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Ch 10: Investments

Diversification
To spread around one’s investment dollars among several different classes of financial assets and among the securities of many issuers; results in lowered risk
Investments
Account or arrangement in which one would put their money for long-term growth. It should not be withdrawn for a suggested minimum of 5 years
Liquidity
Quality of an asset that permits it to be converted quickly into cash without loss of value. Availability of money, when there is more liquidity, there is typically less return
Portfolio
A list of your investments
Risk
Degree of uncertainty of return on an asset. In business, the likelihood of loss or reduced profit
Risk-Return Ratio
Relationship of substantial reward in comparison to the amount of risk taken
Share
Piece of ownership in a company or mutual fund
Explain the KISS rule of investing
The “Keep It Simple Stupid” rule means successful investments are one that are simple

Avoid complicated investments that are difficult to understand or explain

What is the relationship between diversification and risk
Diversification or the spreading around of your investments, causes more stable growth

Many companies work together to increase your investments value, which in turn lowers the risk

Money market mutual funds
A low-risk mutual fund with investments in short-term (usually 90 days or less) maturities; great for your emergency fund
Bonds
Debt tool where an issuer owes you money, a form of I.O.U.
Single stocks
An investment in one particular stock only
Mutual funds
Pool of money managed by an investment company and invested in multiple companies, bonds, etc.
Rental real estate
Buying real estate to rent it out as an investment
Annuities
Contract sold by an insurance company, designed to provide payments to the holder at specific intervals, usually after retirement
The only people who get rich from get-rich-quick schemes are
the people selling them
You need a financial advisor with a
heart of a teacher
You should never buy any financial product or service if you
can’t explain to someone else how it works
Never invest purely on
tax savings
T/F It is smart to invest on borrowed money because you can pay it back and keep the rest
F. Never invest using borrowed money
Diversification means to
spread around
Diversification _________ risk
Diversification *lowers* risk
Speculative
Purchasing risky investments that present the possibility of large profits, but also post a higher-than-average possibility of loss
With virtually all investments, as the ________ goes up, so does the return
With virtually all investments, as the *risk* goes up, so does the return
When there is more liquidity there is typically _______ return
When there is more liquidity there is typically *less* return
Savings accounts
Accounts at a financial institutions that allow regular deposits and withdrawals; the minimum required deposit, fees charged, and interest rate paid varies among providers
A C.D is a
Certificate of Deposit, typically at a bank
Certified Deposit (C.D.)
Usually at a bank

Savings account with a slightly higher interest rate because of a longer savings commitment (e.g. six months, one year, etc.)

Money market mutual funds are _______ risk money market accounts with check-writing privileges. These are great for _________
Money market mutual funds are *low* risk money market accounts with check-writing privileges. These are great for *emergency funds*
Money Market Mutual Fund
Mutual fund that seeks to maintain stable share price and to earn current income by investing in interest-bearing instruments with short-term (usually 90 days or less) maturities
Single stock investing carries an extremely ________ degree of risk
Single stock investing carries an extremely *high* degree of risk
Single Stocks
An investment in one particular stock only
When you buy stock, you are buying a small piece of _______ in the company
ownership
With single stocks your return comes as the company increases in _______ or pays you, its owner, some of the profits (dividends)
value
Dividend
Distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders

Generally distributed in the form of cash or stock

A bond is a _______ instrument by which the company owes you money
debt
With a bond your return is fluctuation in price and the _________ rate paid
interest
T/F Individuals do well with single bond purchases
F. Few individuals do well
Bond
Debt tools where an issuer, such as a corporation, municipality, or government agency owes you money

A form of I.O.U.

The issuer makes regular interest payments on the bond and promises to pay back or redeem the face value of the bond at a specified point in the future (the maturity date)

T/F Investors pool their money to invest with a mutual fund
T
With mutual funds_______ manage the pool or fund
portfolio managers
With mutual funds your return comes as the ____ of the fund is increases
value
Mutual Fund
Pool of money managed by an investment company and invested in multiple companies, bonds, etc.

Offers investors a variety of goals depending on the fund and investment character

Often used to generate income on a regular basis or to preserve an investor’s money

Sometimes used to invest in companies that are growing at a rapid pace

As the interest rate increases the bond value
decreases
Mutual funds are good _____ term investments
long
Mutual funds that are properly diversified will have investment dollars spread equally among four different classes of financial assets. What are the 4 classes?
1. Small-Cap (25%)

2. Mid-Cap (25%)

3. Large-Cap (25%)

4. International (25%)

Aggressive Growth Stock Mutual Fund
Funds that seek to provide maximum long-term capital growth from stocks of primarily smaller companies

The most volatile fund, also referred to as a “small-cap” fund

Growth Stock Mutual Fund
Fund that buys the stock in medium sized companies that have experienced some growth and are still expanding

Also called a “mid-cap” fund

Growth and Income Stock Mutual Fund
Fund compromised of a large, well-established companies

Also called a “large-cap” fund or a blue chip fund

International Stock Mutual Fund
Fund that contains internationally or overseas companies
Global fund
U.S. and international companies
T/F The International Stock Mutual Fund includes international and U.S. companies
F. International only
T/F It is a good idea to sell your mutual fund to pay off debt
F
Rule of 72
Compound interest calculation

The Rule of 72 says that by dividing the interest rate into 72, you will know approximately how long it will take to double your money

Know how to calculate for exam

72/Interest Rate = How long take to double your money

e.g. 72/8% = 9 years

Real estate is the ______ liquid consumer investment
least
T/F You should always have lots of cash before using real estate as an investment
T
Annuities are _______ accounts with an insurance company
savings
Annuity
Contract sold by an insurance company, designed to provide payments to the holder at specified intervals, usually after retirement, the holder is taxed at the time of distribution or withdrawal, making this a tax-deferred arrangement
What type of annuities are at a low interest rate of around 5%
Fixed
T/F Fixed annuities are not really fixed and are a bad investment
T
What type of annuities are mutual funds sheltered by the annuity covering, thereby allowing the mutual fund to grow tax-deffered
Variable
T/F Gold is a good investment
F
What are the four horrible investments
1. Gold
2. Commodities & Futures
3. Day trading
4. Viaticals
Commodity
A food, metal, or fixed physical substance that investors buy or sell, usually via future contracts
Futures
A term to designate all constructs covering the sale of financial instruments or physical commodities for future delivery on a commodity exchange
What is a Viatical
Getting a beneficiary on someone who is dying

This is a scam

T/F Most people cannot buy stock in huge companies
T
T/F Start investing now
T
T/F Don’t put your money in one place. Spreading out your money lowers your risk
T
T/F Never put money into something you don’t understand. If you do not understand an investment well enough to teach someone else how it works, don’t buy it
T
T/F You can get rich quick if you use Dave’s tips
F. Building wealth takes time. It’s the tortoise, not the hare who wins the race
Growth and Income Stock Mutual Funds
Large-Cap
Always check this record when investing
5-10-year track record
Spread around the risk
Diversification
Piece of ownership in company stock
Share
List of your investments
Portfolio
Least liquid of all investments
Real estate
Degree of uncertainty of return on an investment
Risk
Aggressive Growth Stock Mutual Funds
Small-cap
Savings account within an insurance company
Annuity
Risk goes up, return goes up
Risk-return ratio
T/F “Liquidity” means to spread around and lower risk
F. Diversification. Liquidity refers to the ease of access to your money. The more liquid, the easier it is to gain access to your money.
T/F A single stock is the best place to keep your emergency fund
F. Money Market Mutual Fund
T/F A certificate of deposit is the best place to keep an emergency fund
F
T/F Diversification lowers your risk when investing
T
T/F Commodities and futures are extremely speculative and carry a high risk
T
______% of any 15-year period in the stock market has made money

a. 53
b. 97
c. 75
d. 100

d. 100
Long-term investments properly diversified include the following mutual funds

a. Growth, growth and income, bonds, aggressive growth

b. Growth, balanced, international, bond

c. International, bond, aggressive growth growth

d. Growth, growth and income, international, aggressive growth

d. Growth, growth and income, international, aggressive growth
What is the KISS rule of investing

a. Keep it Simple Stocks
b. Keep it Simple, Stupid
c. Keep it Solo Situated
d. Keep it Somewhere Safe

b. Keep it Simple, Stupid
Which of the following is not a good investment

a. Gold
b. Viaticals
c. Futures
d. all of the above

d. all of the above
Which statement is true about liquidity

a. The less liquid the investment, the less the return

b. The more liquid an investment, the more return

c.The more liquid an investment, the less return

d. Both a and b

c.The more liquid an investment, the less return
Which one is not a type of annuity

a. variable

b. stable

c. fixed

d. none of the above

b. stable
A savings account with a certificate is a

a. bond

b. annuity

c. C.D.

d. viatical

c. C.D.
T/F If something is already protected from taxes do not bother adding an annuity
T

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