Investment Fundamentals Quiz
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Questions and Answers

What percentage range do dividends typically fall within for most stocks?

  • 3% to 5%
  • 5% to 7%
  • 0% to 1%
  • 1% to 3% (correct)

Firms that pay low dividends tend to be characterized as which of the following?

  • Older and financially stable
  • Younger with high growth potential (correct)
  • Overvalued and risky
  • Underperforming and declining

Which type of stock represents companies that are undervalued by the market?

  • Growth stocks
  • Income stocks
  • Blue-chip stocks
  • Value stocks (correct)

What is the primary means through which bonds offer returns to investors?

<p>Coupon payments (B)</p> Signup and view all the answers

What does the Holding Period Return (HPR) refer to?

<p>Total return on an investment during a specific time period (B)</p> Signup and view all the answers

Which kind of stocks provides periodic income through large dividends?

<p>Income stocks (A)</p> Signup and view all the answers

What is the key difference between capital gains and interest income concerning taxes?

<p>Capital gains usually incur a lower tax burden. (C)</p> Signup and view all the answers

What type of investment generates income through rent payments?

<p>Real Estate (D)</p> Signup and view all the answers

What is one primary benefit of portfolio diversification?

<p>It reduces the impact of poorly performing investments. (D)</p> Signup and view all the answers

Which type of investment is prioritized for ensuring adequate liquidity?

<p>Money market securities (B)</p> Signup and view all the answers

What defines the secondary market?

<p>A marketplace for selling existing securities. (D)</p> Signup and view all the answers

What do individual investors typically seek from their investments in stocks?

<p>High returns with the potential for growth. (B)</p> Signup and view all the answers

What is the role of a portfolio manager?

<p>To make investment decisions on behalf of clients. (D)</p> Signup and view all the answers

Which of the following investment types is considered high risk?

<p>Stocks (C)</p> Signup and view all the answers

What occurs during an Initial Public Offering (IPO)?

<p>Firms sell shares to the public for the first time. (D)</p> Signup and view all the answers

How can shareholders earn returns besides dividends?

<p>By selling their stocks at a higher price. (A)</p> Signup and view all the answers

What is generally true about the relationship between risk and risk premium?

<p>Higher risk correlates with a higher risk premium. (D)</p> Signup and view all the answers

What is a disadvantage of term deposits?

<p>Low returns compared to other investments. (D)</p> Signup and view all the answers

Why is asset allocation considered important in a portfolio?

<p>It can influence over 90% of a portfolio's return. (D)</p> Signup and view all the answers

Which of the following best describes diversification?

<p>Reducing risk by spreading investments across different assets. (C)</p> Signup and view all the answers

How does negative correlation among investments affect a portfolio?

<p>It offers substantial diversification benefits. (B)</p> Signup and view all the answers

What is an important factor in determining the volatility of a portfolio?

<p>The correlation of returns of individual investments. (B)</p> Signup and view all the answers

Which investment type is typically associated with lower risk and stable returns over the long term?

<p>GICs or mutual funds including GICs. (D)</p> Signup and view all the answers

What is insider trading characterized by?

<p>Seeking information that is not available to the public. (C)</p> Signup and view all the answers

What benefit does diversifying investments across different industries provide?

<p>Reduces exposure to one specific industry (B)</p> Signup and view all the answers

Why might investors include bonds in their portfolios?

<p>Bonds help reduce overall risk in a portfolio (B)</p> Signup and view all the answers

What does constant weighting asset allocation entail?

<p>Rebalancing the portfolio to original asset allocation (B)</p> Signup and view all the answers

Which strategy involves adjusting asset allocation based on long-term market conditions?

<p>Strategic asset allocation (B)</p> Signup and view all the answers

What is a primary characteristic of tactical asset allocation?

<p>Adjustments are based on short-term market forecasts (C)</p> Signup and view all the answers

For investors early in their lives, which type of securities is generally recommended?

<p>Safe and liquid securities for easy access to funds (C)</p> Signup and view all the answers

What is a limitation of diversifying investments across different countries?

<p>It can expose investors to conditions affecting entire industries (A)</p> Signup and view all the answers

Why might a single asset allocation formula not be suitable for all investors?

<p>Personal characteristics and investment goals vary among individuals (B)</p> Signup and view all the answers

What is one primary characteristic of hedge funds?

<p>Pooled investment (A)</p> Signup and view all the answers

What is a requirement for an individual to be considered an accredited investor?

<p>Possessing financial assets of $1 million or more (B)</p> Signup and view all the answers

What feature of Target Date Funds makes them suitable for retirement saving?

<p>Their asset allocation mix becomes more conservative as the target date approaches (D)</p> Signup and view all the answers

Which of the following is a disadvantage of using robo advisors?

<p>Cannot choose equity classes (C)</p> Signup and view all the answers

Which statement about Dollar Cost Averaging is correct?

<p>It requires consistent investments over time regardless of the market conditions. (A)</p> Signup and view all the answers

What type of investments can you make using a self-directed brokerage account?

<p>Mutual funds and ETFs (C)</p> Signup and view all the answers

What is a disadvantage commonly associated with hedge funds?

<p>They often fail and have low average lifespans. (D)</p> Signup and view all the answers

Which option best describes the nature of commodities?

<p>They include both agricultural and resource products. (C)</p> Signup and view all the answers

Which account should you consider using first if you are in the lowest tax bracket?

<p>TFSA (C)</p> Signup and view all the answers

What is a potential benefit of buying ETFs in the USA in USD?

<p>Greater variety of ETFs available (C)</p> Signup and view all the answers

Which scenario leads to more money spent on RRSP tax savings?

<p>Having a lower retirement income than current income (D)</p> Signup and view all the answers

Which of the following accounts can avoid income tax on dividends if held within an RRSP?

<p>Investments on US stock exchanges (B)</p> Signup and view all the answers

To be in the top 1% of income earners globally, what annual after-tax income is required?

<p>$60,000 USD (D)</p> Signup and view all the answers

What investment strategy is suggested during market dips?

<p>Buy more into the market (B)</p> Signup and view all the answers

Why are women statistically considered better investors?

<p>They exhibit greater patience (C)</p> Signup and view all the answers

What is the suggested rule of thumb for short-term investing?

<p>Keep any money needed in the next 5 years in a high-interest savings account (C)</p> Signup and view all the answers

What happens to the price of a stock when there is an increase in demand?

<p>The price goes up. (D)</p> Signup and view all the answers

Which of the following statements accurately describes what investing in stocks means?

<p>You have a claim on a portion of the company's assets and earnings. (B)</p> Signup and view all the answers

What is a public company?

<p>A company whose stock is listed and sold on public markets. (B)</p> Signup and view all the answers

How do dividends benefit shareholders?

<p>They provide a share of the company's profits. (C)</p> Signup and view all the answers

What primarily influences the fluctuation of a company's stock price?

<p>Supply and demand for the stock. (C)</p> Signup and view all the answers

Investors aim to make money by purchasing stocks primarily through which of the following methods?

<p>Selling the stock for a profit or receiving dividends. (C)</p> Signup and view all the answers

What is the essence of a company's value in relation to stock price?

<p>It is supposed to represent the present value of future cash flows. (C)</p> Signup and view all the answers

What does it mean when a company buys back its stocks from the market?

<p>It reduces the number of shares outstanding. (A)</p> Signup and view all the answers

What is the expected long-term rate of return from a broad-based real estate investment?

<p>9% to 11% (A)</p> Signup and view all the answers

What is one of the recommended rules for rebalancing an investment portfolio?

<p>Rebalance using new money rather than selling assets (C)</p> Signup and view all the answers

Which characteristic is essential for mutual funds regarding their investment purpose?

<p>They have a stated investment purpose that limits their investments. (C)</p> Signup and view all the answers

Why might an investor prefer a no-load mutual fund?

<p>They help save money by eliminating load fees. (B)</p> Signup and view all the answers

What does the net asset value (NAV) of a mutual fund unit represent?

<p>The fair market value of all investments divided by the units outstanding. (C)</p> Signup and view all the answers

What is a primary reason to avoid investment advisors who sell high MER mutual funds?

<p>High MER fees reduce overall investment performance over time. (B)</p> Signup and view all the answers

In what way do rebalancing strategies benefit an investment portfolio?

<p>They help maintain the desired asset allocation and reduce risk. (C)</p> Signup and view all the answers

What is a common misconception about mutual funds that charge a load?

<p>They always outperform no-load funds. (C)</p> Signup and view all the answers

What type of fund is generally preferred for adding large baskets of stocks to a portfolio?

<p>Index funds (B)</p> Signup and view all the answers

What is a significant disadvantage of investing in individual stocks?

<p>It can be uncertain when to buy or sell (B)</p> Signup and view all the answers

Why is it advised not to invest more than 25% of your portfolio in a single stock?

<p>To enhance diversification and reduce risk (C)</p> Signup and view all the answers

Which investing strategy has a higher success rate, lump sum or dollar cost averaging?

<p>Lump sum is better 70% of the time (C)</p> Signup and view all the answers

Which broker type is preferable for investing small amounts regularly?

<p>One that charges no commissions (A)</p> Signup and view all the answers

What does 'Norbert’s Gambit' refer to in investing?

<p>A way to convert between currencies using stocks (A)</p> Signup and view all the answers

What determines the choice of a fund with higher fees?

<p>If it can outperform the market by more than its fee (C)</p> Signup and view all the answers

Which statement best reflects the philosophy of passive investing?

<p>To invest across all stocks in an index (C)</p> Signup and view all the answers

What is one reason why mutual funds are considered less tax efficient than ETFs?

<p>They generate capital gains due to high turnover. (D)</p> Signup and view all the answers

Which feature distinguishes ETFs from mutual funds in terms of trading?

<p>ETFs allow intra-day trading like stocks. (D)</p> Signup and view all the answers

What aspect of ETF investment typically leads to greater tax efficiency compared to mutual funds?

<p>Lower turnover rates in holdings. (A)</p> Signup and view all the answers

What is a characteristic of mutual funds that can contribute to additional costs for investors?

<p>Mutual funds often charge loads or management fees. (A)</p> Signup and view all the answers

Which statement is true regarding the structure of both ETFs and mutual funds?

<p>Both pool investor money to invest in a diversified portfolio. (C)</p> Signup and view all the answers

Why might an investor prefer ETFs over mutual funds?

<p>ETFs offer flexibility to buy and sell at any time during trading hours. (C)</p> Signup and view all the answers

What is a disadvantage of mutual funds that could potentially affect investor returns?

<p>Mutual funds incur annual tax burdens on investors. (A)</p> Signup and view all the answers

How do mutual funds handle investor redemptions differently from ETFs?

<p>Mutual funds require selling underlying securities to meet redemption requests. (B)</p> Signup and view all the answers

What should individuals in the highest tax bracket typically prioritize using for retirement savings?

<p>RRSP first, then TFSA (D)</p> Signup and view all the answers

What is a significant benefit of using RRSP contributions wisely?

<p>Opportunity to grow wealth through investment (B)</p> Signup and view all the answers

What is a common advantage of investing in ETFs listed in the USA compared to Canada?

<p>Lower fees for comparable ETFs (D)</p> Signup and view all the answers

What should individuals consider when opting for RRSP contributions?

<p>Maximized tax refund potential (D)</p> Signup and view all the answers

Which scenario describes a disadvantage of investing in US ETFs?

<p>Risk of currency exchange fees (A)</p> Signup and view all the answers

Why might someone choose to use a TFSA in retirement planning?

<p>No mandatory withdrawals required (C)</p> Signup and view all the answers

How can individuals manage risk when investing in ETFs across borders?

<p>By understanding return differences between US and Canadian ETFs (A)</p> Signup and view all the answers

What is a key consideration when deciding whether to use RRSP or TFSA contributions?

<p>The immediacy of tax deductions (D)</p> Signup and view all the answers

What withdrawal rate is generally advised to maintain wealth for heirs while retiring?

<p>4% (C)</p> Signup and view all the answers

Which factor is crucial in determining how much to invest monthly for retirement?

<p>Average annual compound rate of return (A)</p> Signup and view all the answers

What is the primary risk associated with choosing a higher withdrawal rate during retirement?

<p>Running out of money (D)</p> Signup and view all the answers

How many years must a 19-year-old save if they plan to retire at 65?

<p>46 years (C)</p> Signup and view all the answers

What strategy is recommended for adjusting retirement plans as you gain new information?

<p>Review your plan annually (D)</p> Signup and view all the answers

What is a conservative approach when estimating spending for retirement planning?

<p>Ignore potential income sources like OAS (D)</p> Signup and view all the answers

What is the suggested annual return rate to plan for retirement safety?

<p>6% - 12% (C)</p> Signup and view all the answers

Which statement best describes the importance of balancing withdrawal rates and legacy goals?

<p>Enjoyment of retirement years should be weighed against legacy desires. (D)</p> Signup and view all the answers

Flashcards

Portfolio Diversification

Spreading your investments across different asset classes to reduce risk.

Liquidity

The ability to quickly convert assets into cash.

Primary Market

A market where newly issued securities are traded for the first time.

Secondary Market

A market where existing securities are traded between investors.

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Initial Public Offering (IPO)

The first offering of a company's shares to the public.

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Institutional Investors

Professional investors who manage large sums of money for clients.

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Individual Investors

Individuals who invest a portion of their income in stocks hoping for a higher return.

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Portfolio Managers

Employees of financial institutions who make investment decisions for a portfolio of securities.

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Risk Premium

The added return expected from investing in a riskier asset compared to a risk-free asset. Higher risk should be compensated with higher expected returns.

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Asset Allocation

The process of distributing investments across different asset classes (stocks, bonds, real estate, etc.) to reduce overall risk.

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Portfolio

A collection of multiple investments, aiming to reduce risk through diversification.

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Positive Correlation

The tendency of investment returns to move in the same direction over time.

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Negative Correlation

The tendency of investment returns to move in opposite directions over time.

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Insider Trading

Using non-public information to make investment decisions, which is often considered unethical and illegal.

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Portfolio Benefits

The difference between the return of an individual investment and the return of the entire portfolio.

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Stock price appreciation

The potential for a stock's price to increase over time.

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Growth stocks

Firms with substantial growth potential, often younger, with potential for large returns, but also higher risk.

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Value stocks

Stocks of firms undervalued by the market due to factors other than business performance, offering potential for future recognition and price increases.

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Dividends

The payment by a company to its shareholders, usually a percentage of the stock price.

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Income stocks

Stocks that provide investors with regular income in the form of large dividends.

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Holding Period Return (HPR)

The return an investor receives over a specific holding period, including any income and price changes.

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Capital gain or loss from bonds

The difference between the price a bond is sold for and the price it was bought for.

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Land price appreciation

The change in the price of land over time, influenced by factors like real estate development.

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Diversification

A strategy to minimize losses by spreading investments across different assets, industries, or countries.

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Diversification: Industry vs. Asset Class

Investing in different companies within the same industry reduces only unsystematic risk. Investing in different industries reduces both unsystematic and systematic risk.

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International Diversification

Investing in securities from different countries can minimize risk related to economic conditions in a single country.

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Constant Weighting Asset Allocation

A technique to maintain a predetermined allocation of assets by regularly buying assets that have decreased in value and selling assets that have increased in value.

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Strategic Asset Allocation

A strategy where asset allocation is adjusted based on long-term market trends or expectations.

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Tactical Asset Allocation

A strategy to adjust asset allocation based on short-term market expectations.

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Individualized Asset Allocation

The ideal asset allocation varies based on individual factors like age, risk tolerance, and financial goals.

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Hedge Funds

A type of investment fund that pools money from many investors and uses it to buy a wide range of assets like stocks, bonds, real estate, or commodities. They are actively managed by professional fund managers who aim for high returns.

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Self-Directed Brokerage Account

A financial account that allows you to buy and sell securities like ETFs and mutual funds. You can have RRSP, TFSA, or taxable accounts.

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Dollar Cost Averaging

A strategy where you invest a fixed amount of money regularly in a specific asset, regardless of market fluctuations. This helps reduce the impact of market volatility and averages your purchase price over time.

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Target Date Funds (TDF)

A type of mutual fund designed to provide a simple investment solution that automatically shifts its asset allocation to become more conservative as the target date (usually retirement) approaches.

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Buying the Dip

An investment strategy that involves buying assets when their prices are declining in the hope that they will rebound in the future.

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Robo-Advisors

A type of investment advisor that uses computer algorithms to manage your portfolio. They offer low fees and minimums, attracting younger investors.

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Commodities

Products that include agricultural and resource products like oil, natural gas, wheat, and orange juice. They historically have a less consistent track record for long-term returns when compared with other asset classes.

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RRSP (Registered Retirement Savings Plan)

A type of retirement savings account in Canada. Contributions are tax-deductible, and withdrawals are taxed in retirement.

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TFSA (Tax-Free Savings Account)

A tax-free savings account in Canada. Contributions are not tax-deductible, and withdrawals are tax-free.

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FHSA (First Home Savings Account)

A type of retirement savings account offered in Canada. It allows tax-free withdrawals of up to $40,000 for a home purchase.

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S&P 500 ETF

An exchange-traded fund (ETF) that tracks the performance of the S&P 500 index. This index represents the top 500 publicly listed companies in the US.

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S&P 500 Average Annualized Return

The annualized average return of the S&P 500 index, which has historically been around 10%.

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Don't Get Off the Rollercoaster

The best investors are the ones who stay invested for the long term and don't panic sell during market dips. Think of it like riding a roller coaster - don't get off during the dips!

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Buying US ETFs in USD

A strategy to buy ETFs in the US dollar (USD) while holding Canadian dollar (CAD). This allows you to potentially benefit from a rising US dollar.

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What is Stock?

A share of ownership in a company, representing a claim on its assets and earnings. Owning stock makes you a shareholder and entitles you to a portion of the company's profits.

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What is a 'public company'?

When a company sells its shares to the public on a stock exchange, it is considered a 'public company'.

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What factors affect the price of a stock?

The price of a stock is influenced by supply and demand. When more people want to buy, the price goes up. When more people want to sell, the price goes down.

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How can you make money from stocks?

Investors aim to make money from stocks by buying low and selling high, which is called a capital gain. Another way is by receiving a dividend, which is a portion of the company's profits distributed to shareholders.

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How is a company's value related to its stock price?

A company's value is estimated based on its future earnings potential. However, accurately predicting future earnings is extremely difficult.

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How does a company's income affect its stock price?

A company's stock price tends to go up when its income increases and down when its income shrinks. This is because a company with higher profits is considered more valuable.

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Mutual Fund

A type of investment fund that pools money from many investors and invests in various assets like stocks, bonds, etc., with a specific investment purpose. Each fund has a stated investment goal, so you can invest in a fund that aligns with your objectives.

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What is an MER (Management Expense Ratio)?

An expense ratio is a percentage of a fund's assets that is charged annually to cover expenses. These include administrative fees, management fees, and operating costs.

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What is a "No Load" Mutual Fund?

A no-load mutual fund doesn't have a commission charged when buying or selling units. It's generally considered a more cost-effective option compared to load funds.

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What is the Net Asset Value (NAV) of a mutual fund?

The net asset value (NAV) of a mutual fund unit is calculated by dividing the total market value of all its investments by the number of units outstanding. This price reflects the value of the fund's holdings at a specific point in time.

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What is portfolio rebalancing?

Rebalancing ensures that your investment portfolio maintains its intended asset allocation over time. It involves buying assets that have decreased in value and selling assets that have increased to bring them back to your desired weighting.

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How often should you rebalance your portfolio?

Rebalancing is typically done annually to maintain your desired weighting.

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Why should you rebalance your portfolio?

Rebalancing helps reduce risk by taking advantage of buying low and selling high. It's like taking advantage of market fluctuations to improve your overall portfolio performance.

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Why should you diversify your portfolio across different asset classes?

U.S./Canada/Int’l/Emerging Markets, Small/Mid/Large Cap, Value & Growth are all different asset classes. By diversifying your portfolio across these classes, you can reduce risk and potentially increase returns.

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Index Funds

Investing in a diversified basket of stocks that tracks a specific market index, aiming to match the market's overall performance.

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ETFs vs. Mutual Funds

Exchange-traded funds (ETFs) are index funds traded on stock exchanges, offering more flexibility and often lower costs than mutual funds.

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Passive Investing

A passive investment strategy that emphasizes buying and holding a diversified portfolio of index funds, aiming to match market returns over the long term.

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Fund Fees

Fees charged by fund managers for managing and operating an investment fund, impacting potential returns.

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Dollar Cost Averaging (DCA)

Investing a fixed amount of money at regular intervals, regardless of market fluctuations, averaging out your purchase price.

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Lump Sum Investing

A strategy that involves investing a lump sum of money all at once, potentially benefiting from greater market swings.

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Norbert's Gambit

A currency conversion strategy that involves buying a security listed in one currency, transferring it to the equivalent security priced in another currency, and then selling it for profit.

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Withdrawal Rate

The percentage of your retirement portfolio you withdraw each year to cover your living expenses. A higher withdrawal rate means more money to spend now, but less for your heirs.

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4% Withdrawal Rate

A common rule of thumb for retirement withdrawals, aiming to maintain your portfolio for the long-term. This rate allows you to spend 4% of your savings each year without depleting your principle, assuming average market returns.

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Portfolio Rebalancing

Regularly adjusting your investment mix to maintain your desired asset allocation. This helps you stay on track with your financial goals.

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Exchange Traded Funds (ETFs)

Exchange-traded funds (ETFs) are similar to mutual funds in that they pool money to invest in assets. However, ETFs trade on stock exchanges like individual stocks, offering greater flexibility and lower costs. They also tend to be more tax-efficient.

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Mutual Fund Turnover

Mutual funds are actively managed, meaning fund managers constantly buy and sell assets to try and beat the market. This 'trading' creates frequent capital gains, which can lead to higher tax liabilities.

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ETF Turnover

Unlike mutual funds, ETFs typically have low 'turnover', meaning they rarely buy and sell assets. This results in fewer capital gains and a tax advantage over mutual funds.

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MER (Management Expense Ratio)

The MER (Management Expense Ratio) represents the annual fees charged by an investment fund, such as a mutual fund or ETF.

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Loads (Mutual Funds)

Fees charged for buying or selling shares in a mutual fund. These fees increase the overall cost of investing in the fund. While ETFs don't have 'loads', they may have commission costs, which vary depending on your broker.

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Intraday Trading (ETFs)

A key advantage of ETFs is that you can buy and sell them like individual stocks, throughout the trading day. This intraday trading allows you to take advantage of fluctuating market prices.

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ETFs and Mutual Funds: Investment Vehicles

Both Mutual Funds and ETFs act as vehicles to diversify investments across various assets, allowing individuals to participate in the market with smaller amounts. They differ in structure, trading mechanisms, and tax efficiency.

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What is a TFSA?

A tax-free savings account in Canada, where contributions are not tax-deductible but withdrawals are tax-free.

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What is an RRSP?

A retirement savings account in Canada with tax-deductible contributions and taxed withdrawals in retirement.

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What is an FHSA?

A retirement account in Canada offering tax-free withdrawals (up to $40,000) for a home purchase.

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When should I choose TFSA vs. RRSP?

Using a TFSA or RRSP depends on your income bracket and future tax implications. Generally, TFSA is preferred in lower brackets, and RRSP in higher brackets.

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What should I do with my RRSP tax refund?

When you contribute to an RRSP, you receive a tax refund. Use this refund wisely for investments, debt reduction, or emergency fund, instead of spending it.

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What are the pros and cons of buying US ETFs in USD?

Investing in ETFs listed in the US can offer greater variety, lower fees, and potential to avoid US dividend withholding tax. However, currency conversion and exchange rate fluctuations are considerations.

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Why should I use both RRSP and TFSA?

Using a combination of both RRSP and TFSA throughout your lifetime offers flexibility and tax advantages.

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Why are US ETFs attractive for investors?

A key advantage of US ETFs is the wider selection available compared to Canadian ETFs.

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Study Notes

Portfolio Diversification

  • Diversification is a safer investment strategy than focusing on individual stocks.
  • Diversification mitigates risk by balancing out poor-performing investments with strong performers.

Types of Investments

  • Money Market Securities: These are low-risk investments like savings accounts, money market funds, and GICs. They provide liquidity but lower returns.
  • Stocks: Represent partial ownership in a company.
    • Primary Market: Where newly issued securities are traded.
    • Secondary Market: Existing securities are traded between investors.
    • IPO (Initial Public Offering): A company's first offering of shares to the public.
    • Institutional Investors: Professionals managing large investment pools (e.g., pension funds).
    • Individual Investors: Individuals investing a portion of their income in stocks.
    • Portfolio Managers: Financial professionals who make investment decisions.
    • Day Traders: Investors who buy and sell stocks within the same day.
    • Stock Price Appreciation: Investors gain when stocks increase in value.
    • Dividends: Regular payments to shareholders by companies, potentially increasing the overall return of a portfolio.
  • Bonds: Long-term debt securities issued by governments or corporations, that provide a fixed income stream.
  • Mutual Funds: Pooled investment funds managed by professionals. They offer diversification and professional management.
  • Real Estate: Includes real estate investments and trusts.

Investment Return

  • Return From Investing In Stocks: Measured by dividend income and stock price appreciation.
  • Value Stocks: Represent stocks undervalued by the market. These can still be profitable.
  • Growth Stocks: Represent potential for very high returns from younger firms.
  • Asset Allocation: Dividing investment assets across various types of investments.

Risk of Investing

  • Unsystematic Risk: Risk specific to a company, industry, or country.
  • Systematic Risk: Risk affecting all companies, industries, and countries. This is usually harder to predict and diversify against than unsystematic risk.
  • Risk-Free Rate: Rate of return for an investment with no risk - typically government bonds.
  • Risk Premium: Extra return for taking on investment risk.

Asset Allocation

  • Asset Allocation: Dividing investment assets across various types of investments.
  • Term Deposits: Fixed returns from short-term investments, providing liquidity with lower returns.
  • Strategic Asset Allocation: Adjusts investment portfolio allocation based on anticipated shifts in conditions.
  • Tactical Asset Allocation: Adjusts investment portfolio with short-term perspectives.

Investing Fundamentals

  • Dividend Reinvestment Plan (DRIP): Automatically reinvesting dividends in the same company.
  • Bonds: Investors who earn interest payments on their investment, potentially providing income through the fixed interest rate.
  • Mutual Funds: Pooled investment funds offering diversification and professional management.
  • Exchange-Traded Funds (ETFs): Securities that mirror specific market indexes and are often cheaper and more tax-efficient than Mutual Funds with lower management fees.
  • Active Investing: Investors actively seeking to outperform the market by making quick decisions, which can be risky.
  • Passive Investing: Investors holding investments for a longer period and following market indexes.
  • Brokerage Accounts: Accounts for buying and selling investments, often with varying fee structures (commissions).

Additional Notes

  • Professional Managers: are unlikely to consistently better the market.
  • Lump Sum vs. Dollar Cost Averaging (DCA): Lump sum is putting all savings at once while DCA is spreading investments regularly.
  • Cryptocurrency: Digital, decentralized currencies, with high volatility.
  • Target Date Funds (TDF): Investment designed for long-term goals, typically retirement, offering diversification and automatic rebalancing.
  • Robo-Advisors: Automated investment services based on algorithms, often with low fees and high convenience.
  • Risk Tolerance: A measure evaluating how much risk one is willing to take, crucial for creating a tailored investment strategy.

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Related Documents

Final Exam Notes_ 2277A PDF
Final Exam Notes - Textbook and Lecture PDF

Description

Test your knowledge on key concepts in investments, including dividends, stocks, bonds, and portfolio management. Discover the differences between various investment types and measure your understanding of market strategies. Perfect for finance students and aspiring investors!

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