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Exam 1 Finance
Terms in this set (59)
The stock market lost _____ % in one day on October 19, 1987 from table 1.4 in your book.
In 2001, the stock market declined because
9/11 terrorist attacks
In 2008, the stock market declined because
the collapse of the housing market
From October 2007 to March 2009 the S&P 500 declined by
What is a capital gain?
A profit from selling a property or investment
Formula for Dividend Yield
dividends per share of common stock/market price per share of common stock
What does the term "Market Cap" refer to?
the total value of a company's shares of stock
Rate the following asset classes according to historic return with 1 being the highest return and 5 being the lowest return.
Small Company Stocks
Large Company Stocks
Government Bonds- 4
Corporate Bonds- 3
Large Company Stocks- 2
Small Company Stocks- 1
Which of the 5 asset classes above has exhibited the highest risk?
Small Company Stocks
According to the graph in your book, what is the highest return earned on small cap stocks in any one year?
What is the highest return on large cap stocks in any one year?
In what year was the interest rate on the U.S Treasury Bills the highest?
Approximately what was the interest rate on U.S Treasury Bills in that year?
What has happened to interest rates over the last several decades? Bond Prices?
they've both declined
What does the term "risk premium" refer to?
the investment return an asset is expected to yield in excess of the risk-free rate of return
The average return on the following investments from 1926 to 2018 from table 1.2 in your book is
Large Company Stocks ___%
Small Company Stocks ___%
Long Term Corporate Bonds ___%
Long Term Government Bonds ___%
U.S Treasury Bills ___%
What two things do you get if you buy a stock?
you own a fraction of the company and you get voting rights
What two things determine the return you earn on a bond?
term to mature, supply and demand
What are the characteristics of Money Market Securities?
facilitate creation of Money Market Funds.
Stocks Provide Investors with
Bonds Provide Investors with
preserving capital and earning a predictable return
Money market or cash equivalents provide investors with
higher returns than savings accounts
Stock prices ___ during an economic recession
A decline of 10% or more in the stock market is referred to as a
A decline of 20% or ore in the stock market is referred to as a ___ market.
When the stock market is rising, it is referred to as a ___ market
What are some of the risks that an investor faces if they own a stock?
market risk, interest rate risk, inflation risk
What are some of the risks that an investor faces if they own bonds?
reinvestment risk, liquidity risk, credit risk
What does the term asset allocation refer to?
process of deciding where to put money to work in the market
How can investors minimize their risk when investing?
have a diversified portfolio of investments, know your investment goals, keep track of your investments
Why does diversification lower risk?
each investment would react differently to the same event.
An effective investment plan begins with identifying the client's
The type of risk that can be eliminated by diversification is referred to as ___ risk, while the type of risk that cannot be eliminated by diversification is ___ risk.
An effective investment plan should only focus on high priority goals. T/F?
6 investment constraints and their effect
What does it mean if an investor is risk tolerant?
They don't mind taking risks.
What does it mean if an investor is risk averse?
They don't want to take any kind of risks.
For a 21 year old entering the workforce from college, the goal of saving for a downpayment on a home has a ___ horizon and the investments planned to finance this goal should be more ___, while the goal of retirement would have a ___ horizon and should be financed with a more ___ portfolio.
What does it mean if a client has high liquidity needs?
They want a lot of readily accessible money
Give 2 examples of how a client's tax bracket might affect the selection of securities for their portfolio.
Discuss some "unique circumstances" that might affect your investment recommendations for your clients.
Asset Allocation Vs Security Selection
Asset allocation determines the mix of assets held in a portfolio, while security selection is the process of identifying individual securities
Explain the difference between a passive investment strategy and an active investment strategy.
Investment professionals should be meeting with their clients to review performance and reassess their situations at least how often?
Explain how the corporate culture in a major wirehouse like Merrill Lynch is different than the corporate culture in a company like Edward Jones.
Why would someone use a full service broker these days when those companies charge more for buying and selling securities for the client?
Explain the difference between a commission based account and a fee-based account.
What does the term "round trip commissions" refer to?
all the costs incurred in a securities or other financial transaction
Explain what "churning" is. How does a "wrap" account remove the incentive for churning a client's account?
Studies suggest that which strategy, asset allocation or security selection, is more important?
What is a "managed account"?
an account owned by an investor but managed by someone else
Explain an active asset allocation strategy combined with an active security selection strategy.
Explain an active asset allocation strategy combined with a passive security selection strategy.
Explain a passive asset allocation strategy combined with an active security selection strategy.
Explain a passive asset allocation strategy combined with a passive security selection strategy.
Explain the difference between a discretionary account and a non-discretionary account.
Explain what the SIPC does and what does it cover or guarantee.
Securities Investor Protection Corporation. Helps protect assets in a brokerage account.
Explain what the FDIC does and what does it cover or guarantee.
Federal Deposit Insurance Corporation. Insures money you have in a deposit account with a financial institution.
What is IPS
investment policy statement. document that outlines the general rules for the manager of the portfolio.
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