Chapter 8 - Personal Finance

IRA

Tax-defered arrangement for individuals with earned income; individual retirement arrangement

What is the Rule of 72? How is it calculated?

The Rule if 72 is a quick way to calculate the length of time it will take to double a sum of money. Divide 72 by the expected interest rate to determine the number of years.

Which statement is true about liquidity?

The more liquid an investment, the less return.

Explain the risk return ratio.

The risk return ratio is used by investors to compare the expected returns of an investment to the amount of risk they take to get the returns.

Diversification lowers risk with investing.

True

Explain why you should never invest using borrowed money.

You should never borrow money. Borrowing money for investing in particularly bad because it increases the risk of the investment and if you lose the money, you are still left with payments on it.

Portfolio

A list of your investments

Share

A piece of ownership in a company, mutal fund or other investment

401(k)

A retirement savings plan offered by a corporation to it's employees; the employee contributes money from his/her gross pay, and the money grows tax defered

Investment

Account or arrangement in which one would put their money for long-term growth

Risk

Degree of uncertainty of return on an asset

A single stock would be a good place to keep your emergency fund.

False

Long-term investments properly diversified include the following mutual funds:

Growth,Growth & Income,International,Aggressive Growth

Why do single stocks carry a high degree of risk? Why do mutual funds carry a less risk?

If you buy a single stock, there is no diversification in your investment. Investing in mutual funds ensures diversification and, therefore, lowers risk.

Which is a good investment option?

Mutual Funds

Is real estate a liquid investment? Explain your answer.

No. Real estate is the least liquid consumer investment. It takes time and consideration of the current market to sell real estate, thereby making it difficult to access your investment dollars.

Mutual Fund

Pool of money managed by an investment company and invested in multiple companies

Liquidity

Quality of an asset that permits it to be converted quickly into cash without loss of value

*NOTE

Read through the chapter roughly. Some information on the test is not included in the review.