Finance

30 year mortgage * $2,000 monthly mortgage payment * 3% interest rate How much mortgage does this get me?

$474,379 P/YR = 12 30 [Shift] N = 360 I/YR = 3 PMT = -2,000 FV = 0 Solve for PV

The maximum amount a US taxpayer under the age of 50 can contribute to a Roth IRA in 2021 is

$6,000 or their total income, whichever is less.

I just went to a car dealership to look at cars. The salesperson says they can probably get me a loan of $20,000 to purchase a lower-end vehicle but since my credit history is short my interest rate will be 9% compounded monthly for a three year loan. If I decide to go for it, what will my payment be? How much will I end up paying for this $20,000 car?

$635, about $23,000 P/YR = 12 3 [Shift] N = 36 I/YR = 9 PV = 20,000 FV = 0 Solve for PMT = -635, 635 x 36 = 22,860

According to the reading "Inflation Calculator" having $100 today is like having _____ back in the year 2000.

$66.96 In other words, if you earned nothing on your savings over that period you lost more than 33% in total purchasing power.

According to the Consumer Expenditure Survey what was the mean income after tax and expenses of a typical household (all consumer units)

$71,487 income, $63,036 expenditures

I have a balance on my credit card of $895. The bank charges me 8.99% interest on unpaid balances, compounded monthly. What payment should I make if I want to have this paid off in one year?

$78 P/YR = 12 1 [Shift] N = 12 I/YR = 8.99 PV = 895 FV = 0 Solve for PMT = -78 (a $78 per month payment).

According to the lecture, we can prepare for inflation by investing to earn interest and

"Leaning In" - by buying pieces of businesses that produce the goods that may rise in price over time.

We can use some cognitive biases to our advantage by

"Leaning into them" - using the brain's natural shortcuts to accomplish our goals.

According the the reading, "...Worldly Wisdom...", having multiple mental models in your mind helps you avoid the problem of

"To the man with only a hammer, all the world looks like a nail."

You own 100 shares of IBM common stock priced at $118 per share. IBM paid qualified dividends totaling $1.73 per share for the year. You are in the 12% federal income tax bracket. How much will you owe in federal income taxes for your ownership in IBM for 2013?

$0 No long-term capital gains tax in the 12% income tax bracket.

If a bond pays $30/year, matures in 10 years at $1,000, and prevailing interest rates are 2% the current price of the bond should be (assume semi-annual payments)

$1,090.23 P/YR = 2 N = 10 (20 total) I/YR = 2 PMT = 15 (30 per year is 15 every 6 months) FV = 1,000 Solve for PV

The standard deduction amount for a single US tax filer in 2021 is:

$12,550 2x this or $25,100 for Married filing joint.

in the late 70's/early 80's gold rose to ____ per ounce and by the late 90's it was ____ per ounce.

$850, $253

A US taxpayer filing single and earning $75,000 will pay how much in Federal tax in 2021:

$9,487.50

As it turns out, I need to buy a car to get to my new job each day but I don't have any savings to do so. My wage will be $3,500 per month and, based on the rest of my bills, I feel like I can comfortably afford a $150/month car payment. My bank just sent me a flyer for a car loan. They are offering loans at 3.74% interest for a 6 year term. After I'm approved, how much money will I have to shop for a car?

$9,661 P/YR = 12 6 [Shift] N = 72 I/YR = 3.74 PMT = -150 FV = 0 Solve for PV

I purchase a condominium in downtown Atlanta for $80,000 and collect rent of $400/month after taxes and maintenance costs. I will be happy if I can achieve a 10% average annual return on this investment over the next 10 years but then I want to sell. Based on this information, what price will I need to sell it for to achieve my goal?

$134,625 12 [Shift] P/YR (monthly rent collected) 10 [Shift] N = 120 I/YR = 10% PV = -80,000 PMT = 400 (the net rent collected each month) Solve for FV = 134,625.3277

How much would a 5% down-payment be for a $300,000 home or condo?

$15,000 300,000 x .05 = 15,000

According to the reading, "Inflation Calculator" $100 worth of goods and services in 2000 would have risen in cost to $157.36 by 2021 and if you had invested $100 in the S&P 500 in the year 2000 you would have a real, inflation adjusted, after-tax return of

$161 So if you earned zero over that period you lost over 33% in purchasing power but if you owned the S&P 500 stock index you gained 61% in purchasing power.

In 2021 pre-tax 401k contributions can reduce your current year taxable income by up to:

$19,500 $26,000 if you are age 50 or over.

For a single filer with $110,000 of taxable income a $10,000 pre-tax 401k contribution will reduce their Federal tax bill by:

$2,400

My first job out of school is paying me $48,000 per year after taxes. I calculate my food, etc. will be about $1,000 per month. I decide I want to allocate 40% of my budget to a mortgage payment. If the bank is offering a 15 year mortgage at 2.25%, and I have $15,000 set aside as a down payment, how much can I spend on a condo purchase?

$259,243 $48,000/year = $4,000 per month $4,000 per month x .40 = $1,600 mortgage payment P/YR = 12 N = 180 (15 years x 12 payments per year) I/YR = 2.25 PMT = -1,600 FV = 0 Solve for PV = 244,243 + 15,000 downpayment = $259,243 purchase price.

Assume the following: * 30 year mortgage * $2,000 monthly mortgage payment * 6% interest rate How much mortgage does this get me?

$333,583 P/YR = 12 30 [Shift] N = 360 I/YR = 6 PMT = -2,000 FV = 0 Solve for PV

According to the Consumer Expenditure Survey, what did households under 25 earn after taxes and spend (total expenditures)? How many people were in the household?

$35,578, $39,293. 1.9

If I put 3% down on a house purchase of $417,500, how much will I need to borrow?

$404,975 417,500 x .97 (the "compliment" of 3%)

As it turns out, I will have to borrow to pay for my college education. At $20,000 per year, by the time I'm done I'll owe $80,000?! Based on a 25 year term and a 4% interest rate, what kind of payments am I facing when I graduate?

$422 per month 12 Shift] P/YR (monthly payments) 25 [Shift] N = 300 I/YR = 4 PV = 80,000 (the beginning amount when I graduate) FV = 0 Solve for PMT = -422.2695

One of the largest expenses an investor will likely have to pay is that of:

Taxes

What do we call points A - H below?

The "Efficient Frontier"

The Consumer Price Index or CPI is an attempt to measure

The change in price of goods and services in the US over time

According to the reading, "Time Value of Money Definition", money deposited into a savings account earns interest. Over time, the interest is added to the principal, earning more interest. That's the power of...

compounding interest

Which of the following measures how two series of numbers move together?

correlation

According to the reading, "Time Value of Money Definition", TVM is the concept that a sum of money is worth more now than the same sum will be at a future date due to its...

earnings potential.

Confusing the familiar with the safe and/or over-rating the value of what you own is known as

endowment effect

What is the difference between the mutual fund classes A, B and C

fee structure

Despite major differences (including differences in government structures, tax structures, economies, ethnicities, languages, currencies, etc.) in various countries around the world, the behavior of each country's stocks, bonds and cash

has been very similar

the global trend for life expectancy and income per person over the last 200 years has been:

higher for both.

I invested $1,000 in stock A five years ago. Over that period stock A appreciated to $5,000 and paid me a dividend of $5 every quarter. What was my average annual return?

34.56% P/YR = 4 (dividends pay every 3 months or four times per year) N = 20 (4 quarters x 5 years) PV = -1,000 (the amount invested, a negative number out of my checking account) PMT = 5 (the quarterly dividend; a positive number back into my checking account) FV = 5,000 (the ending value, a positive number, back into my checking account; if I sell anyway) Solve for I/YR = 34.5604 or 34.56%

According to the "Rule of 72" what average annual return will I need if I want my money to double in two years?

36% 72 ÷ 2 = 36%. Either you love this rule or you think it may be the dumbest thing you've encountered in college.

According to our class discussion, the long-term average annual rate of return for real estate has been:

4% 4% - 5% depending on how far back you go (5% over the last 60+ years, 4% over the last 100)

Roger earned $70,000 and contributed the maximum to his 401k in 2021. How much did he save in taxes vs. if he had not contributed at all?

4,033 Nice! To solve, first calculate without 401k ($70,000 income - $12,550 standard deduction = $57,450 taxable income = $8,388 tax (per tax tables) then solve with the 401k contribution ($70,000 - $19,500 maximum 401k contribution - $12,550 standard deduction = $37,950 taxable income = $4,355 tax (per tax tables) then subtract the difference ($8,388 tax without contribution - $4,355 tax with contribution = $4,033 tax savings by making the maximum 401k contribution).

If a bond pays $40 per year and can be purchased in the open market for $963 the current yield on the bond is

4.2% Yield = income/price or 40/963 = 0.0415 or 4.2%

Assume the following: * 30 year mortgage * $2,000 monthly mortgage payment * $400,000 borrowed What is my interest rate?

4.39% P/YR = 12 30 [Shift] N = 360 PV = 400,000 PMT = -2,000 FV = 0 Solve for I/YR

A fund with a turnover of 20% tends to hold its securities for an average of

5 years If 20% of the holdings change each year, every holding will have changed after five years. In truth, the turnover ratio will likely change quite a bit year to year for actively managed funds.

the average annual return for real estate (as measured by the median home price) from roughly 1963 to 2020 was:

5.47% Turning rent inflation into home appreciation is a good thing. Real estate returns have lagged stocks but it's still an investment you can live in.

I just purchased a $6,277 mountain bike on my credit card. The credit card's interest rate is 12.99%, compounded monthly. When my bill comes, it says the minimum payment due is $125 per month. If I just make the minimum payment each month, how long will it take for me to pay off the bill? How much in total will I end up paying for the bike?

6 years, $9,106 P/YR = 12 I/YR = 12.99 PV = 6,277 PMT = -125 FV = 0 Solve for N = 72.85 months, divided by 12 = 6.07 years

In general, the youngest one can begin their Social Security Benefit is age:

62

According to the Consumer Expenditure Survey, what percent of households were homeowners (vs. renters)

64

Your Social Security Benefit stops growing at age

70

An example of mental accounting is

investing money received as a gift in a high-risk investment while you normally invest in a diversified portfolio (with deductions from your paycheck)

An example of the endowment effect would be:

investing the bulk of your money in your employer's stock

Personal Net Cash Flow is important because

it reveals what resources I will have to work with, which will impact my investment options

According to our class discussion, the 1930's was a period of

mostly deflation

Most index funds:

own all the securities in an index

An index fund is an example of which type of management style:

passive

The graph below is an example of:

perfect negative correlation

According to the class discussion, understanding a history of asset classes can help us

prepare for the future.

With regard to investing, "liquidity"

refers to the efficiency or ease with which an asset or security can converted to cash

An example of anchoring is:

refusing to sell shares of Apple common stock that you bought for $189 per share but has since dropped in value

stocks and bonds have shown a strong tendency to _________ over the last 120 years.

revert to the mean The "sideways tornado" narrows over time.

Per the St. Louis Fed and Case-Shiller data reviewed in class, home ownership in the United States has not been without

risk

Per the "Owning vs. Renting" spreadsheet we reviewed in class, assuming $1,000/month rent, 3% inflation and a 3.25% mortgage rate, owning

saved roughly $200,000 over a 30 year period.

According to our class discussion, the growth rate of global population is

slowing

According to our class discussion, over the last 120 years, across 26 countries studied, the one asset class that consistently had a positive real return over the long term was

stocks

According to the reading, "Stocks..." in discussions, the more shares you own

the larger portion of profits you get

Which of the following statements is correct regarding qualified dividends?

they are taxed at the lower/more favorable "long-term capital gains rates".

When a company purchases its own stock in the market that stock is called...

treasury stock

According to the "Investment Math" article, $1 today is worth more than $1 a year from now because

you could earn interest or investment returns during the intervening 12 months.

The embedded, ongoing cost that exists in all mutual funds, index funds and ETFs is called:

The expense ratio.

In general the lower the premium you pay for insurance

The higher the deductible will be

Your tax "bracket" is:

The highest tax rate you will pay on your income. Today the tax brackets are from 0% - 37%.

According to the reading, "...Worldly Wisdom..." a magazine like "Motocross" can make a lot of money because...

They have a well defined niche

Funds with low turnover have an advantage tax-wise because

They will not sell securities as often as funds with high turnover. This results in fewer realized capital gains that are subject to taxation.

According to class discussion, the lesson of "Aunt Rosie's German Pancakes" is

Time and proportion matter.

Government bonds, also known as treasury bonds, are guaranteed by the US government to pay interest and a known par value amount at maturity

True

US government bonds are currently issued with maturities from 1 - 30 years

True

Contributions to a Roth IRA can be withdrawn prior to age 59 1/2 without penalty

True Exactly. In fact there is no tax or penalty on contributions taken back any time.

You pay social security tax from your paycheck

Up to a limit, and your benefit is limited as well

According to the reading, "...Worldly Wisdom..." Carl Braun of Braun company developed his own accounting system and mandated all communications in the company include:

Who, What, Where, When and Why

According to the reading, "Stocks..." in Discussions, stocks are purchased and sold on the exchanges using

a brokerage account

Reviewing a history of asset class returns, risk and return appear to have

a positive correlation

Investors acting on emotion (specifically greed and fear) tend to ________, ______ when the market is up and ______ when the market is down.

act irrationally, buy, sell

Which of the following is not a benefit of a mutual fund?

allows you to be a direct owner in the underlying securities owned by the fund

According to the reading, "Time Value of Money Definition", an investment delayed is..

an opportunity lost".

Most ETFs:

are passively managed

According to the reading, "Stocks..." in Discussions, stock buy-backs...

benefit existing shareholders.

The following asset classes are ranked from lowest return/lowest risk (as measured by volatility) to highest return/highest risk (as measured by volatility)

bills, fixed income, equities

Based on the information provided below, calculate the weighted average expected return for the portfolio. Fund Name% Invested in FundExpected Return of FundABC40% 11% DEF25% 8%GHI 35% 5%

8.15% ABC = .40 (weight of ABC) x 11 (expected return of ABC) = 4.40% (ABC's contribution to the portfolio return) DEF = .25 (weight of DEF) x 8 (expected return of DEF) = 2.00% (DEF's contribution to the portfolio return) GHI = .35 (weight of GHI) x 5 (expected return of GHI) = 1.75% (GHI's contribution to the portfolio return) 4.40% (ABC's contribution) + 2.00% (DEF's contribution) + 1.75% (GHI's contribution) = 8.15% total portfolio return

Assuming a normal distribution of results, one should expect _____% of values to fall within three deviations of the mean?

99.7%

Consider the following two investments: A: Average annual return 5%. Standard Deviation 20% B: Average annual return 10%, Standard Deviation 10% Based on only this information, which of the two would you expect could lose the most money next year?

A "A" has the higher standard deviation, also 20 standard deviation x 3 = 60, 5 average annual return - 60 = -55% (max loss based on 3 standard deviations from the mean) whereas for "B" standard deviation of 10% x 3 = 30, 10 average annual return - 30 = -20% max loss based on 3 standard deviations from the mean.

A bond is most similar to

A CD because they pay interest and mature at a defined date and defined amount

A Gaussian or normal distribution looks like...

A hill.

A bond is

A loan to a corporation or government

A CD can also be thought of as:

A loan to the bank

Adding bonds to a stock portfolio should result in

A lower standard deviation of the total portfolio

According to the reading, "...Worldly Wisdom..." we can think of the stock market as "Mr. Market"

A manic-manic depressive that comes to you every day with a desire to buy or sell at a different price.

One definition of "Stock" relevant to personal investing is

A quantity of something accumulated, as for future use: a stock of provisions

Spread costs occur when:

A security experiences a difference between the bid and the ask price.

A recession can be defined as

A slow-down in the business cycle in which profits generally decline and unemployment often rises

One definition of "Stock" relevant to personal investing is:

A supply of goods kept on hand for sale to customers by a merchant, distributor, manufacturer, etc.; inventory.

According to the "Investment Math" article, lenders are required to disclose the __________ or _________ in order to make it easier for borrowers to compare loans.

APR...Annual Percentage Rate

Net Worth Is Important:

All of these reasons are true. Net worth can be considered our "true" financial position. Calculating and tracking lets us know where we stand and how much we have to lose

Why do investment formulas matter

Among other things, they can provide consistent measuring sticks to compare investments and investment options

Index Funds and ETF (Exchange Traded Funds)

Are both considered "passive", low-cost investments. Index Funds are priced once a day at the close of the market and ETFs are trade throughout the day.

Coca Cola Stock (ticker KO) and Pepsi stock (ticker PEP)

Are likely to have a tendency to move up and down together over time, but won't always do so

The Bureau of Labor statistics publishes the publicly accessible Consumer Price Index or CPI, along with spending by age which can be useful

As a base planning tool for making future projections

The Bureau of Labor statistics publishes the publicly accessible Consumer Price Index or CPI, along with spending by age which can be useful:

As a base planning tool for making future projections

One advantage of owning real estate is

As a potential hedge against the risk of rental price increases over time.

Net Worth Is Equal To:

Assets minus Liabilities

The purpose of an emergency fund is:

At least in part to pay your expenses during periods of unemployment.

When a publicly traded company declares bankruptcy, any remaining assets are distributed as follows:

Attorneys (administrative expenses), bond holders, preferred stock holders, common stock holders.

Please consider investments "A" and "B": A: Average Annual Return of 10%, Standard Deviation 20% B: Average Annual Return of 10%, Standard Deviation of 25% Based on this, which investment would you say has more risk? Which has more return potential?

B, B B has the higher standard deviation and therefore more risk. It also has more return potential assuming a normal bell curve distribution.

The following assets are listed from most liquid/accessible to least

Checking account, Brokerage account, Retirement account, Car

A Roth IRA is more accessible than other retirement accounts because

Contributions can be taken back any time tax-free and penalty free

The impact of property loss can include:

Cost to replace Time to replace Ability to work

A bond's income payment is also called a

Coupon

According to the reading, "...Worldly Wisdom..." economies of scale can be a massive advantage for businesses but can also lead to...

Crippling bureaucracies.

All other things equal, will I earn more if my savings account pays me interest compounded daily, monthly or annually?

Daily

When bonds don't pay what is promised this is known as

Default

Charlie Munger, one of the great investors of all time, in his investment speech, "...Worldly Wisdom..." has the following to say about psychology...

...it's an ungodly important subject..."

According to the reading, "...Worldly Wisdom..." Warren Buffett says he could improve (your) ultimate financial welfare by...

...limiting your investments to 20 over a lifetime.

In 2019 the number of households age 65 - 74 was

.about the same as the number of households age 25 - 34.

Among other things, recessions can cause job loss, stock declines, real estate declines and

Difficulty obtaining credit

To calculate your yield on an investment you

Divide the annual income paid by the amount invested.

What is the yield for an investment with the following traits? Cost to invest $300 Annual income paid to investor $3

1% 3/300 = .01 or 1% yield

An investment has an average annual return of 18% with a Standard Deviation of 36%. Based on three deviations from the mean, what is the highest positive return you would expect from this investment going forward?

126% Multiply the Standard Deviation of 36 x 3 = 108 Average return of 18 + 108 (3 x the standard deviation) = 90, "The investment could gain as much as 126% in a year."

According to the "Rule of 72", if I think I can earn 25% annually on my investments my money will double every...

2.88 years 72 ÷ 25 = 2.88

According to the reading, "Inflation Calculator" the highest single year of inflation occurred in the year _____ and was _____

2021, 4.70%

When earnings are falling, stocks will tend to:

Fall

When interest rates rise, bonds tend to:

Fall

When interest rise bonds generally

Fall

When stocks fall, interest rates tend to:

Fall

According to class discussion, the lesson of "Aunt Betty's House" is:

First you need a good foundation.

Having a car insurance policy with a $1,000 deductible when I have $500 in savings could impact my investment strategy by

Forcing me to borrow or sell assets in the event I'm found at fault in an accident.

The state of Washington's Affordable Care Act (ACA) health insurance plan can be found at

HTTPS://wahealthplanfinder.org

Over the last (nearly) 200 years, the U.S. Stock market:

Has been up roughly every 7 out of 10 calendar years

We can address many cognitive biases by

Having systems and processes that "take the brain out of the process".

Among many other things, global warming could lead to:

Higher taxes

It is far more likely you will earn a positive return investing in a diversified portfolio of stocks if you:

Hold the stocks for at least ten years

According to the Consumer Expenditure Survey the largest single expense category for the typical American Household was:

Housing

According to the "Worldly Wisdom..." reading, having a "mental model" in place is better than just knowing the facts because...

If the facts don't hang together on a latticework of theory, you don't have them in usable form.

Risks matter in an investment plan because:

If we are not prepared for them we may have to liquidate investments before we want to. Which might cause us to violate stock broker rule # 1: "Buy Low, Sell High".

When might a Roth IRA be a better investment choice than a regular IRA?

If your ordinary federal income tax rate will be greater in retirement than it is when you making contributions to the IRA.

Net Cash Flow is equal to

Income minus expenses

Please consider investments "C" and "D": C: Average Annual Return of 10%, Standard Deviation of 20% D: Average Annual Return of 8%, Standard Deviation of 10%

Investment D has been less volatile than investment C.

According to the article, "5 Biases..." belief perseverance bias occurs when

Investors cling to their previously held beliefs

What is the 2021 maximum contribution limit for a single person under the age of 50 for a regular IRA?

It was $6,000 in 2021.

How will net worth be affected by a negative net cash flow

It will go down

Why were ETFs initially created?

Larger investors desired them due to the fact that mutual funds only perform transactions at market close Net Asset Values.

Index Funds and ETFs (Exchange Traded Funds) are generally

Less expensive than actively managed mutual funds.

The real power of stocks as an investment lies in their:

Limited downside and unlimited upside.

Over the last (nearly) 200 years the U.S. Stock market:

Looks like a normal bell curve with a positive skew.

Which of the following aspect(s) is true of an ETF?

Low fees

The S&P 500 is the largest 500 companies in the US based on

Market Capitalization Market Capitalization = The Number of Shares Outstanding x The Latest Price Per Share

Another term for "average" is:

Mean

According to the reading, "Inflation Calculator" the highest inflation category from 2000 to 2021 was:

Medical Care

Which mutual fund type strives to keep its Net Asset Value (NAV) at $1?

Money market funds

Which website is well known for providing information about mutual funds?

Morningstar.com

An investment has an average annual return of 18% with a Standard Deviation of 36%. Based on three deviations from the mean, how much would you expect this investment could lose in a given year?

Multiply the Standard Deviation of 36 x 3 = 108 Average return of 18 - 108 (3 x the standard deviation) = -90, "The investment could lose 90% of its value."

The stock market is "dynamic" in the sense that:

New companies are always entering the market and those companies benefit from the creative energy of their employees.

Nonfeasance, misfeasance and malfeasance can be defined as:

Not doing something you should, doing something you should do wrong and doing something bad

The Consumer Expenditure Survey shows

Over time we earn more and spend more; then we earn less and spend less

Key features of a bond are

Par value, maturity, interest payments, present value and yield

When a CD matures it

Pays back the full amount originally invested.

An example of paralysis by analysis is:

People passing up billions of dollars (in aggregate) by not investing in their employer's matching 401k plan.

I purchase a condo in Baja for $20,000 that pays $500/month but am forced to sell for $10,000 after 10 years. What was my total return?

250% Again, this can be done in steps: Step 1: My income received was $500/month x 120 months (12 months per year for 10 years) = $60,000 of income received Step 2: My gain or loss is calculated as $10,000 sales price - $20,000 purchase price = ($10,000), a $10,000 loss Step 3: My total gain was $60,000 of income received - $10,000 loss = $50,000 profit or gain or total return in dollar terms Step 4: $50,000 profit/$20,000 purchase price = 2.5 or 250% (move the decimal twice to convert to a percentage)

The standard deviation of the following sample data set: +14 +22 +17 +19 +18

3%

As a rule of thumb, the Certified Financial Planning Board recommends maintaining an emergency fund of

3-6 months of expenses

If a bond pays $40 per year and can be purchased in the open market for $1,151 the current yield on the bond is:

3.5% 40/1,151 = 0.0348 or 3.5%

According to the Consumer Expenditure Survey, Housing made up _______ percent of the average household's budget?

33

When interest rates fall bonds generally

Rise

Inflation can be defined as

Rising cost of goods over time

"Runaway Inflation" can cause a recession and:

Rising interest rates

Rising net worth equates to:

Rising security and rising ability to generate positive net cash flow

What is the point of the graph below?

Risk can be reduced but cannot be eliminated.

Which of the following ETFs tracks the Standard & Poor's 500?

SPY(ders)

According to the reading, "Inflation Calculator" the city that experienced the highest inflation rate in the US from 2000 to 2021 was _________ whereas the lowest was

San Diego, St. Louis

We can directly hedge the risk of rising interest rates and inflation with

Short-term bonds and TIPS (Treasury Inflation Protected Securities).

According to the reading, "...Worldly Wisdom..." the brain uses very crude

Shortcuts

According to the reading, "...Worldly Wisdom..." the impact of taxes on your investment return is...

Significant

According to class discussion the lesson of "Sailing" is

Some preparation slows you down but helps you survive

According to class discussion, a "Black Swan" is

Something totally unexpected

According to the article, "5 Biases..." Cognitive biases stem from...

Statistical, information processing, or memory errors.

Which type of fund purposefully changes its asset allocation over time?

Target Date retirement funds

I have saved $1,000 and would like to earn some interest on this money. I am evaluating two savings accounts at two different banks. Bank One pays 6% compounded monthly. Bank Two pays 6.05% compounded every year. How much will my savings be worth after four years in either bank?

$1,270.49 at Bank One, $1,264.86 at Bank Two Bank One: 12 Shift] P/YR (monthly compounding) 4 [Shift] N = 48 I/YR = 6 PV = -1,000 PMT = 0 Solve for FV = 1,270.49 Bank Two: 1 Shift] P/YR (annual compounding) 4 [Shift] N = 48 I/YR = 6.05 PV = -1,000 PMT = 0 Solve for FV = 1,264.86; Bank One is the better investment despite the lower interest rate because your money compounds monthly at Bank One vs. annually at Bank Two.

If rent rises with inflation at a rate of 3% per year over the next 10 years, a monthly rental payment of $1,000 will grow to:

$1,344 P/YR = 1 N = 10 I/YR = 3 PV = -1,000 PMT = 0 FV = 1,343.9164

After purchasing $100 of Etherium I sell for $90 two days later. What is my Capital Gain or Loss?

$10 Capital Loss $90 ending value - $100 starting value = ($90), a $90 Capital Loss. Since I actually sold the investment this is a "Realized" Capital Loss.

If I invested $300 per month in stocks for 13 years, and had an average annual return of 10% over that period of time, at the end I would have ____ in savings. If my return was 5% per year I would have ____. If my return was 15% per year I would have ____ and at 20% per year I'd have

$95,385, $65,733, $142,662, $219,209 P/YR = 12 ("per month") N = 156 (12 months x 13 years) I/YR = 10 (the average annual return assumption) PV = 0 (no starting balance mentioned) PMT = -300 (investment per month is a negative number; money coming out of my checking account) Solve for PV = 95,385 Replace I/YR = 10 with 5 and solve for FV = 65,732 Replace I/YR = 5 with 15 and solve for FV = 142,662

A bond with par value of $1,000 pays $60 per year and currently trades at $912.50 in the open market. The bond matures in seven years. If interest rates fall by 1% what should the new value of the bond be (assume semi-annual payments)?

$964.80 P/YR = 2 N = 7 (14 total payments) PV = -912.50 PMT = 30 (every six months) FV = 1,000 Solve for I/YR = 7.6369 7.6369 - 1 = 6.6369 I/YR = 6.6369 Solve for PV = 964.80, interest rates fell and the bond rose in price.

Assume the following: * 30 year mortgage * $250,000 borrowed * 2.5% rate What is my mortgage payment?

$988 P/YR = 12 30 [Shift] N = 360 I/YR = 3 PV = 250,000 FV = 0 Solve for PMT = -988 (a $988 per month payment)

If the stock market was up 10% this year and my index fun had an expense ratio of .04%, roughly how much should I earn on $1,000 invested in the fund?

$99.60 $1,000 x (.10 - .0004) = 99.60 or $99.60 earned

Which type of correlation would result in the greatest amount of risk reduction

-1 Perfect negative correlations are not likely to actually be found over sufficiently long periods of time. In fact, since the largest diversified asset classes (such as stocks, bonds and real estate) have all been up over the long-term their correlations to each other are all positive (but still less than 1).

If my stock has a Beta of 1.8 and I expect the stock market to be down 12% this year what should I expect my stock return to be?

-21.60% 1.8 x -12% (the stock market was down)

According to the "3 deviations from the mean" approach, and given the data covered in class, one could expect the world stock market to be anywhere from ____ to ____ in any given year.

-41.40%, +60.60

If an investment has had an average annual return of 20% and a standard deviation of 30%, assuming I had a large enough sample size, I can can expect the returns over the next 100 years to be roughly between:

-70% and +110% Multiply the Standard Deviation of 30 x 3 = 90 Average return of 20 - 90 (3 x the standard deviation) = -70, "We estimate the investment could lose 70% of its value in its worst year." Average return of 20 + 90 (3 x the standard deviation) = +110%, "We estimate the investment could 100% of its value in its best year."

According to the reading, "Inflation Calculator" the average annual inflation rate from the year 2000 to the year 2022 was...

2.36

To earn any benefit one must work (and pay into) Social Security for:

10 years or 40 quarters

In the "Rolling Returns Since 1950" data reviewed in class, which was the minimum risk portfolio for periods of 1 year?

10% Stocks, 90% Bonds

According to the Yale histogram reviewed in class, the long term average annual return of the stock market has been roughly _____, the standard deviation has been roughly ____, the worst single calendar year was down roughly ____, and the best calendar year was up roughly ____.

10%, 20%, 50%, 60%.

According to the "Investment Math" article, investment losses hurt more than gains. For example, if I lose 50% this year on my investments I would need a _____ positive return just to get back to even.

100% $100 x (.50, a 50% loss) = $50. To get back to even I need to double my money which is a 100% rate of return. $50 profit ÷÷ $50 initial investment = 1 or 100% (moving the decimal to the right two places).

Please consider the following 10 years of returns for an investment: Year 1: 2.11% Year 2: 16% Year 3: 32.39% Year 4: 13.69% Year 5: 1.38% Year 6: 11.96% Year 7: 21.83% Year 8: -4.38% Year 9: 31.49% Year 10: 18.40%

12.33% These are the actual returns of the S&P 500 from 2011 - 2020. The standard deviation of 12.33% was much lower than the historic norm of 20%.

A young dentist is considering purchasing an existing practice from an established dentist and considers the following two existing practices for sale: Practice A: Asking price $1.2 million, expected profit of $90,000 per year Practice B: Asking price $5 million, expected profit of $250,000 per year What are the payoff periods for each of these investments and why would it matter?

13 years for A, 20 years for B...because a more things can change in 20 years vs. 13. Practice A: $1,200,000 ÷÷ $90,000 = 13.33 year payoff Practice B: $5,000,000 ÷÷ $250,000 = 20 year payoff Practice B pays a high income but they are asking for a higher purchase price relative to the income generated. Practice B might argue the income is going to grow faster than Practice A to justify the lower initial bang for your investment buck but if the income growth rates were assumed to be the same Practice A looks better.

I purchase a stock for $100 which pays dividends of $1 every quarter. If I sell for $105 two years later what is my total return?

13% Every quarter means every three months. To find the answer here takes a few steps: Step 1: $105 ending value - $100 starting value = $5 capital gain Step 2: $1 every quarter x 8 quarters (for quarters per year for two years) = $8 of income earned. Step 3: $5 capital gain + $8 of income = $13 total return (in dollars) Step 4: $13 total return ÷÷ $100 starting value = 13% total return (expressed as a percentage) Expressing as a percent gives me an idea of how much "bang" I got out of my "buck".

Please consider the following 10 years of returns for an investment: Year 1: 2.11% Year 2: 16% Year 3: 32.39% Year 4: 13.69% Year 5: 1.38% Year 6: 11.96% Year 7: 21.83% Year 8: -4.38% Year 9: 31.49% Year 10: 18.40% What is the Average Annual Return of this investment over that period of time?

14.49% Sum the total and divide by 10 (the number of observations). These are the actual returns of the S&P 500 from 2011 - 2020. The average of 14.49% is much higher than the historic average of 10%.

Five years ago I was looking at a beautiful house that cost $300,000. I finally saved up enough money for a downpayment but was shocked to find the price to buy the house is $600,000 now?! What was the inflation rate for this home over that period?

14.87% Set calculator to 1 P/YR, N = 1, PV = -300,000, PMT = 0, FV = 600,000, solve for I/YR

According to class discussion, the United states stock market was ____ of the global pie in 1899 and is roughly ____ of the pie today.

15%, 55.9%

in the last 120 years, US equities have never had a negative real return if held for at least (roughly) ____ years.

16 years

The standard deviation of the following sample data set: -14% -4% -28% -2% -40%

16%

Finland had a long-term stock market return of ____ with a standard deviation of ____, while Switzerland had a long-term stock market return of ____ and a standard deviation of

16.40%, 30.80%, 8.40%, 18.70

from 1900 - 2017, the standard deviation for stocks, bonds and short-term government bills for the World was

17%, 9.40%, 2.90

You own 10 shares of Apple stock. Apple paid qualified dividends totaling $12.15 per share for the year. You are in a 22% ordinary income tax bracket. How much must you pay in taxes on the Apple dividend?

18.22 The long-term capital gain rate for someone in the 22% income tax bracket is 15%. 10 shares x $12.15 dividends per share = $121.50 total dividends x 15% long-term capital gains rate = $18.22.

I purchase a stock for $50 and sell for $1,000 after two years. The stock also paid me $4 in dividends over that time! Based on the time value of money approach, what was my return?

183% Per year 4 [Shift] P/YR (because dividends pay quarterly) 2 [Shift] N = 8 PV = -50 PMT = 0.50 (4 ÷÷ 8; $4 worth of dividends paid over two years is $4 ÷÷ 8 total payments or $0.50 each) FV = 1000 Solve for I/YR = 183.2138%

Two password generator/password keeper apps are

1Password & Dashlane

I would very much like to accumulate $1,000,000. I have seen Warren Buffett's returns at Berkshire Hathaway and believe I can do the same. Therefore I expect to earn 20% annually on my investments. My first job out of school is paying me $3,000 per month (after taxes) and because my expenses will be low I believe I can save half of that each month. Also, I managed to save $10,000 in my investment account already from odd jobs in school and gifts at graduation. Based on all of this information, how long will it take me to be a millionaire?

About 12 years 12 [Shift] P/YR (because I'll be saving monthly) I/YR = 20 PV = -10,000 (the savings I'm starting with) PMT = -1,500 (half of 3,000) FV = 1,000,000 (the goal) Solve for N = 144 months; 144 ÷÷ 12 = 12 years

I purchase a four-plex in downtown Bellingham for $920,000 and expect to collect $30,000 per year, net, in rent. What is my payback period?

About 30 years $920,000 purchase price ÷÷ $30,000 annual rent collected = 30.67 or about 30 years. The word "net" means "after costs" or how much of the rent did I "net" to my checking account.

What are tax-deferred accounts?

Accounts where taxes are not paid on contributions or earnings until they are withdrawn. No penalty for 401k, 403b or 457 if age 55 or after 59 1/2 for IRA and Roth IRA.

"Real Return" is defined as

After inflation has been accounted for

Which statement is most true?

All investors, collectively, underperform "the market" by what they pay in fees and taxes, so we should minimize these two things that we can control.

I am considering two investments, A & B. A requires an initial investment of $750 and will be worth $1,000 in five years. B requires and initial investment of $700 and will be worth $1,000 in six years. Based on the Time Value of Money Method, which should I choose? What is the rate of return for each?

B: A's annual return is 5.92%, B's is 6.12% A: P/YR = 1 (can be assumed since no other compounding period was given) 5 [Shift] N = 5 PV = -750 PMT = 0 FV = 1000 Solve for I/YR = 5.92 B: A: P/YR = 1 (can be assumed since no other compounding period was given) 5 [Shift] N = 6 PV = -700 PMT = 0 FV = 1000 Solve for I/YR = 6.12; I should choose B if I can wait an extra year (the return is higher sufficiently compensating me for the extra time compared to A).

According to the class discussion, the lesson of "Adam's Mountain Biking Advice" is:

Be an expert on the path past the rocks.

Why does the Time Value of Money matter?

Because a bird in hand is worth two in the bush.

According to the reading, "...Worldly Wisdom..." you have to know accounting...

Because it's a useful starting point - and to know its limitations.

A personal net worth statement can be viewed as being very similar to a company's

Book Value

How can an investor accomplish points A through H?

By changing the weights of each of the nine indexes

One catch-all hedge against the problems (and opportunities) that can arise in a recession is

Cash

The best investment for an emergency fund is

Cash

The largest annual expense for the typical American Household is:

Dwelling Expense

Poor record keeping can lead to negative tax consequences and

Escheatment

The three major credit agencies that you can go to to freeze your credit at no cost are

Experian, Equifax, Transunion

In the reading, "...Worldly Wisdom..." Charlie Munger says the stock market is like the race track but with much less taken...

Off the top

What would I have to do if I want to purchase stocks, bonds, index funds and mutual funds?

Open a brokerage account.

To best impact your credit score

Open a credit card, pay it off early, in its entirety and pay often

Positive Net Personal Cash Flow is similar to what in a business?

Profit

Owning insurance and maintaining a cash emergency fund helps my investment strategy directly by

Providing liquidity when I need it thus avoiding forced sales of my investments.

in 1900, the ____ industry made up the vast majority of the US stock market and is nearly non-existent today.

Rail

What is a major difference between regular IRAs and Roth IRAs?

Regular IRAs are tax-deferred whereas Roth IRAs are not.

Which of the following represent a feature of a 401k plan?

The IRS allows you to borrow up to 1/2 of your balance or $50,000, whichever is less without tax or penalty (the plan must allow this as well).

The "standard deduction" is:

The amount of a US taxpayer's earnings not subject to taxation under current rules

An insurance deductible is

The amount you pay in the case of an insurable event

The formula used to find the Standard Deviation of a Sample Population (incomplete data set) is:

The square root of: the sum of each observation in a data set minus the average of the data set, squared; divided by the number of observations minus 1.

I am considering investing $10,000 in one of three options. Which will pay me the most income? A: CD with minimum $1,000 investment paying 2% interest B: Stock currently trading at $200 per share and paying annual dividends of $4 per share C: A condominium in another country, selling for $10,000 and paying net rent of $200 per year

The yield on these investments is the same. A: $1,000 x .02 = $20. 20 ÷÷ 1,000 = a 2% yield B: $4 dividends ÷÷ $200 per share = 2% yield C: $200 annual rent ÷÷ $10,000 value = 2% current yield

the stock market has by far outperformed when which political party was in power?

There is no clear correlation between political parties and stock market performance.

Why might it be important to calculate the yield of an investment?

To compare to other investment options

What is the use of the Standard Deviation formula with regard to investing?

To help estimate both the risk and return potential of an investment.

In the standard deviation calculation, why do we subtract each observation from the mean?

To measure how far each observation deviated from the average.

According to the "Investment Math" article, by combining an investment's price change and the income it generated, you can calculate the investment's

Total Return Capital Gain + Income

Dividends, interest, gains and losses are

Tracked and reported to the IRS annually and generally reportable on your tax return when they occur in a taxable brokerage account.

The following bonds are ranked in order from safest to least safe

Treasuries, Municipals, Corporates

A bond carries with it a promise to pay a certain amount at a certain date and interest while you wait.

True

What is the primary difference between withdrawals from a regular IRA and a Roth IRA?

Withdrawals from a regular IRA are taxed at the recipient's ordinary federal income tax rate, while withdrawals from a Roth IRA are not taxed at the federal level.

According to the video, "The Oracle of Real Estate" the 30 year fixed mortgage is

Wonderful

What's the first thing I should do when I start a Time Value of Money Calculation?

[Shift] C All

An asset class is a grouping of investments that exhibit similar

characteristics

A strong foundation for investments requires we:

dentify risks and address (or accept) them. Mountain Biking Rule # 1: "You have to identify the rocks before you can focus on the path past them".

Physical risks that may have significant financial impact include:

disability, death, ilness