27 Questions
What is the traditional definition of investment?
A commitment of resources to achieve later benefits
In finance, what is the purpose of investing?
To generate a return on the invested asset
What does a low-risk investment generally result in?
Low return
What is the term for money received in a series of several time periods?
Cash flow stream
What is the effect of diversification on overall risk?
It reduces overall risk
What do investors generally expect from riskier investments?
Higher returns
What does the P/E ratio indicate for investors?
The price investors are paying for each dollar of a company's earnings
What is the main focus of growth investors?
Capital appreciation and higher future earnings
Who is credited with popularizing the growth investing strategy in 1950?
Investment banker Thomas Rowe Price Jr.
What is the characteristic of stocks purchased for momentum investing?
Consistently high returns for the past three to twelve months
In the process of the P/B ratio, what is not taken into account?
Goodwill
What is the focus of Venture Capital investing?
High growth companies with equity or equity-linked investments
What type of market does momentum investing involve short-selling securities in?
Bear market
What do growth investors seek profits through?
$ capital appreciation
Which metric is likely to be higher for growth stocks compared to others in its industry?
$P/E ratio
What does the P/E ratio indicate about stock valuations?
The lower the P/E, the cheaper the stock
What is the purpose of value investing?
To seek undervalued stocks
Which type of investment involves entrusting capital to agents for trading and sharing profits?
Qirad
What is the primary characteristic of private equity investments?
They are in non-publicly traded businesses
What do commodities typically refer to in the context of investments?
Goods like gold or potatoes
What represents ownership of a business?
Stocks
What is the term for generating profit without investing or bearing risk?
Arbitrage
What do foreign currency savings bear?
Exchange rate risk
What is the characteristic of collectables in investment terms?
They are items like art or stamps
Which financial instrument involves investors sharing profits from trading?
Qirad
In which type of investment can property risks be mitigated through mortgages and lower loan ratios?
Real estate
What is the term used for investors in stocks, bonds, and securities in the early 1900s?
Speculators
Study Notes
- Modern financial investments include stocks, bonds, cash, real estate, private equity, other loans, commodities, collectables, carbon offsets, digital entities, and hedge funds.
- Stocks represent business ownership, Bonds are loans, Cash is holding a currency, Real estate can be rented or resold, Private equity is in non-publicly traded businesses, Other loans include mortgages, Commodities are goods like gold or potatoes, Collectables are items like art or stamps, Carbon offsets are environmental credits, Digital entities are cryptocurrencies or NFTs, and Hedge funds use sophisticated techniques like derivatives and leverage.
- Investment involves risk of loss of capital, unlike arbitrage which generates profit without investing or bearing risk.
- Savings can default, and foreign currency savings bear exchange rate risk.
- Property investment also has risks, which can be mitigated through mortgages and lower loan ratios.
- Industry volatility influences investment risk, with biotechnology being particularly risky due to the high failure rate of products.
- The qirad, an Islamic financial instrument, involved investors entrusting capital to agents for trading and sharing profits.
- In the early 1900s, investors in stocks, bonds, and securities were called speculators, but the term investment came to denote more conservative securities.
- Value investing involves buying undervalued securities using financial analysis and ratios like P/E.
- Value investors, like Warren Buffett and Benjamin Graham, seek undervalued stocks and sell overvalued ones.
- Graham and Dodd's Security Analysis was written after the 1929 stock market crash.
- The P/E ratio is an important fundamental ratio for comparing stock valuations, with a lower P/E indicating a cheaper stock for the same level of financial performance.
- Industry comparisons require considering P/E ratios in context, as normal ranges vary between industries.
Test your knowledge on the definition of investment and its broader viewpoint. This quiz will also cover the concept of net monetary receipt in a time period.
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