Investments Quiz (Ch. 1)

Front 1

Exposure to stocks & bonds without owning stocks & bonds

Back 1

indirect equity

Front 2

A type of indirect equity that is designed for "sophisticated investors" (based on income & net worth)

Back 2

hedge funds

Front 3

Hedge funds (a type of indirect equity):
- less heavily ________
- can change ________ without telling investors
- more ________ oriented
- more ________ about what they invest in
- more ________ (% of profits taken out)

Back 3

regulated, objective, derivative, secretive, expensive

Front 4

A type of indirect equity: retirement funds aka ________

Back 4

pension funds

Front 5

A way to bet on stock price declining, higher risk, can lose a lot more money

Back 5

selling short

Front 6

________, not investors, trade commercial paper. (Creditor)

Back 6

Institutions

Front 7

Hybrid between stocks & bonds

Back 7

preferred stock

Front 8

Agreement to take at a certain price at a later date

Back 8

futures

Front 9

With futures (agreement to take at a certain price at a later date), someone has to lose money for me to ________.

Back 9

make money

Front 10

While real estate & precious metals are ________ assets, you can have ________ assets on them.
- REITS (Real Estate Investment
Trust) - similar to a ________
fund for real estate
- ETF (Exchange Traded Fund) -
like a mutual fund, but trades
like a ________ (Ex: Gold)
*Can own real assets (gold) in
the form of a financial asset
(________)

Back 10

real, financial, mutual, stock, ETF

Front 11

How do we measure risk?
1.
2.
3.

Back 11

standard deviation, beta, value at risk (VAR)

Front 12

The ability to tolerate risk depends on many factors such as:

Back 12

Job security, kids (dependents), inflation, disposable income, age (time to retirement)

Front 13

Willingness to tolerate risk largely depends on a person's ________.

Back 13

personality

Front 14

________ - more risk-seeking with one account & more risk-averse with another account

Back 14

segment

Front 15

The more exposure you have to the downsides of risk, the less ________ you are to take risk.

Back 15

willing

Front 16

Usually the more disposable income a person has, the ________ their ability to take risk but they have less of an ________ to take risk.

Back 16

greater, incentive

Front 17

An investment objective where there is guaranteed money coming in right now (ex: dividend, interest, rents, etc.)

Back 17

current income

Front 18

Increasing the value of your investment over time is known as ________ appreciation.

Back 18

capital (investment objective)

Front 19

Where liquidity is concerned, there are two fundamental questions:
1. Can we sell it ________?
2. Can we sell it for fair ________ value?

Back 19

quickly, market

Front 20

The ________ job stability, the less liquidity you need. The ________ the time frame, the less liquidity you need.

Back 20

higher, longer

Front 21

A way to vary liquidity is to separate into different accounts with different ________ of liquidity.

Back 21

levels

Front 22

Stocks (short-term orientation) may offer a higher return, but there's also more ________ associated with them and they may not be appropriate.

Back 22

volatility

Front 23

When you take on more risk, you have the potential to lose a lot of ________.

Back 23

money

Front 24

Time period determines not only the level of ________, but also how much ________ we're willing to take.

Back 24

liquidity, risk

Front 25

Short term trading is taxed as ________ income.

Back 25

ordinary

Front 26

If an investment is held for > 1 yr, it is considered ________.

Back 26

long-term

Front 27

A traditional IRA offers a ________ tax benefit.

Back 27

frontloaded

Front 28

With a traditional IRA, you retire and make a withdrawal which is taxed as ________.

Back 28

income

Front 29

A Roth IRA offers a ________ tax benefit.

Back 29

backloaded

Front 30

A Roth IRA compounds ________-free. Since there isn't a tax benefit up front, you get to keep ________ of what you take out.

Back 30

tax, 100%

Front 31

With Arithmetic Averages, you ________/# of ________.

Back 31

add them all up, of observations

Front 32

Arithmetic averages don't work well with returns because of the ________ effect.

Back 32

compounding

Front 33

The greater the ________, the worse arithmetic average is.

Back 33

volatility

Front 34

Equation for Geometric Average

Back 34

[(1+k1)(1+k2)....(1+kn)]^(1/n) - 1

Front 35

When calculating the standard deviation for historical data, use ________ average, because you don't want to take into account the compounding effect.

Back 35

arithmetic

Front 36

STUDY STANDARD DEVIATION FORMULA

Back 36

STANDARD DEVIATION

Front 37

Beta is ________ risk and is systematic, ________.

Back 37

market, nondiversifiable

Front 38

When evaluating investments on their own, ________ is a more appropriate risk measurement.

Back 38

sigma

Front 39

Average market risk is a beta of ________.

Back 39

1

Front 40

A beta ________ than 1 is considered high risk.

Back 40

greater

Front 41

Most betas fall in what range?

Back 41

.4 - 1.8

Front 42

Beta varies from source to source because of the specifics of ________.

Back 42

calculations

Front 43

Value At Risk (VAR) looks at ________case scenario.

Back 43

worst

Front 44

STUDY VAR HANDOUT

Back 44

VAR

Front 45

Problems with Value At Risk:
1. Doesn't take into consideration ________
2. There's no way to really know what the risk is going to be in the ________.
3. It can create a false sense of ________ as to what can happen.

Back 45

outliers, future, security

Front 46

Sigma doesn't work with ________ returns.

Back 46

random

Front 47

Beta assumes a ________.

Back 47

portfolio

Front 48

STUDY TAX HANDOUT.

Back 48

TAX

Front 49

Required Return = ________ Rate of Return + Anticipated ________ + ________

Back 49

Real, Inflation, Risk Premium

Front 50

Taxes DO/DO NOT affect required return.

Back 50

do

Front 51

Artificial demand that keeps interest rate artificially low, which in turn creates a negative return is known as ________.

Back 51

quantitative easing (QE)

Front 52

claims to cash flows or assets based on a legal agreement (ex: share of stock entitles you to ownership in a corporation and the value of the stock will be based on the perceived value of the corporation and the number of shares outstanding)

Back 52

financial asset

Front 53

a tangible asset (ex: you can set foot inside a piece of property or hold a diamond in your hand )

Back 53

real asset

Front 54

Financial assets of LOWER/GREATER liquidity than real assets.

Back 54

greater

Front 55

Financial assets have LOWER/HIGHER storage/management costs.

Back 55

lower

Front 56

FINANCIAL/REAL assets have a greater chance of becoming worthless.

Back 56

Financial

Front 57

Real assets are less liquid, require ________ or active management, but are likely to maintain some ________ over time.

Back 57

storage, value

Front 58

7 key areas relating to investment objectives:

Back 58

1. Risk and Safety of Principal
2. Current Income vs. Capital Appreciation
3. Liquidity
4. Short-Term vs. Long-Term Orientation
5. Tax Factors
6. Ease of Management
7. Retirement and Estate Planning considerations

Front 59

Risk and Safety of Principal (key area relating to investment objectives) - Choosing the correct risk level is one of the most important functions of developing a sound investment plan.

Factors that influence appropriate level of risk include:
- Age - All else equal, for most individuals age and risk tolerance are ________ related. Young people have more time to recover from investment setbacks and more time to take advantage of the higher expected returns associated with higher risk investments. As we age, we have less time to recover from large investment losses.
-Income - At higher levels of income, we increase our risk ________, but decrease the ________ for taking risk. Someone that is earning a relatively low income needs to earn higher rates of ________ (more risk), but they have less ability to recover from setbacks.
- Wealth - With high levels of wealth, and individual does not need to take as much risk to generate sufficient investment income. However, with high levels of wealth, it is easier

Back 59

inversely, increase, decrease, return, reserve, more, feels

Front 60

Current Income (________, ________, ________) vs. Capital Appreciation (________) (Key area relating to investment objectives) -
-One argument - it is important! People that are in the wealth accumulation stage should focus on ________, while people that have started spending their investment income should focus on ________.

Other Side - IRRELEVANT
People should focus on maximizing their ________ risk-adjusted rate of return regardless of whether that return is form current income or capital appreciation. If an individual needs to spend investment income, they can sell a portion of their ________ as easily as they can spend a dividend check. If an individual is in the accumulation stage, they can reinvest those dividends in place of capital gains. As long as transaction costs are low, the method of accessing your investment income should not matter.

Back 60

dividends, interest, rent,
gains,
capital appreciation, current income
after-tax, assets

Front 61

Liquidity (Key area relating to investment objectives)-
If you are using your investment portfolio as a source of income (beyond the current income generated from dividends, interest, etc) you need to think about liquidity. Also, if you have a ________-term investment horizon, you need to think about ________. All else equal, liquidity lowers ________ slightly. As investors prefer liquidity, they typically will accept lower returns for investments that are more liquid. Also if you focus on liquid investments, it limits your potential ________. If you are not concerned with the liquidity of your investments, you may be able to generate slightly ________ returns.

Back 61

short, liquidity, returns, options, higher

Front 62

Short-Term vs. Long-Term Orientation (Key area relating to investment objectives)-
Two big concerns for short-term investors - 1. ________, 2. ________

With long-term orientation, much of the short-term ________ may wash out. This allows people with long-term orientations to take ________ risk levels on average

Back 62

liquidity, volatility, volatility, higher

Front 63

Tax Factors (Key area relating to investment objectives) - While most returns are on a pre-tax basis, what matters is ________ returns. It is critical to be aware of what impact taxes have on your returns and how to best maximize your after-tax returns (adjusted for risk). The two biggest mistakes people make in this area are ignoring ________ impacts and trying to ________ taxes (instead of maximizing after-tax returns)

Back 63

after-tax, tax, minimize

Front 64

Ease of Management (Key area relating to investment objectives) - Decision whether to be actively involved in all of their ________ decisions or mildly involved (ex: ________ fund)

Back 64

investment, mutual

Front 65

Retirement and Estate Planning Considerations (Key area relating to investment objectives)-
The rules and regulations associated with estate planning and retirement can require special attention in developing an ________ plan.

Back 65

investment

Front 66

ownership of individual common stocks or instruments that allow you to purchase individual shares (such as call options)

Back 66

direct equity

Front 67

stock exposure without actually owning individual shares (a stock-based mutual fund, within 401k plans)

Back 67

indirect equity

Front 68

The long-term investor buying short-term assets tends to more more ________ in that there is little time for the value of their investments to change substantially. These money market type securities tend to offer low rates of return, typically only slightly higher than the anticipated rate of ________.

Back 68

conservative, inflation

Front 69

A short-term ________ is often purchasing long-term assets (stocks and bonds) or volatile short-term assets (options and futures) in anticipation of significant changes in value for these assets over a short period of time. They will see more ________ returns and typically face ________ transaction costs. They are less concerned with avoiding losses on any one trade and more concerned with the cumulative impact of all their trades.

Back 69

trader, volatile, higher

Front 70

In a highly inflationary environment, investors tend to favor ________assets. As inflation drives up prices of good and services, the value of the real assets tend to ________ at a similar rate. However, the real key is based on expectations. If inflation is fully anticipated, ________ assets should hold up just as well as ________ assets. If inflation grows faster than expected, ________ assets will be a poor investment. On the flip side, you could see a period of high inflation that is still less than expected where ________ assets would outperform ________ assets.

Back 70

real, increase, financial, real, financial, financial, real

Front 71

the possibility of earning less than expected

Back 71

risk

Front 72

a way to measure risk that measures how much volatility we have in our returns, (all else equal the greater the volatility the more significant the chance of earning less than expected will become)

Back 72

standard deviation

Front 73

a way to measure risk that measures how sensitive our stock is to the overall market

Back 73

beta

Front 74

a way to measure risk that tries to measure the worst potential loss we might encounter given a percentage of the outcomes.

Back 74

value-at-risk (VAR)

Front 75

The three elements that impact an investors return are:
1. ________ - The compensation investors need to forego current consumption
2.________ - The compensation to maintain purchasing power
3. ________ - The compensation for risk of the investment.

Back 75

Real Risk-Free Rate of Return
Inflation Premium
Risk premium

Front 76

One issue that is often neglected when figuring an investor's return is ________ implications.

Back 76

tax

Front 77

Equation for Return

Back 77

(Real Risk-Free Rate + Inflation Premium + Risk Premium) / (1 - Tax Rate)

Front 78

Equation for Calculating Expected Return

Back 78

(P1-Po+D1)/Po

Front 79

How do you figure the arithmetic average?

Back 79

Add up all the returns and divide by the number of returns.

Front 80

How do you calculate the expected return for a probability distribution.

Back 80

Take the probability, multiply by the corresponding value and add all together.

Front 81

If the required return is greater than the expected return, DO/DO NOT invest.

Back 81

do not

Front 82

If the required return is less than the expected return DO/DO NOT invest.

Back 82

do

Front 83

To figure out after tax rate of return, you take the ________ return and divide by 1-(________ tax rate).

Back 83

expected return, marginal

Front 84

What rule is designed to prevent investors from selling stocks purely to claim the capital loss for tax purposes and then buying back the stock immediately afterwards? Therefore, in order to claim the capital loss, an investor may not buy back the stock until 31 days later. Note that you do not give up the capital loss if you buy back the stock before the 31 day window. Instead you just don't get to claim the loss at that time.

Back 84

wash sale rule