Maddie Norton Period #2 Chapter 11 Review Questions 1. Explain the difference between investing and speculating.

Give an example of each Investment- An asset that generates value or a return. For example, stocks pay dividends and bonds pay interest, so these are considered investments. Speculations- An asset whose value depends solely on supply and demand, as opposed to being based on the return that it generates. For example gold coins and baseball cards are worth more in the future only if someone is willing to pay for them. 2. Why is it important to maintain an adequate emergency fund before creating and implement an investment program It is important to maintain an adequate emergency fund before an investment program so that if anything goes wrong such as an unexpected illness, or car accident you can pay for it and dont have to try and pool that money from other areas as they may be harder to turn into cash. 3. What are five ways to find money to invest? Pay yourself first Make Investing Automatic Take advantage of uncle sam and your employer Windfalls Make 2 month a year investment months 8. What is the basic difference between the nominal rate of return and the real rate of return? Which of them might be a better measure of how well an investment has performed? Why? Nominal rate of return is the rate of return earned on an investment, unadjusted for lost purchasing power. Real rate of return is the current or nominal rate of return minus the inflation rate. Real rate of return is a better measure because it tells you how much youve really earned after adjusting for inflation.

11. Differentiate between systematic and nonsystematic risk. Which of these is more important to the average investor? Why? Systematic is the portion of a securitys risk or variability that cant be eliminated through investor diversification. This type of variability or risk results from factors that affect all securities. Unsystematic is the risk or variability that can be eliminated through investor diversification. Unsystematic risk results from factors that are unique to particular firm.

13. What is the long-term relationship between risk and time? Why is this relationship such an important concept to remember when developing and implementing an investment program?

As the length of the investment horizon increases, you can afford to invest in riskier assets. This concept is important because the time of your investment directly affects the return. 14. What is meant by the term asset allocation? What makes asset allocation such a simple and powerful concept? When should an investor change an asset allocation mix? Asset allocation an attempt to ensure that the investors strategy reflects his or her investment time horizon and is well diversified generally with assets in several different classes of investments, such as domestic common stocks, international common stocks, and bonds. Asset allocation is a powerful concept because every persons is different. An investor should change an asset allocation mix when they enter different stages of their life.. 15. What is the purpose for adjusting your asset allocation as you age? Why wouldnt the best or highest returning portfolio always be prudent? The purpose of adjusting your asset allocation is because your time horizon, financial situation or capacity for risk, and risk tolerance change throughout your life. The closer you get to retirement the highest returning portfolio might not be the best for you. When you are entering your retirement or are in retirement you are trying to save your money.