Mos 2277- Final Exam Questions and
Correct Answers.
investing risk rule #1 - Answer own all ( the best) boats aka diversify
investing risk rule #2 - Answer don't get off the roller coaster - don't sell during low troughs,
market will always go up
risk vs volatility - Answer risk - only owning a few stocks -> avoid risk
volatility - fluctuating price of stocks -> welcome volatiltiy
short term rule of thumb (investing) - Answer keep any money you need to spend in the next
5 years in a high-interest savings account -> provides liquidity
long term rule of thumb (investing) - Answer invest money on a consistent basis, no matter
up or down
what is a stock and what does it represent? - Answer a share in the ownership of a company
represents a claim on the company's assets and earnings
rights of a shareholder? - Answer no say in day-to-day operations but can vote on board of
directors
2 reasons for purchasing stock - Answer 1. sell for profit if price appreciates
2. dividend income
what does a stock price represent? - Answer the present value of all the future cash flows of
a company -> requires many assumptions
how do dividends affect stock price? - Answer dividends reduce the present value of
company's future cash flows because they pay you dividends so the stock price goes down by
the amount of a dividend
total return of stock investor - Answer dividend income + increase in stock price
what should you do with your dividends? - Answer always reinvest them - can result in huge
returns
, market capitalization? what does it represent? - Answer total # of shares outstanding *price
per share
represents total market value of company
3 reasons hawn advises against investing in bonds? - Answer 1. bondholders dont share in
the profits of the company, just interest so when the company's profit increases the interest
payments stay the same -> no growth potential
2. bonds tend to have longer maturities -> you need to wait longer to get the principal payment
back (your original investment)
3. why buy a bond that barely pays enough interest for you to profit and risk losing value ->
currently hard to find bonds paying above inflation
why are long term bonds riskier - Answer the longer the maturity, the more the prices
fluctuate and the more sensitive they are to market and interest rate changes
why does barry say bonds are not as safe as they used to be? - Answer 1. bond prices
fluctuate with interest -> they go down too
2. interest rates are already low so they're likely to go up aka bond prices are likely to drop
why are long term rewards of stocks better than bonds? - Answer individual stocks are riskier
so there are higher rewards
result of bonds with negative interest rates? - Answer you lose money by the time you get
your money back
6 asset classes you can invest in - Answer 1. stocks
2. bonds
3. real estate
4. cash
5. precious metals
6. commodities
why is holding cash as an asset (outside of emergency fund) a bad idea - Answer cash loses
value to inflation
Correct Answers.
investing risk rule #1 - Answer own all ( the best) boats aka diversify
investing risk rule #2 - Answer don't get off the roller coaster - don't sell during low troughs,
market will always go up
risk vs volatility - Answer risk - only owning a few stocks -> avoid risk
volatility - fluctuating price of stocks -> welcome volatiltiy
short term rule of thumb (investing) - Answer keep any money you need to spend in the next
5 years in a high-interest savings account -> provides liquidity
long term rule of thumb (investing) - Answer invest money on a consistent basis, no matter
up or down
what is a stock and what does it represent? - Answer a share in the ownership of a company
represents a claim on the company's assets and earnings
rights of a shareholder? - Answer no say in day-to-day operations but can vote on board of
directors
2 reasons for purchasing stock - Answer 1. sell for profit if price appreciates
2. dividend income
what does a stock price represent? - Answer the present value of all the future cash flows of
a company -> requires many assumptions
how do dividends affect stock price? - Answer dividends reduce the present value of
company's future cash flows because they pay you dividends so the stock price goes down by
the amount of a dividend
total return of stock investor - Answer dividend income + increase in stock price
what should you do with your dividends? - Answer always reinvest them - can result in huge
returns
, market capitalization? what does it represent? - Answer total # of shares outstanding *price
per share
represents total market value of company
3 reasons hawn advises against investing in bonds? - Answer 1. bondholders dont share in
the profits of the company, just interest so when the company's profit increases the interest
payments stay the same -> no growth potential
2. bonds tend to have longer maturities -> you need to wait longer to get the principal payment
back (your original investment)
3. why buy a bond that barely pays enough interest for you to profit and risk losing value ->
currently hard to find bonds paying above inflation
why are long term bonds riskier - Answer the longer the maturity, the more the prices
fluctuate and the more sensitive they are to market and interest rate changes
why does barry say bonds are not as safe as they used to be? - Answer 1. bond prices
fluctuate with interest -> they go down too
2. interest rates are already low so they're likely to go up aka bond prices are likely to drop
why are long term rewards of stocks better than bonds? - Answer individual stocks are riskier
so there are higher rewards
result of bonds with negative interest rates? - Answer you lose money by the time you get
your money back
6 asset classes you can invest in - Answer 1. stocks
2. bonds
3. real estate
4. cash
5. precious metals
6. commodities
why is holding cash as an asset (outside of emergency fund) a bad idea - Answer cash loses
value to inflation
