Investments Test 1

Front 1

What two primary components are use to measure the rate of return achieved from an investment?

Back 1

Capital gains or losses and current income

Front 2

What are some of the differences between financial and real assets?

Back 2

Financial asset-represents a financial claim on an asset that is usually documented by some form of legal representation. (Equity claims-direct/indirect, Creditor claims, Preferred stock, Commodity Futures)

Real asset- represents and actual tangible asset that may be seen, felt, or collected (Real estate, Precious metals, Precious gems, Collectibles, Other (cattle, oil..)

Front 3

Many people think of risk as the danger of losing money. Is this the same way that risk is defined in finance?

Back 3

Risk-Uncertainty concerning the outcome of an investment or other situations. It is often defined as variability of returns from an investment. The greater the range of possible outcomes, the greater the risk.

Front 4

What is a market?

Back 4

Market- A mechanism for facilitating the exchange of assets through buyer-seller communication. The communication, and not a central negotiation location, is the requisite condition for a market to exist, though some transactions do involve a direct meeting of buyers and sellers or their agents.

Front 5

What is the difference between primary and secondary markets?

Back 5

Primary Market-A market in which an investor purchases and asset from the issuer of the asset.

Secondary Market- A market in which an investor purchases and asset from another investor rather than the issuing corporation.

Front 6

Briefly explain the difference between exchanges and the over-the-counter markets.

Back 6

Organized exchange-have a central trading location where securities are bought and sold in an auction market by brokers acting as agents for the buyer and seller.

OTC-provide markets for exchange but not in a central location

Front 7

Explain the difference between a cash account and a margin account.

Back 7

Cash Account-requires full payment

Margin Account-allows investors to borrow a percentage of the purchase price from the brokerage firm

Front 8

Explain what is meant by a limit order. How does a stop order differ from a limit order?

Back 8

Limit Order-Limits the price at which you are willing to buy or sell and ensures you will pay no more than the limit price on a buy or receive no less than the limit price on a sell.

A limit order does not guarantee execution if orders are timed stamped ahead of you on the specialist's book.

Stop Order-it is placed at a specific price like a limit order, but when the price is reached, the stop turns into a market order that will be executed at close to the stop price but not necessarily at the exact price specified. Guaranteed

Front 9

What are the criticisms and a defense of the Dow Jones Industrial Average?

Back 9

Criticism-too selective and represents too few stocks

Defense-Does follow the general trend of the market, and these 30 stocks comprise more than 25 percent of the market value of the 3,000 firms listed on the NYSE

Front 10

What is fiscal policy?

Back 10

Described as the governement taxing and spending policies

Large impact on the direction of the economic activities

Front 11

What is monetary policy?

Back 11

Determines the appropriate level of money supply and interest rates that accomplish the economic goals

Front 12

Describe how the Federal Reserve can influence economic activity?

Back 12

Raise/lower reserve requirements on commercial banking time deposits

Change discount rate periodically to reflect its attitude toward the economy

The Fed can also influence bank behavior by issuing policy statements, or jawboning

The Fed uses Open-Market Operations and can buys and sells US government securities for its own portfolio

Front 13

Distinguish between a peak and a trough.

Back 13

Trough-end of recession, beginning of expansion

Peak- end of expansion, beginning of recession

Front 14

What is the advantage of using a composite of indicators over simply using an individual indicator?

Back 14

Much smoother curve than each individual components since erratic changes in one indicator are offset by movements in other indicators

Front 15

Distinguish between a “top-down approach” and a “bottom-up approach” to selecting stocks.

Back 15

Top Down- Economy, Industry, Company

Bottom Up- Company, Industry, Economy

Front 16

If the investor does not correctly identify the crossover point between grow and expansion, what might happen to the price of the stock?

Back 16

Once investors recognize that past growth rate will not be extrapolated and instead, is in decline, stock prices can take a sizable tumble as price-earning ratio collapse because slower growth expectation

Front 17

If an investor fears higher inflation, what possible industries might they choose for investment and why?

Back 17

move into basic materials and energy. The price pressures in the economy spill over into rising prices for these commodities and rising profits for aluminum, oil, steel, and other companies in these industries.