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Chapter11 - a The best time to change your asset allocation...

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Matt Serna Mr. Mckenzie Personal Finance November 21, 2010 Chapter 11 1. Explain the difference between investing and speculating? Give examples of each. a. An investment is an asset that generates return, and speculation is an asset that’s value depends solely on supply and demand. b. Example of Investment, stocks pay dividends and bonds earn interest. Example of speculation is, gold coins and baseball cards are worth more in the future only if someone is willing to pay more for them. 2. Name and describe the two basic categories of investments, give example for both. a. There are two categories of investments, they are Lending and Ownership, Lending investments are savings accounts and bonds, which are debt instruments issued by the government are examples of lending investments. Ownership investments are stocks and common stocks, which represent an ownership position in a corporation, along with income-producing real estate, are examples of ownership investments. 3. When should an investor change the asset allocation mix?
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Unformatted text preview: a. The best time to change your asset allocation mix is when your life circumstances change. Rebalance your asset allocations to match with your life. 4. What are the three primary points of information needed to evaluate the potential total annual return of a lending investment? a. The three primary points of information are the ending value, beginning value, and the income return. The equation for this is i. (ending value – beginning value) + income return i. beginning value 5. Briefly distinguish among short-, intermediate-, and long-term goals, give examples. a. Short Term – any financial goals that can be accomplished in a 1 year period, such as buying a new TV, or a family vacation b. Intermediate Term – any financial goals that can be accomplished in 1-10 year time period, such as paying for college or a down payment on a new house. c. Long-Term – Takes more than 10 years, such as retirement...
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