Chapter 11 Investment Basics

Question 1

an asset that generates a return

Answer 1

investment

Question 2

an asset whose value depends solely on supply and demand

Answer 2

speculation

Question 3

value derived from value of other assets

Answer 3

derivative securities

Question 4

right of owner to buy or sell an asset

Answer 4

option

Question 5

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

Answer 5

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

Question 6

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

Answer 6

consequences

time frame

Question 7

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

Answer 7

means
insurance
emergency

Question 8

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

Answer 8

income return

Question 9

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

Answer 9

yourself
investing
employer
invest
two

Question 10

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

Answer 10

marginal
after
liquidate
zero

Question 11

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

Answer 11

lending investments

Question 12

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

Answer 12

ownership investments

Question 13

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

Answer 13

maturity date

Question 14

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

Answer 14

par value of principal

Question 15

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

Answer 15

coupon interest rate

Question 16

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

Answer 16

return

Question 17

If issuer goes bankrupt, bondholder can ____ entire investment

Answer 17

lose

Question 18

what are the two major forms of ownership investments

Answer 18

real estate and stocks

Question 19

what is the major disadvantage of real estate

Answer 19

tends to be illiquid

Question 20

a fractional ownership in a corporation

Answer 20

stock

Question 21

a payment by a corporation to its shareholders

Answer 21

dividend

Question 22

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 _________ _________

Answer 22

capital gain

Question 23

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

Answer 23

nominal rate of return

Question 24

the current or nominal rate of return minus the inflation rate

Answer 24

real rate of return

Question 25

can the real rate of return be negative?

Answer 25

yes

Question 26

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

Answer 26

higher

Question 27

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

Answer 27

reward | losing

Question 28

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

Answer 28

risk

Question 29

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

Answer 29

risk

Question 30

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

Answer 30

interest rate risk

Question 31

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

Answer 31

inflation risk

Question 32

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

Answer 32

business risk

Question 33

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

Answer 33

financial risk

Question 34

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

Answer 34

liquidity risk

Question 35

risk associated with overall market movements

Answer 35

market risk

Question 36

risk resulting form unanticipated changes in the tax or legal environment

Answer 36

political and regulatory risk

Question 37

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

Answer 37

exchange rate risk

Question 38

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

Answer 38

call risk

Question 39

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

Answer 39

calling a bond

Question 40

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

Answer 40

diversification

Question 41

a group of investments held by an individual

Answer 41

portfolio

Question 42

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

Answer 42

systematic or market-related risk

Question 43

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

Answer 43

unsystematic or firm specific risk

Question 44

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

Answer 44

risk-tolerance

Question 45

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

Answer 45

more

Question 46

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.

Answer 46

variability | uncertainty

Question 47

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

Answer 47

asset allocation

Question 48

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

Answer 48

time horizon financial situation or capacity for risk risk tolerance

Question 49

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

Answer 49

80% common stock and 20% bonds

Question 50

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

Answer 50

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

Question 51

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?

Answer 51

40% stocks 40% bonds 20% tbills

Question 52

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

Answer 52

efficient markets

Question 53

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

Answer 53

information

Question 54

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

Answer 54

stock analysts

Question 55

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 __________.

Answer 55

upswing | downswing

Question 56

What are some of the behavioral quirks of investors?

Answer 56

``` overconfidence disposition effect house money effect loss then risk aversion effect herd behavior ```

Question 57

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

Answer 57

disposition

Question 58

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

Answer 58

house money effect

Question 59

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

Answer 59

loss then risk aversion effect

Question 60

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

Answer 60

herd behavior