Personal Finance Chapter 13 Quiz & Flashcards

Questions and Answers

When the stock markets crashed the most heavily affected investments were those that were _____.

poorly diversified

The best way to earn money long term is _____.

stocks, bonds, and mutual funds

Savings is the _____.

accumulation of excess funds by intentionally spending less than you earn

Investing is the ____.

taking of some money you are saving and putting it to work so that it can earn you more money Signup and view all the answers

The most common way that people invest is by putting money into assets called _____.

securities (stocks, bonds, and mutual funds) Signup and view all the answers

Stocks are _____.

shares of ownership of a corporation Signup and view all the answers

Bonds ____.

represent loans to companies and governments Signup and view all the answers

All of your investments make up your _____.

portfolio Signup and view all the answers

When people invest money they take a ____.

financial risk - the possibility that the investment will fail to pay any return to the investor Signup and view all the answers

Investors hope that their investments will earn them a ____.

positive total return - the income an investment generates from a combination of current income and capital gains Signup and view all the answers

Current income is ____.

money received while you own an investment which is received on a regular basis as interest, rent, or dividends Signup and view all the answers

Interest ____.

is the return earned for lending money Signup and view all the answers

Rent is ____.

payment received for allowing someone to use your real estate property Signup and view all the answers

Dividend is ____.

a portion of a company's earnings that the firm pays out to its shareholders Signup and view all the answers

A capital gain occurs when ____.

you sell an investment that has increased in value Signup and view all the answers

Capital losses are when ____.

there is a decrease in the paper value of an initial investment Signup and view all the answers

The rate of return is ____.

the total return on an investment which is expressed as a percentage of its price Signup and view all the answers

Pure risk ____.

means there is no potential for gain, only possibility of loss Signup and view all the answers

Speculative risk ____.

involves potential gain as well as potential loss Signup and view all the answers

Investment risk ____.

represents the possibility that the yield on an investment will deviate from its expected return Signup and view all the answers

T-bill ____.

is a short-term treasury bill which is a risk-free investment with very low return (0.25 and 0.35) Signup and view all the answers

When making investments, people demand a ____.

risk premium - the difference between a riskier investment's expected return and the totally safe return on the T-bill Signup and view all the answers

Risk tolerance is the ____.

willingness to weather changes in the values of your investments Signup and view all the answers

Investment philosophy is the ____.

general approach to tolerate risk for investments (conservative, moderate or aggressive) Signup and view all the answers

A conservative investment philosophy generally means ____.

you accept very little risk and are generally awarded with low rates of return Signup and view all the answers

Preservation of capital means ____.

you do not want to lose any of the money you have invested, meaning you are risk averse Signup and view all the answers

People with a moderate investment philosophy are usually ____.

seeking capital gain slowly and steadily while inviting a fair amount of capital loss Signup and view all the answers

People with an aggressive investment philosophy are usually characterized as ____.

risk seekers who aim for high capital gain while inviting a higher risk Signup and view all the answers

Active investing involves ____.

carefully studying the economy, market trends, and investment alternatives and regularly monitoring these factors Signup and view all the answers

You can invest money in two ways: ____.

lending or owning Signup and view all the answers

The lending investments (debts) offer ____.

a fixed maturity and a fixed income Signup and view all the answers

Fixed maturity means ____.

the borrower agrees to repay the principal to the investor on a specific date Signup and view all the answers

Fixed income ____.

means the borrower agrees to pay the investor a specific rate of return for the use of the principal Signup and view all the answers

Equities ____.

indicate ownership of investments Signup and view all the answers

Random risk ____.

is the risk associated with owning only one investment of a particular type which could do poorly Signup and view all the answers

To counteract random risk you ____.

diversify - the process of reducing risk by spreading investment money among several different investment opportunities Signup and view all the answers

Market risk ____.

is the possibility for an investor to experience losses due to the overall performance of financial markets Signup and view all the answers

Financial risk ____.

is the possibility that the investment will fail Signup and view all the answers

Inflation risk ____.

means that the money will not grow as fast as inflation so it will not be worth as much in the future Signup and view all the answers

Time horizon risk ____.

refers to how the role of time will affect all investments; the more time your money is invested, the higher the risk Signup and view all the answers

Business cycle risk ____.

is the risk that the business cycle can impact your investments Signup and view all the answers

Market-volatility risk ____.

is the risk that all investments are subject to sharp changes in price as a result of events affecting a particular company Signup and view all the answers

Liquidity risk ____.

is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss Signup and view all the answers

Commissions ____.

are fees or percentages of the selling price paid to salespeople, agents, and companies for their services in buying or selling an investment Signup and view all the answers

Leverage ____.

is using borrowed funds to invest with the goal of earning a rate of return and excess for the after-tax costs of borrowing Signup and view all the answers

Securities markets ____.

are places where stocks and bonds are traded Signup and view all the answers

A bull market ____.

results when securities prices have risen 20 percent or more over time Signup and view all the answers

A bear market ____.

results when prices have declined in value by 20 percent or more Signup and view all the answers

A market correction ____.

involves a short-term price decline in the stock market of at least 10 percent in a stock, bond, commodity, or index to adjust for a recent price rise Signup and view all the answers

Market volatility ____.

is the likelihood of large price swings due to a company's success (or lack thereof) Signup and view all the answers

Market timers ____.

attempt to predict the short-term movements of various markets and move capital from segment to another to capture market gains and avoid losses Signup and view all the answers

Market efficiency ____.

is the speed at which new information is reflected in investment prices suggesting that the security prices are reflective of their true value at all times Signup and view all the answers

Herd behavior ____.

is when you do something because everyone else is doing it Signup and view all the answers

Buy and hold ____.

is an investment strategy where investors buy a widely diverse mix of stocks to reinvest the dividends and hold onto those investments indefinitely Signup and view all the answers

Dollar-cost averaging ____.

is a systematic program of investing equal sums of money at regular intervals, regardless of the price of investments Signup and view all the answers

Below-average costs ____.

refers to the average costs of an investment if more shares are purchased when the price is down Signup and view all the answers

Average share price ____.

is calculated by dividing the share price by the number of investment periods Signup and view all the answers

Average share cost ____.

is the actual cost basis of the investment used for income tax purposes, calculated by dividing the total amount invested by the total shares purchased Signup and view all the answers

Asset allocation ____.

is the process of spreading your assets among several different types of investments to lessen risk Signup and view all the answers

A limited managed account ____.

is an account at an investment firm whereby, for a fee, they buy and sell your mutual fund assets to automatically rebalance your portfolio Signup and view all the answers

Monte Carlo analysis ____.

is a technique that performs a large number of trial runs called simulations Signup and view all the answers

An investment plan ____.

is an explanation of your investment philosophy and your logic on investing to reach specific goals Signup and view all the answers

The business cycle ____.

is the increase and decrease in a nation's economic activity Signup and view all the answers

A corporate bond ____.

is a corporation's written pledge to repay a specified amount of money along with interest Signup and view all the answers

A dividend ____.

is a distribution of money, stock, or other property that a corporation pays to stockholders Signup and view all the answers

Economics ____.

is the study of how wealth is created and distributed Signup and view all the answers

An emergency fund ____.

is an amount of money you can obtain quickly in case of immediate need Signup and view all the answers

Equity capital ____.

is money that a business obtains from its owners Signup and view all the answers

A government bond ____.

is the written pledge of a government or municipality to repay a specified sum of money along with interest Signup and view all the answers

A line of credit ____.

is a short-term loan that is approved before you actually need the money Signup and view all the answers

Liquidity ____.

is the ability to buy or sell an investment quickly without substantially affecting its value Signup and view all the answers

A maturity date ____.

is the date on which a corporation, government, or municipality will repay the borrowed money Signup and view all the answers

A mutual fund ____.

pools the money from many investors to invest in a variety of securities Signup and view all the answers

The rate of return ____.

is the total income you receive on an investment over a specific period divided by the original amount invested Signup and view all the answers

A speculative investment ____.

is a high-risk investment made in the hope of earning a relatively large profit in a short time Signup and view all the answers

What are the typical asset classes? (Select all that apply)

Stocks issued by small rapidly growing companies (small cap) Signup and view all the answers

A 401(k) ____.

is a retirement savings plan funded by employees often matched by contributions from the employer; contributions are usually made before taxes and grow tax-free until withdrawn Signup and view all the answers

An annual fee ____.

is a yearly fee associated with some financial accounts Signup and view all the answers

An annual percentage rate (APR) ____.

is the yearly interest rate charged on outstanding credit card balances Signup and view all the answers

An asset ____.

is anything of material value owned by an individual or company Signup and view all the answers

Bankruptcy ____.

is a condition of insolvency where an individual or business is unable to pay debts Signup and view all the answers

A bond ____.

is a type of loan in which an investor extends money to the government or a corporation with a set interest rate and maturity date Signup and view all the answers

A budget ____.

is a plan for future spending and saving, weighing estimated income against estimated expenses Signup and view all the answers

Capital ____.

is wealth in the form of money or property Signup and view all the answers

Capital gains ____.

are profits from the sale of an investment Signup and view all the answers

A certificate of deposit (CD) ____.

is a saving certificate issued by a bank that deposits money for a specified length of time Signup and view all the answers

Collateral ____.

is an asset or amount of money provided as security for repayment of a loan Signup and view all the answers

Compound interest ____.

is interest calculated on both the principal and the accrued interest Signup and view all the answers

Credit ____.

is an agreement by which a borrower receives something of value now and agrees to pay the lender at a later date Signup and view all the answers

A credit bureau ____.

is a reporting agency that collects information on consumer credit usage Signup and view all the answers

A credit card ____.

is a card issued by a bank or other business for purchases using borrowed funds to be paid back later Signup and view all the answers

A credit history ____.

is a record of an individual's past borrowing and payments Signup and view all the answers

A credit report ____.

is a document outlining an individual's credit history for use by credit card issuers and other lenders Signup and view all the answers

A credit report agency ____.

is a company that compiles and provides information to creditors to facilitate their decision about extending credit Signup and view all the answers

A credit score ____.

is a number representing a person's creditworthiness based on past credit and payment history Signup and view all the answers

A debit card ____.

is a card that allows consumers to make purchases using money from their checking account Signup and view all the answers

Debt ____.

is the state of owing money to another individual or business, or the amount of money borrowed Signup and view all the answers

A dividend ____.

is a sum paid regularly by a company to its shareholders Signup and view all the answers

A down payment ____.

is the amount a consumer pays upfront for something on the day of the purchase Signup and view all the answers

Study Notes

Personal Finance Key Concepts

Poorly diversified investments are most vulnerable during stock market crashes.
Long-term earnings are best achieved through stocks, bonds, and mutual funds.
Savings represent the intentional accumulation of excess funds by spending less than one earns.

Investments Overview

Investing involves using saved money to generate additional income.
The primary assets for investing include securities like stocks, bonds, and mutual funds.
Stocks signify ownership in a corporation, while bonds represent loans to companies or governments.
An individual’s total investments are collectively known as a portfolio.

Risk and Returns

Financial risk arises when investments fail to generate returns.
Investors aim for a positive total return, combining current income and capital gains.
Current income consists of money received regularly from investments (interest, rent, dividends).
Interest is compensation for lending money, while dividends are corporate earnings paid to shareholders.
Capital gains occur when an investment is sold at a higher value, whereas capital losses reflect a drop in investment value.

Investment Metrics

The rate of return is calculated as the total return expressed as a percentage of the original investment amount.
Pure risk involves potential loss without any chance of gain, while speculative risk includes both potential gains and losses.
Inflation risk indicates that the investment will not grow as fast as inflation, affecting its future value.

Investment Strategies

Risk tolerance refers to an investor's ability to endure market fluctuations.
Investment philosophy can be categorized as conservative, moderate, or aggressive based on risk acceptance.
Conservative strategies minimize risk for low returns, while aggressive strategies seek high rewards at higher risks.

Market Insights

Active investing requires monitoring economic trends and frequently adjusting portfolios.
Common investment strategies include buy-and-hold, dollar-cost averaging, and maintaining below-average costs.
Market corrections signify a temporary decline in market prices to adjust for artificial inflation in asset values.

Securities and Market Dynamics

T-bills are risk-free short-term investments with minimal returns (0.25%-0.35%).
Market risk reflects potential losses from overall financial market performance, while volatility risk refers to sharp price changes due to specific company events.
Liquidity risk highlights the challenge of quickly selling assets without loss.

Complex Investments

Leverage involves using borrowed capital for investment to exceed potential returns.
Securities markets are platforms for buying and selling stocks and bonds, influenced by market conditions.
Market periods are categorized into bull markets (20%+ gains) and bear markets (20%+ losses).

Financial Management Tools

An emergency fund provides quick access to cash during urgent financial needs.
A budget is a strategic plan outlining expenditure against income.
Asset allocation involves diversifying investments across various asset classes to minimize risk.
Monte Carlo analysis simulates potential investment outcomes to assess risks and returns.

Credit and Debt Information

Credit is the agreement for delayed payment after receiving goods or services.
Credit scores reflect an individual's creditworthiness based on past usage and payment performance.
Different accounts, such as 401(k) retirement plans or credit cards, come with specific terms related to fees and rates.

Key Terminology

Capital includes wealth in monetary or property form.
A mutual fund pools investor money to diversify investments across various securities.
Bankruptcy signifies an individual or entity’s inability to meet financial obligations.

Asset Classes and Investment Structures

Equity capital pertains to funds raised from owners, while collateral serves as security for loans.
Common asset classes include large-cap stocks, small-cap stocks, bonds, and cash, each with unique risk-return profiles.
Certificates of deposit are time-bound savings products offering fixed interest rates.

Summary

Knowledge and management of personal finance, investments, risks, and credit are crucial for long-term financial health.
Understanding how various economic factors and personal choices impact wealth accumulation provides a foundation for informed financial decision-making.

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Description

This quiz focuses on key concepts from Chapter 13 of Personal Finance, helping you to reinforce your understanding of investment strategies, savings, and market dynamics. Each flashcard highlights essential terms and definitions that are crucial for mastering personal finance.

Personal Finance Chapter 13 Flashcards

Questions and Answers

When the stock markets crashed the most heavily affected investments were those that were _____.

The best way to earn money long term is _____.

Savings is the _____.

Investing is the ____.

The most common way that people invest is by putting money into assets called _____.

Stocks are _____.

Bonds ____.

All of your investments make up your _____.

When people invest money they take a ____.

Investors hope that their investments will earn them a ____.

Current income is ____.

Interest ____.

Rent is ____.

Dividend is ____.

A capital gain occurs when ____.

Capital losses are when ____.

The rate of return is ____.

Pure risk ____.

Speculative risk ____.

Investment risk ____.

T-bill ____.

When making investments, people demand a ____.

Risk tolerance is the ____.

Investment philosophy is the ____.

A conservative investment philosophy generally means ____.

Preservation of capital means ____.

People with a moderate investment philosophy are usually ____.

People with an aggressive investment philosophy are usually characterized as ____.

Active investing involves ____.

You can invest money in two ways: ____.

The lending investments (debts) offer ____.

Fixed maturity means ____.

Fixed income ____.

Equities ____.

Random risk ____.

To counteract random risk you ____.

Market risk ____.

Financial risk ____.

Inflation risk ____.

Time horizon risk ____.

Business cycle risk ____.

Market-volatility risk ____.

Liquidity risk ____.

Commissions ____.

Leverage ____.

Securities markets ____.

A bull market ____.

A bear market ____.

A market correction ____.

Market volatility ____.

Market timers ____.

Market efficiency ____.

Herd behavior ____.

Buy and hold ____.

Dollar-cost averaging ____.

Below-average costs ____.

Average share price ____.

Average share cost ____.

Asset allocation ____.

A limited managed account ____.

Monte Carlo analysis ____.

An investment plan ____.

The business cycle ____.

A corporate bond ____.

A dividend ____.

Economics ____.

An emergency fund ____.

Equity capital ____.

A government bond ____.

A line of credit ____.

Liquidity ____.

A maturity date ____.

A mutual fund ____.

The rate of return ____.

A speculative investment ____.

What are the typical asset classes? (Select all that apply)

A 401(k) ____.

An annual fee ____.

IDC 4U0 Investing & Personal Finance Exam Format Study Guide