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Personal Finance > Wealth Management > Flashcards

Wealth Management Flashcards

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1
Q

Concept

is the risk associated with owning only one investment of a particular type or asset class that, by chance, may perform very poorfly in the future because of uncontrollable or random factors

A

random risk

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2
Q

Concept

also called unsystematic risk

A

random risk

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3
Q

Define

random risk

A
  • also called unsystematic risk
  • risk associated with an investment that may do very poorly in the future because of uncontrollable or random factor
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4
Q

Concept

the process of reducing risk by spreading investment money among several different investment opportunities and asset classes.

A

diversification

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5
Q

Define

diversification

A
  • the process of reducing risk by spreading investment money among several different investment opportunities and asset classes
  • diversification is a form random risk management
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6
Q

effects of diversification on

portfolio return

A
  • results in a potential rate of return on all investments that is lower than the potential return on a single alternative instrument, but
  • the returns will be more predictable, and;
  • the risk of loss is lower
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7
Q

Concept

the possibility for an investor to experience losses due to unknown factors that affect the overall performance of the financial markets

A

market risk

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8
Q

Fill in the blank

diversification cannot eliminate all risk because of ____

A

market risk

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9
Q

causes of market risk

A
  • changes in economic, social, political conditions
  • fluctuations in investor preferences
  • black swans
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10
Q

Concept

consists of the sum of the random risk and the market risk

A

total risk

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11
Q

Define

total risk

A

consists of the sum of the random risk and the market risk

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12
Q

Concept

is the possibility that the investment wil fail, perhaps go bankrupt, and result in a massive or total loss

A
  • business failure risk
  • financial risk
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13
Q

Define

business failure risk

A
  • also called financial risk
  • is the possibility that the investment will fial, perhaps go bankrupt, and result in a massive or total loss
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14
Q

Concept

is the danger that your money will not grow as fast as inflation, and; therefore, its present value will be lower in the future

A

inflation risk

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15
Q

Concept

is the most important dimension of risk for the long-term investor

A

inflation risk

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16
Q

Concept

also called purchasing power risk

A

inflation risk

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17
Q

Concept

The chance that the value of an investment will decline when overall prices decline

A

deflation risk

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18
Q

Define

deflation risk

A

This is the chance that the value of an investment will decline when overall prices decline

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19
Q

Concept

The sooner your invested money is supposed to be returned to you—the time horizon of an investment—the less the likelihood that something could go wrong

A

time horizon risk

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20
Q

Concept

investors usually expect higher returns with increasing amounts of this risk

A

time horizon risk

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21
Q

Concept

results from changes in the income tax or legal environments imposed by a government.

A

regulatory risk

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22
Q

Define

regulatory risk

A

results from changes in the income tax or legal environmnets imposed by a government

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23
Q

Concept

subject to occasional sharp changes in price as a result of events affecting a particular company or the overall market for similar investments

A

market-volatility risk

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24
Q

Define

business-cycle risk

A
  • risk of a recession occuring after periods of expansion lasting typically 3 or 4 years
  • seasonality risk
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25
Q

Concept

the exposure of a portfolio to geographic unknowns due to diversification in an attempt to reduce other types of risk

A

global investment risk

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26
Q

Define

global investment risk

A

The more globally diversified a portfolio, the smoother the returns over time; however, it exposes the portfolio to geographic unknowns

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27
Q

Define

liquidity risk

A
  • is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss, or realize a profit
  • real estate is illiquid
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28
Q

Concept

  • is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss, or realize a profit
A

liquidity risk

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29
Q

Concept

  • where the agreement can be terminated by either of the parties if they give proper notice in advance
  • this arrangement also typically applies in situations in which no written lease is established
A

periodic tenancy

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30
Q

Concept

  • lease that provides for a pre-arranged period of time, usually one year
  • this is the most common
A

tenancy for a specific time

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31
Q

tenants rights

absence of a written lease

A
  • retaliatory actions
  • habitability
  • making repairs
  • security deposit return
  • nonperformance
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32
Q

Concept

The right to file a lawsuit in small-claims court against a landlord

A

nonperformance right of a tenant (even without a lease)

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33
Q

Concept

  • an amount returned at the end of the lease
  • must explain specific reasons for deductions
A

security deposit return

34
Q

Concept

  • legally prescribed minimum standards of living
  • running water, heat, and working stove, etc.
A

habitability right of a tenant

35
Q

number

renting is considered “affordable” if one does not pay more than ____ percent of their disposable income on housing

A

30

36
Q

Concept

Those who spend between 30 and 50 percent of their disposable income on rent

A

moderately rent-burdened

37
Q

Concept

  • ratio is the median existing home price divided by the average annual you would pay for a comparable home in the area
A

price-to-rent ratio

38
Q

after taxes and appreciation

which is better: owning or renting

A

after taxes and appreciation, owners usually win

39
Q

The buyers are faced with substantial initial costs when purchasing a home, these include:

A
  • down payment
  • closing costs
40
Q

Define

closing costs

A

include fees and charges other than the down payment and typically vary from 2 to 7 percent of the mortgage loan amount

41
Q

Define

point

A
  • short for interest point
  • free equal to 1 percent of the total loan amount
  • any charges for points must be paid in full when the home is brought
42
Q

Define

title insurance

A

lenders often require buyers to purchase it because it protects the lender’s interest if the title is later found faulty

43
Q

Concept

is conducted to ensure that the home is physically sound and that all operating systems are in proper order

A

home inspection

44
Q

Define

PITI

A

real estate agents and lenders often use to indicate a mortgage payment that includes principal, interest, real estate taxes, and homeowner’s insurance

45
Q

Define

loan-to-value

A
  • is a ratio of the amount financed to the value of the home
  • LTV ratio is simply the loan amount divided by the value of the home, which initially is the purchase price
46
Q

list three types of

mortgage insurance

A
  • private mortgage insurance
  • FHA mortgage insurance
  • VA mortgage insurance
47
Q

Define

HARP

A
  • Home Affordable Refinance Program
  • a government program offered by Fannie Mae and Freddie Mac
48
Q

Define

HAMP

A
  • Home Affordable Modification Program
  • a government program offered by Fannie Mae and Freddie Mac
49
Q

Calculate interest payment, principal repayment, balance due

first month
* mortgage - $200,000
* monthly payment - $978.03
* 30-year duration
* 4.2%

A

First month:
* $200,000 x 4.2% x 1/12 = $700.00 interest payment
* $978.03 - 700.00 = $278.03 principal repayment
* $200,000 - 278.03 = $199,721.97 balance due

50
Q

Calculate interest payment, principal repayment, balance due

second month
* mortgage - $200,000
* monthly payment - $978.03
* 30-year duration
* 4.2%

A

First month:
* $200,000 x 4.2% x 1/12 = $700.00 interest payment
* $978.03 - 700.00 = $278.03 principal repayment
* $200,000 - 278.03 = $199,721.97 balance due

Second month:
* $199,721.97 x 4.2% x 1/12 = $699.02 interest payment
* $978.03 - 699.02 = $279.01 principal repayment
* $199,721.97 - 278.03 = $199,442.96 balance due

51
Q

Concept

At any point, the amount that has been paid off (including the down payment) plus any appreciation in the value of the home

A

homeowner’s equity

52
Q

Concept

The equity portion of a mortgage payment is a type of ____

A

forced savings

53
Q

What explains why homeowners typically have higher net worth than renters?

A

forced savings that results from the equity portion of a mortgage payment

54
Q

three factors that affect

mortgage payment

A
  1. amount borrowed
  2. payment period
  3. interest rate
55
Q

Calculate monthly payment

  • interest rate - 8.0%
  • payment period - 30 years
  • amount borrowed - $1,000,000
  • down payment - $200,000
  • payment factor - 7.3376
A
  • monthly payment = ($800,000 / 1,000) x 7.3376 = $5,870.08
56
Q

Define

conventional mortgage

A
  • fixed-rate, fixed-term, fixed-payment mortgage loan
57
Q

Define

adjustable-rate mortgage (ARM)

A
  • sometimes called variable-rate mortgage
  • the borrower’s interest rate fluctuates according to some index of interest rates based on the rising or falling cost of credit in the economy
  • has an interest rate cap
58
Q

Concept

  • the borrower’s interest rate fluctuates according to some index of interest rates based on the rising or falling cost of credit in the economy
A

ARM

59
Q

number

ARM rates are usually ____ percentage point below conventional mortgage rates

A

1

60
Q

features of ARM interest-rate cap

A
  • limit the amount by which the interest rate can increase
  • increase by no more than 1 or 2 percent per year
  • no more than 5 percent over the life of the loan
61
Q

Define

loss aversion effect

A
  • investors who lose money in their investments and later become more reluctant to take risks.
  • research shows that losses are twice as powerful as gains
62
Q

Define

herd behavior

A

arises when investors decide to copy the observed decisions of other investors or movements in the markets rather than follow their own beliefs and information

63
Q

three behaviors for long-term investors to avoid

A
  • being overconfident—optimism bias
  • setting unrealistic goals—chasing excess returns
  • trading too much—the more you trade, the more likely you are to make a wealth destroying mistake
64
Q

4 effective strategies for

long-term investors

A
  1. buy-and-hold anticipates long-term economic growth
  2. portfolio diversification reduces portfolio volatility
  3. dollar-cost averaging buys at “below-average” costs
  4. asset allocation keeps you in the right investment categories for your time horizon
65
Q

Define

DRIP

A
  • dividend-reinvestment plan (DRIP)
  • agreement to buy a certain number of shares and to reinvest cash dividends into more shares of stock for little or no transaction fees
66
Q

Concept

a form of diversification is deciding on the proportion of your investment portfolio that will be devoted to various categories of assets

A

asset allocation

67
Q

list

to achieve an appropriate mix of growth, income, and stability in your portfolio, you need a combination of three investments

A
  1. stocks and/or stock mutual funds (equities)
  2. bonds (debt), and
  3. cash (or cash equivalents like Treasury securities)
68
Q

list

three asset allocation rules of thumb

A
  1. the 110 rule
  2. the 120 rule
  3. new portfolio thinking rules
69
Q

Describe

the 110 rule

A
  • percent to invest in equities is 110 minus your age
  • multiply the result by 1.25
  • place the remainder in bonds and cash
70
Q

Describe

the 120 rule

A
  • percent to invest in equities is 120 minus your age
  • the result is placed in equities
  • place the remainder in bonds and cash
71
Q

Describe

new portfolio thinking rules

A

20s & 30s
* 100% equities

40s
* 90-100% equities; rest in bonds

50s
* 75-85% equities; rest in bonds

60s
* 70-80% equities; rest in bonds

72
Q

asset allocation

  • high risk tolerance
  • 0-5 year time horizon
A

10-30-60
cash; bonds; equities

73
Q

asset allocation

  • low risk tolerance
  • 11+ year time horizon
A

10-30-60
cash; bonds; equities

74
Q

asset allocation

  • high risk tolerance
  • 6-10 year time horizon
A

20-80
bonds; equities

75
Q

asset allocation

  • moderate risk tolerance
  • 11+ year time horizon
A

20-80
bonds; equities

76
Q

asset allocation

  • high risk tolerance
  • 11+ year time horizon
A

100
equities

77
Q

asset allocation

  • moderate risk tolerance
  • 6-10 year time horizon
A

10-30-60
cash; bonds; equities

78
Q

asset allocation

  • low risk tolerance
  • 6-10 year time horizon
A

20-40-40
cash; bonds; equities

79
Q

asset allocation

  • moderate risk tolerance
  • 0-5 year time horizon
A

20-40-40
cash; bonds; equities

80
Q

asset allocation

  • low risk tolerance
  • 0-5 year time horizon
A

35-40-25
cash; bonds; equities

81
Q

5 instances when

it’s time to sell

A
  • something changed significantly in the company
  • the investment is doing so well that it is overvalued
  • the investment is performing poorly
  • you need cash
  • the investment no longer fits

Personal Finance (10 decks)

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