chap 21
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| CFA | Chartered Financial Analyst
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| how do you become a CFA? | 1. pass of series of annual examinations. 2. must have worked in the financial money industry for at least 3 years 3. Be a member of a local society of the financial analysts federation.
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| risk-return trade-off | investments that offer higher expected returns will impose greater risk
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| risk tolerance | the investor's willingness to accept higher risk to attain higher expected returns
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| risk aversion | the investor's reluctance to accept risk
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| what are the two indicators that specify an investors objectives? | return requirement and risk tolerance
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| human capital | used for financing education.
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| what two types of risk does a purchased home hedge against? | 1. risk of increasing rental rates
2. the particular house or apartment where you live may not always be available to you. By buying you guarantee its availability
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| when does our money change from human capital to financial capital? | when we age and start putting money away for retirement.
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| when does our risk tolerance tend to diminish | When we are nearing retirement. With age individuals lose their potential to recover from poor investment performance
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| personal trust | an interest in an asset held by a trustee for the benefit of another person
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| trustee | holder of a trust, usually a bank, lawyer, or and investment professional.
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| t or f investment of a trust is subject to state trust laws and prudent investor rules that limit the types of allow trust invest | true
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| trust risk tolerance | because of their fiduciary responsibility, personal trust managers are expected to invest with more risk aversion than individual investors
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| what investment options are ruled out of a trust? | options, futures, short-selling (betting the price of a security will fall), buying on margin (borrowing up to 50% of the purchase price)
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| mutual funds | firms that manage pools of individual investor money. they invest in accordance with their objectives and issue shares that entitle investors to a pro-rata portion of the income generated by the funds.
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| what are the two basic types of pension plans? | defined contributions and defined benefit.
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| defined contributions plans | in effec savings accounts established by the firm for its employees. the employer contributes funds to the plan, but the employees bears all risk of the funds invest performance. (called defined because the firms only oblig is to make defined contrib.)
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| defined benefits plans |
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| t or f a firm must make up the difference on employee pension plans if the R.0.R. falls below their expectation. | true. The employer must give the employee a certain amount for retirement. If the target rate is not maintained the employer must make up the difference.
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| why do life insurance companies invest? | to hedge their liabilities which are defined by the policies they write.
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| whole life insur policy | combines a death benefit with a kind of savings plan that provides for a gradual buildup of cash value that the policyholder can withdraw later in life.
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| term insur policy | provides death benefits only, with not buildup of cash value.
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| variable life insur policy | entitles the insuredc to a fixed death benefit plus a cash value that can be invested in the policyholder's choice of mutual funds.
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| universal life | allows policy holders to increase or reduce either the insurance premium or the death benefit according to their changing needs. The interest rate changes with the market interest rates.
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| t or f earnings on universal and variable life insurance policies are not taxed until the money is withdrawn. | true
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| bank interest-rate spread | the difference between the interest rate charged to a borrower and the interest rate that banks pay on their liabilities
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| endowment funds | portfolios operated for the benefit of a nonprofit entity. typically managed by educational, cultural and charitable orgs.
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| different types of investor constraints | tax status, requirements for liquidity, reg restrictions, unique needs, investment horizon
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| social investing | a self imposed constraint, means that an investor will not hold shares of firms involved in ethically objectionable activities. (ex. countries that have human rights abuse, production of tobacco or alcohol, partic in polluting activities)
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| investment horizon | the planned liquidation date. example could be a child going to college. or a retirement date.
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| prudent investor rule | the fiduciary responsibility of a professional investor. professional investors who manage other people's money have to restrict invest to assets that would have been approved by a prudent investor.
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| liquidity | the speed and ease with which an asset can be sold and still fetch a fair price.
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| what are the most liquid assets and the least liquid assets? | treasure bills and commercial paper are the most liquid and real estate is the least liquid.
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| What type of investors are constrained by regulations? | only professional and institutional.
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| t or f the performance of any investment strategy shold be measured by what? | It's rate of return after taxes.
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| what is often the primary investment of an individual? | their job
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| what are the 3 major need for funds for any one investor? | housing, children's college, retirement
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| income funds | cater to the conservative investor
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| high growth funds | seek out the more risk tolerant investors
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| tax free bonds funds | segment the market by tax bracket
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| ERISA | Employee retirment income security act of 1974, regulates pension funds, this law revolutionized savings for retirement in the US.
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| what is the difference between mature funds and young pension funds | mature are required to pay out more than the young funds and need more liquidity.
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| asset universe | approved list of assets in which a portfolio manager may invest this list is determined by the investment committee who is made up of top mgmt officers, senior port mgrs, and sr. security analysts.
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| top down method of making a portfolio | assigning asset allocation first.
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| passive core strategy | the manager indexes part of the portfolio, the passive core, and actively manages the rest of the portfolio.
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| investing is a dynamic process | you must continually update and reevaluate your decisions over time
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