Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
18 Cards in this Set
- Front
- Back
|
Principal
|
the original value of an investment or a debt
|
|
|
Total return
|
the sum of the capital appreciation (or losses) and the income earned on an investment over a specified period
|
|
|
Capital appreciation (capital gain)
|
amount by which an asset's selling prices exceeds its purchase price but has never sold
|
|
|
Capital loss
|
the amount by which the proceeds from the sale of a capital asset are less than the adjusted cost of acquiring it
|
|
|
Compound annual rate of return
|
the return earned on reinvested investment income in addition to the return earned on the principal
|
|
|
What are the two components of total return on investments?
|
1. Capital appreciation -- the change in value of the principal
2. Investment income -- such as interest, dividends, and rent |
|
|
Why is the compound annual rate of return a more accurate measure of the rate of return on an investment than the average annual rate of return?
|
It takes into account both the return earned on the original investment and the return on reinvested investment income
|
|
|
What is the trade-off between investment risk and return in relation to a family's savings needs?
|
Lower probability of loss leads to lower possibility of gain. Higher probability of loss leads to higher possibility of gain.
|
|
|
Leverage
|
the practice of using borrowed money to invest
|
|
|
What does the Consumer Price Index (CPI) measure and why doesn't it meet the needs of investor in evaluating inflation risk?
|
It measures the rate of inflation that has occurred. What matters most to investors is what inflation will be over the life of their investment, not what is has been in the past
|
|
|
Why are fixed income securities closely subjected to interest rate risk?
|
If interest rates rise, newly issued bonds will carry higher interest rates, but bonds issued in the past will still be paying the market interest rate in place when they were issued
|
|
|
What are the differences in systematic risk and unsystematic risk? How can investors reduce or eliminate unsystematic risk?
|
Systematic risk is common to all securities of the same general class and cannot be eliminated by diversification.
Unsystematic risk arises from factors unique to a particular investment. It can be reduced or eliminated via diversification. |
|
|
What is the investor's benefit of the dollar cost averaging investment strategy?
|
Investor makes small periodic payments rather than a large single investment.
Can reduce risk of purchasing investments when prices are relatively high. Can devote more energy to choosing appropriate investments. |
|
|
What is a reinvestment strategy and how does it help investors increase returns from their investment portfolios?
|
Reinvestment strategy uses investment returns to make additional investments. Original principal continues to earn returns, and the reinvested funds compound the earnings by providing return on the returns.
|
|
|
What is an asset allocation strategy and what is its use?
|
Investors assign a certain percentage of their portfolio to specific investments. This enables investors to reduce their investment risk substantially for a small sacrifice of investment return. It also allows investors to tailor their profile to suit an individual's tolerance for risk.
|
|
|
Disadvantages to the investor of money market mutual funds
|
- Number of withdrawals per month is limited
- May require higher balances and pay slightly higher interested rates than savings accounts |
|
|
Bonds are generally one of the lowest-risk investments, yet they are exposed to some types of risk. List three types
|
- Inflation risk
- Default risk - Interest rate risk |
|
|
Classifications of mutual funds
|
- Money market
- Bond - Stock - Blended |
