Chapter 11

Question 1

Investment

Answer 1

An asset that Generates Income Return

Question 2

Speculation

Answer 2

An Asset whose value depends solely on supply and Demand

Question 3

Derivative securities

Answer 3

value derived from the value of other assets

Question 4

Option

Answer 4

right of owner to buy or sell an asset

Question 5

ST Goals

Answer 5

1 year

Question 6

Intermediate term

Answer 6

1-10 years

Question 7

LT Goals

Answer 7

10+ years

Question 8

Lending Investments

Answer 8

Savings accounts and Bonds

Question 9

Ownership Investments

Answer 9

Preferred stocks and common stocks

Question 10

Income Return

Answer 10

Any payments you receive directly from the company or organization in which you invested

Question 11

Nominal Rate of Return

Answer 11

without inflation

Question 12

Real Rate of Return

Answer 12

with inflation

Question 13

Sources of Risk

Answer 13

Interest Rate
Inflation
Business
Financial
Liquidity
Market
Political& Regulatory
Exchange Rate
Call

Question 14

Portfolio

Answer 14

Group of Investments held by an investor

Question 15

Systematic Risk

Answer 15

Risk that cannot be eliminated through diversification

Question 16

Unsystematic Risk

Answer 16

Risk that can be eliminated through diversification

Question 17

Capital Gain/ Loss

Answer 17

A gain or loss on the sale of a capital asset.

Question 18

Interest Rate Risk

Answer 18

Risk of fluctuation in security prices due to changes in market interest rates

Question 19

Inflation risk

Answer 19

The risk that rising prices will eat away the purchasing power of your money

Question 20

Business Risk

Answer 20

Risk of fluctuation in security prices resulting from good or bad management decisions

Question 21

Financial Risk

Answer 21

Risk associated with a company’s use of debt. (Risk that they will not be able to pay back on all obligations held)

Question 22

Liquidity Risk

Answer 22

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

Question 23

Exchange rate risk

Answer 23

Risk of fluctuation in security prices from the variability in earnings resulting from change in exchange rates

Question 24

Call Risk

Answer 24

Risk to bondholders that a bond may be called before maturity

Question 25

Asset Allocation

Answer 25

Attempt to ensure that the investors strategy reflects his or her time horizon and is well diversified, generally with assets of different class of investment type

Question 26

Asset Allocation (Through Age 54)

Answer 26

Majority in Common stock (80,20)

Question 27

Asset Allocation (Age 55-64)

Answer 27

Start moving some investments into bonds

60, 40

Question 28

Asset Allocation (Over age 65)

Answer 28

Spend more than saving, Movement away from stock

40 stock, 40 bond, 20 T-bill

Question 29

Asset Allocation (Retirement)

Answer 29

20 stock, 20 T-Bill, 60 Bonds

Question 30

Efficient Market

Answer 30

All relevant information about the stock is reflected in the Stock Price

Question 31

Mind Game/ Financial Personality

Answer 31

Overconfidence
Disposition Effect(Sell winners, keep losers)
House Money Effect(Winners take abnormal Risk)
Loss then Risk Aversion Effect(Losers take more risk)
Herd behavior (Follow the Crowd)