Chapter 11 - Investment Planning

5) How do transactions work in the securities markets? Suppose you are a serious investor with large amounts of capital and prefer to deal directly with an in-person stockbroker. Which of the following statements regarding your options are true? Check all that apply.

- Active traders can generally negotiate reduced fees. - Full service broker is a better option than online brokers for those who want services beyond simply executing trades.

5) How do transactions work in the securities markets? While some brokers still operate exclusively in person or online, the distinction between the three types has become increasingly _______________ over the years. The chart that follows shows fees imposed by different discount brokers; as you can see, _______ of them offer both online and broker-assisted trades.

- blurred - all

5) How do transactions work in the securities markets? Because the fees charged for broker-assisted trades _______________________________, it is __________ shopping around before choosing a broker.

- can vary considerably - worth

10) Managing Your Investment Assets In general, if you have a longer time horizon and a higher risk tolerance, then a higher percentage of your portfolio should be in ____________. If you are investing for a shorter time horizon, or if you have a more conservative investment philosophy, then you should invest a greater percentage of your portfolio in _______________.

- equities - bonds

1) Risk averse

An average investor who is willing to take on higher risk only if he/she is compensated more than what would be adequate for the risk and is likely to prefer an investment with lowest risk

8) Understanding How Indexes Report Data True or False: Based on the numbers not in parentheses in the previous table, you can tell that NASDAQ-100 stocks were performing roughly one-third as well as NYSE Index stocks at the time this data was collected. *** Insert graph where DJIA says "10,736.58 (+132.41)" ***

False

8) Understanding How Indexes Report Data True or False: Based on the numbers not in parentheses in the previous table, you can tell that NASDAQ-100 stocks were performing roughly one-third as well as NYSE Index stocks at the time this data was collected. *** Insert graph where DJIA says "10,773.03 (+132.33)" ***

False

8) Understanding How Indexes Report Data True or False: Based on the numbers not in parentheses in the previous table, you can tell that NYSE Index stocks were performing roughly three-fourths as well as DJIA stocks at the time this data was collected. *** Insert graph where DJIA says "10,993.90 (+133.09)" ***

False

1) Investment plan

This document helps you identify which investment opportunities will help you in achieving your financial goals in a particular time frame with specified risk tolerance. is documented statement that is prepared to create a strategy for your investments to be distributed in the investment vehicles helping you achieve your financial goals in the desired time frame.

1) Capital accumulation plan

This is a statement that helps you in identifying how you can cut down some expenses to save money to invest. helps in finding opportunities that can result in net addition to your personal wealth or help you redistribute your wealth so that you can achieve your financial goals. This plan guides you on how to improve your savings ratio in order to accumulate capital for investments.

1) Bid price

This is a term used to describe the price that a seller receives when selling the security. the quoted price at which the seller is willing to sell a security. In effect, this becomes the lowest price at which the seller is willing to sell the security.

1) Day trader

This type of investor uses the online investing platform to trade securities on a daily basis to reap profits from fluctuations during or within the trading day. the name given to an investor who does not use the strategy of buying and holding a security. This type of investor buys and sells securities throughout the day mostly through an online platform trying to reap quick profits from price fluctuations.

6) Recognizing Different Types of Orders Gilberto is another investor who currently owns shares of MobileRover stock. He would like to place a particular kind of limit order, in which the order is canceled if it cannot be executed immediately at the specified price or better. This type of order is known as _____________________________________.

a fill-or-kill order

3) What are the different ways you can invest? Use your knowledge of different investment features and the information about the individuals below to complete the following paragraphs: Paolo believes that housing prices are likely to rise rapidly in the near future and wants to profit by investing in real estate. He is considering buying individual properties, but he has little practical knowledge of real estate. A friend suggests that he buy ________________________________________________ the real estate sector, because this type of investment vehicle offers diversification within a particular sector.

a mutual fund concentrated in

1) Securities Investors Protection Corporation (SIPC)

a nonprofit corporation with the responsibility of providing investors protection if the brokerage firm they invest with, fails. The SIPC was created by Congress after the Securities Investors Protection Act of 1970 and is subject to SEC and congressional oversight.

3) What are the different ways you can invest? Another friend advises that Paolo stay away from real estate entirely and instead consider buying stock with a fixed stated dividend rate, known as a preferred stock. Holders of this kind of stock receive dividends _____________ holders of common stock receive theirs.

before

3) What are the different ways you can invest? Becky's friend John has a lower tolerance for risk and prefers guaranteed interest payments. Therefore, he should purchase ________________________, which guarantees fixed interest payments in addition to the return of the principal value at the end of the investment period.

bonds

3) What are the different ways you can invest? Ginny is a slightly more confident investor than Eric. She thinks that the technology sector is going to perform particularly well in the stock market in the coming months. Consequently, she chooses to buy shares of a particular technology-centered __________________ because, like Eric's purchase, this option also offers diversification, but it tends to be concentrated in a certain industry.

exchange traded fund

5) How do transactions work in the securities markets? Transactions involving buying and selling securities are conducted through stockbrokers, who are also known as account executives or financial consultants. When choosing a stockbroker, investors have three primary options: full-service brokers, discount brokers, and online brokers. Brokers who offer a complete array of services such as advisory services along with executing client's transactions are called ______________________________.

full-service brokers

8) Understanding How Indexes Report Data The following table lists stock quotes from four of the most widely cited indexes: the Dow Jones Industrial Average (DJIA), the NASDAQ-100, the S&P 500, and the AMEX. In interpreting these numbers, it is most important to consider ____________________________.

how they have changed over a period

1) Prospectus

is a formal legal document that confirms the sale of a security to the buyer and contains important information about the issuing company's business, personnel etc. This document is filed with the Securities Exchange Commission (SEC) and contains all the necessary material an investor needs to know about the issuing company.

5) How do transactions work in the securities markets? Transactions involving buying and selling securities are conducted through stockbrokers, who are also known as account executives or financial consultants. When choosing a stockbroker, investors have three primary options: full-service brokers, discount brokers, and online brokers. Brokers who offer services at low commissions and allow investors to execute trades themselves electronically are called ___________________________.

online brokers

4) Understanding Securities Markets All the investment vehicles that you can use in your investment plan are traded in the securities markets in the form of stocks, bonds, and other financial instruments. There are physical places such as the NYSE (New York Stock Exchange) or the electronic networks such as NASDAQ (National Association of Securities Dealers Automated Quotations) where investors trade these securities. Securities markets can be divided into primary and secondary markets. When new securities created by the issuer are sold to the public usually with the involvement of an investment bank, the transactions take place in the _________________ market.

primary

1) Bull market

refers to the securities markets where investors are optimistic about growth, economic recovery and the expectation that the prices of securities will increase.

4) Understanding Securities Markets All the investment vehicles that you can use in your investment plan are traded in the securities markets in the form of stocks, bonds, and other financial instruments. There are physical places such as the NYSE (New York Stock Exchange) or the electronic networks such as NASDAQ (National Association of Securities Dealers Automated Quotations) where investors trade these securities. Securities markets can be divided into primary and secondary markets. When securities are bought and sold by investors who did not originally purchase the issued security, the transactions take place in the __________________ market.

secondary

7) Understanding How Trade Orders Work Jack purchased 300 shares of an exchange traded fund (ETF) specializing in consumer staples for $90.24 per share. Jack is comfortable holding on to his shares in the face of minor fluctuations, but does not want to risk the share value falling far below his purchase price. He therefore considers placing a ____________ order so that all 300 shares would be sold if the share price falls to $88.

stop

1) Short Sale

transaction involves the sale of securities not owned by the seller who hopes to buy them at a time when the price of the security declines.

11) Rebalancing Your Portfolio Portfolio rebalancing is the process of bringing your different asset classes (stocks, bonds, and cash) back into proper relationship following a significant change in the value of one or more of them. You should monitor your investments and normally rebalance your portfolio about once a year to return your investments to their proper balance when they no longer conform to your investment plan. Suppose that you begin an investment program with a portfolio having an asset allocation of 40% bonds, 25% equities, and 35% cash investments. One year later, you find that some investments have performed better than others. After a year, the portfolio now consists of 40% bonds, 40% equities, and 20% cash investments. To rebalance this portfolio back to its original asset allocation, you should sell some of your ______________ and use the proceeds to purchase additional ______________________

- equities - cash investments

6) Recognizing Different Types of Orders Juanita is an experienced investor who enjoys researching and investing in individual stocks that appear promising. On August 12 she is reviewing the trading information for a new smart-phone company MobileRover, presented in the following table. She would like to buy 100 shares of stock at some point during the day if the price falls to $249.60, therefore she places a ________ order at 12:21 PM EDT. When she places a day order, if the price does not reach $249.60 by the end of the day, her order will be ___________________. Her broker is able to execute the trade two hours later, obtaining her 100 shares at $249.60 each.

- limit - canceled

6) Recognizing Different Types of Orders Caroline is an experienced investor who enjoys researching and investing in individual stocks that appear promising. On August 12 she is reviewing the trading information for a new home security system company SecureYou, presented in the following table. She is extremely confident in the future performance of SecureYou and wants to buy 100 shares of stock regardless of the price, therefore she places a _________________ order at 2:32 PM EDT. She knows that the execution price for this type of order ________________________________________ the last-trade price at the time she places the order. Her broker is able to execute the trade within minutes, obtaining her 100 shares at $157.57 each.

- market - could vary substantially from

6) Recognizing Different Types of Orders Lucia is an experienced investor who enjoys researching and investing in individual stocks that appear promising. On August 12 she is reviewing the trading information for a new educational technology company ESolver, presented in the following table. She is extremely confident in the future performance of ESolver and wants to buy 100 shares of stock regardless of the price, therefore she places a _____________ order at 1:45 PM EDT. She knows that the execution price for this type of order ________________________________________ the last-trade price at the time she places the order. Her broker is able to execute the trade within minutes, obtaining her 100 shares at $77.84 each.

- market - could vary substantially from

8) Understanding How Indexes Report Data Complete the table by indicating the number of stocks tracked by each index, as well as the composition of the stocks it tracks. *** Can be shown finding the "Index", or the numbered ones below. Switches turns. *** 1) DJIA size 2) DJIA composition 3) NASDAQ-100 size 4) NASDAQ-100 composition 5) S&P 500 size 6) S&P 500 composition 7) NYSE Index composition

1) 30 2) Primarily stocks from the NYSE, but a few NASDAQ stocks as well 3) 100 4) The biggest (non-financial) firms traded on NASDAQ 5) 500 6) All large NYSE stocks, as well as major AMEX and NASDAQ stocks 7) All stocks listed on the "big board"

10) Managing Your Investment Assets The following table illustrates several model portfolios that you can use as a basis for your own investment plan, depending on such factors as your time horizon, risk tolerance, and investment philosophy. *** Insert graph where Low Risk/Conservative, 11+ Years has 60% Equities *** Using the model portfolios provided, what is the ideal asset allocation for Roxanne's portfolio, based on her time horizon and investment philosophy? If no funds are recommended to be allocated toward an asset, enter "0" into the numeric entry box for that asset. 1) Cash: 2) Bonds: 3) Equity:

1) 35% 2) 40% 3) 25%

4) Understanding Securities Markets Within the arena of security trading, the secondary market plays an extremely important role. The secondary market can be divided into the broker market and dealer market. For each of the following statements, indicate by checking the appropriate boxes, whether each statement is true of broker markets, dealer markets, both markets, or neither market. 1) Trades take place on a physical trading floor. 2) Ask and bid prices are posted electronically. 3) The NYSE and NYSE/MKT are a part of this market. 4) This market involves trades in securities for big-name companies.

1) Broker 2) Dealer 3) Broker 4) Broker, Dealer

4) Understanding Securities Markets Within the arena of security trading, the secondary market plays an extremely important role. The secondary market can be divided into the broker market and dealer market. For each of the following statements, indicate by checking the appropriate boxes, whether each statement is true of broker markets, dealer markets, both markets, or neither market. 1) The party buying the security directly transacts with the party selling the security. 2) Market orders are posted electronically and are filled immediately at the best available price. 3) This market facilitates the sale of new stock from corporations to private investors. 4) Trades take place on a physical trading floor.

1) Broker 2) Dealer 3) none 4) Broker

4) Understanding Securities Markets Within the arena of security trading, the secondary market plays an extremely important role. The secondary market can be divided into the broker market and dealer market. For each of the following statements, indicate by checking the appropriate boxes, whether each statement is true of broker markets, dealer markets, both markets, or neither market. 1) The NYSE and NYSE/MKT are a part of this market. 2) Buyers and sellers are linked via a mass telecommunications network. 3) This market involves trades in securities for big-name companies. 4) This market facilitates the sale of new stock from corporations to private investors.

1) Broker 2) Dealer 3) Broker, Dealer 4) none

3) What are the different ways you can invest? Use your knowledge of different investment features and the information about the individuals below to complete the following paragraphs: Eric is an inexperienced investor with a relatively small amount of capital that he would like to invest in a wide variety of securities. _________________________ is his best investment option because of the diversification it offers to smaller investors and bigger investors alike.

A mutual fund

3) Mutual funds

An investment company that combines the funds of investors who have purchased shares of ownership in it and then reinvests that money in a diversified portfolio of stocks and issued by other corporations or governments. invests in and professionally manages a diversified portfolio of securities. A mutual fund sells shares to investors, who then become part owners of the fund's securities portfolio. Most mutual funds issue and repurchase shares at a price that reflects the underlying value of the portfolio at the time the transaction is made.

3) Real estate

An investment in this can yield returns in the form of rents, capital gains, and certain tax benefits. Investments range from raw land speculation to limited-partnership shares in commercial property. The returns on real estate investments come in the form of rents, capital gains, and certain tax benefits.

3) Preferred stocks

An investment that has some characteristics of both a stock and a bond. represents an equity position in a corporation. Unlike common stock, preferred stock has a stated (fixed) dividend rate that is paid before the dividends to holders of common stock are paid. Like bonds, preferred stocks are usually purchased for the current income (dividends) they pay.

3) Common Stocks

Shares of ownership in the assets and earnings of a business corporation. are investments in the form of equity that represent an ownership interest in a corporation. Each share of stock symbolizes a fractional ownership position in a firm. A share of stock typically entitles the holder to equal participation in the corporation's earnings and dividends as well as an equal vote to elect the management of the corporation. From the investor's perspective, the return to stockholders comes from dividends and/or appreciation in share price. Common stock has no maturity date and, as a result remains outstanding indefinitely.