Investment Strategies Chapter 10 Quiz

Active Approach to Investing

• Involves regular buying and selling of assets to outperform the market average.
• Fund managers research and analyze stocks to capitalize on price fluctuations.

Asset Allocation

• Strategy for spreading investments across different asset categories (stocks, bonds, real estate).
• Aims to balance risk and return based on an investor's goals and risk tolerance.

Blue Chips

• Stocks from well-established, financially sound companies with a history of stable earnings.
• Often considered safe investments due to their reliability and market position.

Bonds

• Fixed-income securities representing a loan made by an investor to a borrower (issuer).
• Issuers pay interest over a specified term, returning the principal at maturity.

Correlation Coefficient

• A statistical measure that indicates the extent to which two variables move in relation to each other, ranging from -1 to 1.
• A positive coefficient implies both assets move together, while a negative implies they move inversely.

Cyclical Stocks

• Stocks sensitive to economic cycles, performing well during economic expansions and poorly during recessions.
• Examples include companies in automotive and housing industries.

Defensive Stocks

• Stocks that provide consistent dividends and stable earnings regardless of the economic cycle.
• Essential goods and services sectors, such as utilities and consumer staples, often classify as defensive.

Efficient Market Hypothesis (EMH)

• Proposes that all known information is already reflected in stock prices, making it impossible to consistently outperform the market.
• Variants include weak, semi-strong, and strong forms based on the level of information used.

Growth Stocks

• Shares in companies expected to grow at an above-average rate compared to their industry or the overall market.
• Typically reinvest profits for expansion rather than paying dividends.

Growth Style of Investing

• Focuses on investing in companies with strong growth potential, regardless of valuation metrics.
• Investors prioritize revenue and earnings growth; price-to-earnings ratios may be high.

Index Fund

• A type of mutual fund designed to replicate the performance of a specific index, such as the S&P 500.
• Offers broad market exposure, low operating expenses, and diversification.

Insurance Risk

• The potential for loss or gain arising from uncertainty surrounding insurance claims and payouts.
• Insurers must adequately reserve to cover future claims while managing investment risks.

Investment Risk

• The potential for losing money on an investment or not achieving expected returns.
• Types include market risk, credit risk, liquidity risk, interest rate risk, and more.

Maturity Date

• The date when a bond or financial instrument becomes due for repayment of principal.
• Bonds may have different maturity lengths, affecting their risk and yield profiles.

Mean Reversion

• A financial theory suggesting that asset prices and returns eventually revert to their historical averages.
• Indicates that if an asset is priced above or below its average, it may return to that level over time.

Mutual Fund

• An investment vehicle pooling money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities.
• Managed by professional fund managers, offering investors diversification and professional management.

Passive Approach to Investing

• Strategy that seeks to maximize returns by minimizing buying and selling activities, typically through index funds.
• Investors focus on long-term growth rather than trying to time the market.

Portfolio

• A collection of financial assets, such as stocks, bonds, commodities, and currencies, held by an individual or institution.
• Diversification within a portfolio helps manage risk and enhance returns.

Risk Premium

• The expected return on an investment above the risk-free rate as compensation for taking on additional risk.
• Higher-risk investments generally offer higher potential returns.

Risk Tolerance

• An investor’s ability and willingness to endure market fluctuations and potential losses.
• Influenced by individual financial situations, goals, and investment timelines.

Speculative Investments

• High-risk investments expected to generate significant returns from price fluctuations.
• Often associated with assets like options, futures, and cryptocurrencies.

Systematic Risk

• The inherent risk affecting an entire market or asset class, which cannot be eliminated through diversification.
• Examples include economic recessions, interest rate changes, and geopolitical events.

Unsystematic Risk

• The risk unique to a specific company or industry, which can be mitigated through diversification.
• Factors include management decisions, product recalls, or competitive pressures.

Value Style

• An investment strategy focusing on undervalued stocks trading for less than their intrinsic value.
• Investors look for discrepancies between a market price and a company's fundamental value.

Active Approach to Investing

• Involves regular buying and selling of assets to outperform the market average.
• Fund managers research and analyze stocks to capitalize on price fluctuations.

Asset Allocation

• Strategy for spreading investments across different asset categories (stocks, bonds, real estate).
• Aims to balance risk and return based on an investor's goals and risk tolerance.

Blue Chips

• Stocks from well-established, financially sound companies with a history of stable earnings.
• Often considered safe investments due to their reliability and market position.

Bonds

• Fixed-income securities representing a loan made by an investor to a borrower (issuer).
• Issuers pay interest over a specified term, returning the principal at maturity.

Correlation Coefficient

• A statistical measure that indicates the extent to which two variables move in relation to each other, ranging from -1 to 1.
• A positive coefficient implies both assets move together, while a negative implies they move inversely.

Cyclical Stocks

• Stocks sensitive to economic cycles, performing well during economic expansions and poorly during recessions.
• Examples include companies in automotive and housing industries.

Defensive Stocks

• Stocks that provide consistent dividends and stable earnings regardless of the economic cycle.
• Essential goods and services sectors, such as utilities and consumer staples, often classify as defensive.

Efficient Market Hypothesis (EMH)

• Proposes that all known information is already reflected in stock prices, making it impossible to consistently outperform the market.
• Variants include weak, semi-strong, and strong forms based on the level of information used.

Growth Stocks

• Shares in companies expected to grow at an above-average rate compared to their industry or the overall market.
• Typically reinvest profits for expansion rather than paying dividends.

Growth Style of Investing

• Focuses on investing in companies with strong growth potential, regardless of valuation metrics.
• Investors prioritize revenue and earnings growth; price-to-earnings ratios may be high.

Index Fund

• A type of mutual fund designed to replicate the performance of a specific index, such as the S&P 500.
• Offers broad market exposure, low operating expenses, and diversification.

Insurance Risk

• The potential for loss or gain arising from uncertainty surrounding insurance claims and payouts.
• Insurers must adequately reserve to cover future claims while managing investment risks.

Investment Risk

• The potential for losing money on an investment or not achieving expected returns.
• Types include market risk, credit risk, liquidity risk, interest rate risk, and more.

Maturity Date

• The date when a bond or financial instrument becomes due for repayment of principal.
• Bonds may have different maturity lengths, affecting their risk and yield profiles.

Mean Reversion

• A financial theory suggesting that asset prices and returns eventually revert to their historical averages.
• Indicates that if an asset is priced above or below its average, it may return to that level over time.

Mutual Fund

• An investment vehicle pooling money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities.
• Managed by professional fund managers, offering investors diversification and professional management.

Passive Approach to Investing

• Strategy that seeks to maximize returns by minimizing buying and selling activities, typically through index funds.
• Investors focus on long-term growth rather than trying to time the market.

Portfolio

• A collection of financial assets, such as stocks, bonds, commodities, and currencies, held by an individual or institution.
• Diversification within a portfolio helps manage risk and enhance returns.

Risk Premium

• The expected return on an investment above the risk-free rate as compensation for taking on additional risk.
• Higher-risk investments generally offer higher potential returns.

Risk Tolerance

• An investor’s ability and willingness to endure market fluctuations and potential losses.
• Influenced by individual financial situations, goals, and investment timelines.

Speculative Investments

• High-risk investments expected to generate significant returns from price fluctuations.
• Often associated with assets like options, futures, and cryptocurrencies.

Systematic Risk

• The inherent risk affecting an entire market or asset class, which cannot be eliminated through diversification.
• Examples include economic recessions, interest rate changes, and geopolitical events.

Unsystematic Risk

• The risk unique to a specific company or industry, which can be mitigated through diversification.
• Factors include management decisions, product recalls, or competitive pressures.

Value Style

• An investment strategy focusing on undervalued stocks trading for less than their intrinsic value.
• Investors look for discrepancies between a market price and a company's fundamental value.

Active Approach to Investing

• Involves regular buying and selling of assets to outperform the market average.
• Fund managers research and analyze stocks to capitalize on price fluctuations.

Asset Allocation

• Strategy for spreading investments across different asset categories (stocks, bonds, real estate).
• Aims to balance risk and return based on an investor's goals and risk tolerance.

Blue Chips

• Stocks from well-established, financially sound companies with a history of stable earnings.
• Often considered safe investments due to their reliability and market position.

Bonds

• Fixed-income securities representing a loan made by an investor to a borrower (issuer).
• Issuers pay interest over a specified term, returning the principal at maturity.

Correlation Coefficient

• A statistical measure that indicates the extent to which two variables move in relation to each other, ranging from -1 to 1.
• A positive coefficient implies both assets move together, while a negative implies they move inversely.

Cyclical Stocks

• Stocks sensitive to economic cycles, performing well during economic expansions and poorly during recessions.
• Examples include companies in automotive and housing industries.

Defensive Stocks

• Stocks that provide consistent dividends and stable earnings regardless of the economic cycle.
• Essential goods and services sectors, such as utilities and consumer staples, often classify as defensive.

Efficient Market Hypothesis (EMH)

• Proposes that all known information is already reflected in stock prices, making it impossible to consistently outperform the market.
• Variants include weak, semi-strong, and strong forms based on the level of information used.

Growth Stocks

• Shares in companies expected to grow at an above-average rate compared to their industry or the overall market.
• Typically reinvest profits for expansion rather than paying dividends.

Growth Style of Investing

• Focuses on investing in companies with strong growth potential, regardless of valuation metrics.
• Investors prioritize revenue and earnings growth; price-to-earnings ratios may be high.

Index Fund

• A type of mutual fund designed to replicate the performance of a specific index, such as the S&P 500.
• Offers broad market exposure, low operating expenses, and diversification.

Insurance Risk

• The potential for loss or gain arising from uncertainty surrounding insurance claims and payouts.
• Insurers must adequately reserve to cover future claims while managing investment risks.

Investment Risk

• The potential for losing money on an investment or not achieving expected returns.
• Types include market risk, credit risk, liquidity risk, interest rate risk, and more.

Maturity Date

• The date when a bond or financial instrument becomes due for repayment of principal.
• Bonds may have different maturity lengths, affecting their risk and yield profiles.

Mean Reversion

• A financial theory suggesting that asset prices and returns eventually revert to their historical averages.
• Indicates that if an asset is priced above or below its average, it may return to that level over time.

Mutual Fund

• An investment vehicle pooling money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities.
• Managed by professional fund managers, offering investors diversification and professional management.

Passive Approach to Investing

• Strategy that seeks to maximize returns by minimizing buying and selling activities, typically through index funds.
• Investors focus on long-term growth rather than trying to time the market.

Portfolio

• A collection of financial assets, such as stocks, bonds, commodities, and currencies, held by an individual or institution.
• Diversification within a portfolio helps manage risk and enhance returns.

Risk Premium

• The expected return on an investment above the risk-free rate as compensation for taking on additional risk.
• Higher-risk investments generally offer higher potential returns.

Risk Tolerance

• An investor’s ability and willingness to endure market fluctuations and potential losses.
• Influenced by individual financial situations, goals, and investment timelines.

Speculative Investments

• High-risk investments expected to generate significant returns from price fluctuations.
• Often associated with assets like options, futures, and cryptocurrencies.

Systematic Risk

• The inherent risk affecting an entire market or asset class, which cannot be eliminated through diversification.
• Examples include economic recessions, interest rate changes, and geopolitical events.

Unsystematic Risk

• The risk unique to a specific company or industry, which can be mitigated through diversification.
• Factors include management decisions, product recalls, or competitive pressures.

Value Style

• An investment strategy focusing on undervalued stocks trading for less than their intrinsic value.
• Investors look for discrepancies between a market price and a company's fundamental value.