from factors that are unique to a particular firm
unsystematic or firm specific risk
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
risk-tolerance
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
more
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.
variability
uncertainty
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
asset allocation
what are the three most important factors impacting your asset allocation decision
time horizon
financial situation or capacity for risk
risk tolerance
If your investment horizon is quite long, you should place the majority of your savings where?
80% common stock and 20% bonds
when your in your golden ages (55-64) what should you change in your asset allocation?
start moving some of retirement portfolio into bonds
maintain a diversified portfolio
own 60% stocks and 40% bonds
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?
40% stocks
40% bonds
20% tbills
a market in which information about the stock is reflected in the stock price
efficient markets
the more efficient the market, the faster prices react to new _________
information
if the stock market were truly efficient, then there would be no benefit from __________ _______
stock analysts
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 __________.
upswing
downswing
What are some of the behavioral quirks of investors?
overconfidence disposition effect house money effect loss then risk aversion effect herd behavior
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
disposition
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
house money effect
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
loss then risk aversion effect
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
herd behavior
