Mixed Deck — All Investment Topics Flashcards

The risk that an investor cannot secure financing at an affordable rate is called ______ risk.

Answer: Capital

Capital risk is the risk that an investor cannot obtain the funds (capital) needed for an investment at an affordable rate. Business risk relates to operational performance, financial risk to the use of debt, and leverage risk to magnified losses from borrowing — none of which specifically describe the availability and cost of financing.

Since 1970, Buffet has served as chairman and main shareholder of __________.

Answer: Berkshire Hathaway

Warren Buffett is widely recognized as the chairman and CEO of Berkshire Hathaway. He transformed this former textile manufacturing company into a diversified holding company, making it the primary vehicle for his investment strategies and wealth accumulation since the 1970s.

A common rule of thumb for stock allocation by age is to subtract your age from what number?

Answer: 100

Subtracting your age from 100 (or 110) gives a rough percentage to hold in stocks.

A mutual fund or ETF that attempts to mimic the performance of a market index is known as an index fund. A low-cost, tax-efficient, and diversified option to invest in equities is through index funds.

Answer: True

This statement is true. An index fund is designed to passively track the performance of a specific market index, such as the S&P 500. By doing so, they typically incur lower management fees due to less active trading, offer inherent diversification across many securities within the index, and often have lower capital gains distributions, making them a cost-effective and tax-efficient investment option.

Mutual fund share classes (Class A, Class B, Class C, etc.) differ primarily in that they:

Answer: The various costs and fees that each class collects

Mutual fund share classes, such as Class A, B, and C, are primarily distinguished by their different fee structures. These variations include sales charges (loads), annual operating expenses (12b-1 fees), and redemption fees, which can significantly impact an investor's overall return. While the underlying investments of the fund are generally the same, the costs associated with each class differ.

What does 'beta' measure in portfolio analysis?

Answer: A stock's volatility relative to the overall market

Beta measures how much a security's price moves relative to the market; a beta greater than 1 indicates higher volatility than the market, while less than 1 indicates lower volatility.

Under the SEC's Regulation Best Interest (Reg BI), broker-dealers must act in whose best interest when making recommendations?

Answer: The retail customer's best interest at the time the recommendation is made

Reg BI requires broker-dealers to act in the best interest of retail customers when making security recommendations, not merely recommend 'suitable' products.

What does alpha measure in portfolio performance?

Answer: Excess return relative to a benchmark

Alpha represents return generated above what the benchmark or risk would predict.

What is the primary risk that causes high-yield ('junk') bonds to offer higher interest rates than investment-grade bonds?

Answer: Credit (default) risk

High-yield bonds are issued by companies with lower credit ratings, meaning there is a greater probability the issuer may default on interest or principal payments.

What is the purpose of a benchmark in portfolio management?

Answer: To serve as a standard against which a portfolio's performance can be measured

A benchmark, such as the S&P 500, is a reference index used to evaluate whether a portfolio's returns are meeting expectations relative to the broader market or a comparable universe of assets.

A growth fund primarily seeks what objective?

Answer: Capital appreciation through stocks expected to grow faster than average

Growth funds invest in companies expected to appreciate faster than the overall market.

What is a 'churning' violation in securities regulation?

Answer: Excessive trading in a client's account to generate commissions

Churning refers to the illegal practice of a broker executing excessive trades in a client's account primarily to generate commissions rather than to serve the client's interests.

Which statement about the risk-return tradeoff is accurate?

Answer: Higher potential returns generally require accepting higher risk

The fundamental tradeoff is that pursuing higher returns typically means taking on more risk.

You're ready to begin putting together an investing portfolio, but first you must:

Answer: Learn about investing

Once you've concluded that investing is a smart option, you'll need to educate yourself on the subject. Learn everything you can about stocks, bonds, mutual funds, and other financial options.

What is the debt service coverage ratio (DSCR)?

Answer: Net operating income divided by total debt payments

DSCR measures whether income covers debt obligations; above 1.0 means income exceeds payments.

An open-end mutual fund issues shares in what manner?

Answer: Continuously, creating new shares as investors buy in

Open-end funds continuously issue and redeem shares directly at NAV.

What is a 'convertible bond' and what is its primary advantage to investors?

Answer: A bond that can be exchanged for the issuer's common stock; advantage is equity upside potential

A convertible bond gives holders the option to convert the bond into a specified number of the issuer's common shares, allowing investors to benefit from equity upside while having bond downside protection.

Which is a sign of a scam investment for beginners?

Answer: Guaranteed high returns with no risk

Promises of guaranteed high returns with no risk are a classic red flag for fraud.

A dividend is:

Answer: A share of profits paid to shareholders

Dividends are distributions of a company's earnings paid to its shareholders.

In infrastructure investing, what makes it attractive as an alternative asset class?

Answer: Stable, long-term cash flows from essential services with inflation-linked revenues

Infrastructure assets like toll roads, airports, and utilities generate stable, predictable cash flows from essential services often backed by long-term contracts with inflation escalators.