Exam 11: Investment Basics

________ risk is simply the variability in the returns of an investment that is due to events that are unrelated to the overall market.

One should keep in mind that when it comes to tax advantages, ________ is/are better than ________.

A lending type investment, such as a corporate bond, represents a legal obligation for the issuer to pay its creditors back.

The rate of return on an investment is calculated by dividing the capital gain or loss plus the cash flows by the initial investment amount.

A company that doesn't make a dividend payment is insolvent and may be forced into bankruptcy by the stockholders.

Why is speculating in derivatives, futures contracts and options not appropriate for the typical, long-term investor?

You recently purchased a stock for $50. It is now worth $75, and it paid a $15 dividend during the two years you held it. What is your annualized rate of return on this stock?

Why do consumers sometimes demand risk premiums when investing?

Greg spent the weekend in Las Vegas. He started out with $10,000 and won an additional $5000. Greg was very risky with how he gambled with the $5000 he had won. Greg was exhibiting the ________ effect.

Real estate investments are more liquid than stocks most of the time.

A typical bond will pay annual coupon payments until it matures, at which time it will surrender its par value to the owner of the bond.

Bonds are always a safe investment if held to maturity.

One of the most important types of risk associated with real estate is the liquidity risk.

As the number of stocks in your portfolio increases

You have just purchased a large number of Italian bonds, and you reside in the United States. The variability in earnings that you might experience as the relationship between the euro and the U.S. dollar fluctuates is called:

Hostess and Kodak recently filed for bankruptcy protection in an attempt to restructure their debts. One could assume that both of these companies experienced too much ________ risk.

How does the principle of diversification work?

Provide an explanation for the concept of asset allocation in investing and differentiate between the 3 stages.

If you earned a negative 5% return on your investments while the overall stock market was down 9% then you have outperformed the market.

You purchased an investment for $1,000 on which you earned $120 investment last year. The inflation rate during that time was 3%. What was your real rate of return?