exam #4

Question 1

a standard or point of reference against which the performance of investments, such as a portfolio or a mutual fund, can be measured.

Answer 1

benchmark

Question 2

A measure of a stock’s volatility relative to the overall market; a beta of 1 indicates the stock moves with the market.

Answer 2

beta

Question 3

a measure indicating how much value a mutual fund adds or subtracts from a fund’s return, compared to the benchmark

Answer 3

alpha

Question 4

a risk management strategy that mixes different investments within a portfolio to reduce exposure to any single asset or risk

Answer 4

diversification

Question 5

the process of spreading investments across various asset categories like stocks, bonds, and cash

Answer 5

asset allocation

Question 6

a concept in portfolio management that aims for the highest possible returns for a given level or risk through optimal asset allocation

Answer 6

efficient frontier

Question 7

the rate at which the general level of prices for goods and services is rising, eroding purchasing power

Answer 7

inflation

Question 8

long-term positioning of asset mix based on expected returns for asset classes

Answer 8

strategic asset allocation

Question 9

maintaining the same percentages of asset classes over time regardless of market conditions

Answer 9

constant allocation

Question 10

temporary adjustments to the asset mix based on short-term market opportunities

Answer 10

tactical asset allocation

Question 11

an investment strategy where securities are purchased and held for a long period regardless of fluctuations in the market

Answer 11

buy and hold strategy

Question 12

Savings reserved for unexpected expenses, typically covering 3-6 months of living expenses.

Answer 12

emergency fund

Question 13

a method of evaluating securities by analyzing statisitics generated by market activirt, such as past prices and volume

Answer 13

technical analysis

Question 14

a method of measuring a security’s intrinsic value by examining related economic and financial factors

Answer 14

fundamental analysis

Question 15

the perceived or calculated true value of an asset, based on underlying perceptions or calculated valuations

Answer 15

intrinsic value

Question 16

PE ratio

Answer 16

price to earning’s ratio, a valuation ratio of a company’s current share price compared to its per-share earnings

Question 17

random walk of wall street

Answer 17

A book written in 1973 which influenced the low-cost and passive investment management movement.

Question 18

passive investment

Answer 18

is a strategy where investors buy and hold a mix of assets for the long term, typically using index funds or exchange-traded funds (ETFs) that mimic the performance of a market index.

Question 19

active investment

Answer 19

Active investment involves frequent buying and selling of stocks, bonds, or other assets, with the goal of outperforming certain benchmarks or indices.

Question 20

growth stock

Answer 20

are companies that are considered to have the potential to outperform the overall market over time because of their future potential

Question 21

value stock

Answer 21

as companies that are currently trading below what they are really worth and will thus provide a superior return.

Question 22

behavioral finance

Answer 22

a field of fiance that proposes psychology based theories to explain stock market anomalies

Question 23

irrationality

Answer 23

refers to decision-making in financial markets that deviates from rational expectations due to cognitive biases and emotional influences.

Question 24

availability bias

Answer 24

This bias occurs when your brain uses the information that it has handy and weighs it more heavily than information that it has to seek out.

Question 25

confirmation bias

Answer 25

is when investors have a bias toward accepting information that confirms their already-held belief in an investment

Question 26

anchoring

Answer 26

relying too heavily on the first piece of information seen when making decisions

Question 27

herd behavior

Answer 27

Herd behavior states that people tend to mimic the financial behaviors of the majority of the herd

Question 28

mental accounting

Answer 28

treating money differently depending on factors such as it’s origin and intended use

Question 29

emotional gap

Answer 29

the emotional gap refers to decision-making based on extreme emotions or emotional strains such as anxiety, anger, fear, or excitement.

Question 30

self-attribution

Answer 30

a tendency to make choices based on overconfidence in one’s own knowledge or skill

Question 31

effects of irrational behavior

Answer 31

actions like over trading or underreacting to market events, driven by emotional biases rather than rational decision making.

Question 32

endownment effect

Answer 32

demand a higher price for something than we are willing to pay someone else for that same thing.

Question 33

overtrading

Answer 33

Investors can get too emotional and not think rationally when the markets get heated up. A result of this is that they begin trading which can result in “buy high, sell low”.

Question 34

do-nothing

Answer 34

Investors can become overwhelmed with the options and information available. This can sometimes lead to the decision to invest nothing or leave their investments sitting in under-performing or risky vehicles.

Question 35

mean regression bias

Answer 35

The belief is that daily fluctuations are temporary and the price will ultimately return to the average