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84 Cards in this Set
- Front
- Back
Exposure to stocks & bonds without owning stocks & bonds
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indirect equity
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A type of indirect equity that is designed for "sophisticated investors" (based on income & net worth)
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hedge funds
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Hedge funds (a type of indirect equity):
- less heavily ________ - can change ________ without telling investors - more ________ oriented - more ________ about what they invest in - more ________ (% of profits taken out) |
regulated, objective, derivative, secretive, expensive
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A type of indirect equity: retirement funds aka ________
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pension funds
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A way to bet on stock price declining, higher risk, can lose a lot more money
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selling short
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________, not investors, trade commercial paper. (Creditor)
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Institutions
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Hybrid between stocks & bonds
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preferred stock
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Agreement to take at a certain price at a later date
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futures
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With futures (agreement to take at a certain price at a later date), someone has to lose money for me to ________.
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make money
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While real estate & precious metals are ________ assets, you can have ________ assets on them.
- REITS (Real Estate Investment Trust) - similar to a ________ fund for real estate - ETF (Exchange Traded Fund) - like a mutual fund, but trades like a ________ (Ex: Gold) *Can own real assets (gold) in the form of a financial asset (________) |
real, financial, mutual, stock, ETF
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How do we measure risk?
1. 2. 3. |
standard deviation, beta, value at risk (VAR)
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The ability to tolerate risk depends on many factors such as:
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Job security, kids (dependents), inflation, disposable income, age (time to retirement)
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Willingness to tolerate risk largely depends on a person's ________.
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personality
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________ - more risk-seeking with one account & more risk-averse with another account
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segment
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The more exposure you have to the downsides of risk, the less ________ you are to take risk.
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willing
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Usually the more disposable income a person has, the ________ their ability to take risk but they have less of an ________ to take risk.
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greater, incentive
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An investment objective where there is guaranteed money coming in right now (ex: dividend, interest, rents, etc.)
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current income
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Increasing the value of your investment over time is known as ________ appreciation.
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capital (investment objective)
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Where liquidity is concerned, there are two fundamental questions:
1. Can we sell it ________? 2. Can we sell it for fair ________ value? |
quickly, market
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The ________ job stability, the less liquidity you need. The ________ the time frame, the less liquidity you need.
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higher, longer
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A way to vary liquidity is to separate into different accounts with different ________ of liquidity.
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levels
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Stocks (short-term orientation) may offer a higher return, but there's also more ________ associated with them and they may not be appropriate.
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volatility
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When you take on more risk, you have the potential to lose a lot of ________.
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money
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Time period determines not only the level of ________, but also how much ________ we're willing to take.
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liquidity, risk
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Short term trading is taxed as ________ income.
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ordinary
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If an investment is held for > 1 yr, it is considered ________.
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long-term
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A traditional IRA offers a ________ tax benefit.
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frontloaded
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With a traditional IRA, you retire and make a withdrawal which is taxed as ________.
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income
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A Roth IRA offers a ________ tax benefit.
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backloaded
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A Roth IRA compounds ________-free. Since there isn't a tax benefit up front, you get to keep ________ of what you take out.
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tax, 100%
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With Arithmetic Averages, you ________/# of ________.
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add them all up, of observations
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Arithmetic averages don't work well with returns because of the ________ effect.
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compounding
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The greater the ________, the worse arithmetic average is.
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volatility
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Equation for Geometric Average
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[(1+k1)(1+k2)....(1+kn)]^(1/n) - 1
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When calculating the standard deviation for historical data, use ________ average, because you don't want to take into account the compounding effect.
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arithmetic
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STUDY STANDARD DEVIATION FORMULA
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STANDARD DEVIATION
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Beta is ________ risk and is systematic, ________.
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market, nondiversifiable
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When evaluating investments on their own, ________ is a more appropriate risk measurement.
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sigma
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Average market risk is a beta of ________.
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1
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A beta ________ than 1 is considered high risk.
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greater
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Most betas fall in what range?
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.4 - 1.8
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Beta varies from source to source because of the specifics of ________.
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calculations
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Value At Risk (VAR) looks at ________case scenario.
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worst
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STUDY VAR HANDOUT
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VAR
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Problems with Value At Risk:
1. Doesn't take into consideration ________ 2. There's no way to really know what the risk is going to be in the ________. 3. It can create a false sense of ________ as to what can happen. |
outliers, future, security
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Sigma doesn't work with ________ returns.
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random
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Beta assumes a ________.
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portfolio
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STUDY TAX HANDOUT.
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TAX
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Required Return = ________ Rate of Return + Anticipated ________ + ________
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Real, Inflation, Risk Premium
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Taxes DO/DO NOT affect required return.
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do
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Artificial demand that keeps interest rate artificially low, which in turn creates a negative return is known as ________.
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quantitative easing (QE)
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claims to cash flows or assets based on a legal agreement (ex: share of stock entitles you to ownership in a corporation and the value of the stock will be based on the perceived value of the corporation and the number of shares outstanding)
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financial asset
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a tangible asset (ex: you can set foot inside a piece of property or hold a diamond in your hand )
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real asset
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Financial assets of LOWER/GREATER liquidity than real assets.
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greater
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Financial assets have LOWER/HIGHER storage/management costs.
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lower
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FINANCIAL/REAL assets have a greater chance of becoming worthless.
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Financial
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Real assets are less liquid, require ________ or active management, but are likely to maintain some ________ over time.
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storage, value
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7 key areas relating to investment objectives:
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1. Risk and Safety of Principal
2. Current Income vs. Capital Appreciation 3. Liquidity 4. Short-Term vs. Long-Term Orientation 5. Tax Factors 6. Ease of Management 7. Retirement and Estate Planning considerations |
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Risk and Safety of Principal (key area relating to investment objectives) - Choosing the correct risk level is one of the most important functions of developing a sound investment plan.
Factors that influence appropriate level of risk include: - Age - All else equal, for most individuals age and risk tolerance are ________ related. Young people have more time to recover from investment setbacks and more time to take advantage of the higher expected returns associated with higher risk investments. As we age, we have less time to recover from large investment losses. -Income - At higher levels of income, we increase our risk ________, but decrease the ________ for taking risk. Someone that is earning a relatively low income needs to earn higher rates of ________ (more risk), but they have less ability to recover from setbacks. - Wealth - With high levels of wealth, and individual does not need to take as much risk to generate sufficient investment income. However, with high levels of wealth, it is easier |
inversely, increase, decrease, return, reserve, more, feels
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Current Income (________, ________, ________) vs. Capital Appreciation (________) (Key area relating to investment objectives) -
-One argument - it is important! People that are in the wealth accumulation stage should focus on ________, while people that have started spending their investment income should focus on ________. Other Side - IRRELEVANT People should focus on maximizing their ________ risk-adjusted rate of return regardless of whether that return is form current income or capital appreciation. If an individual needs to spend investment income, they can sell a portion of their ________ as easily as they can spend a dividend check. If an individual is in the accumulation stage, they can reinvest those dividends in place of capital gains. As long as transaction costs are low, the method of accessing your investment income should not matter. |
dividends, interest, rent,
gains, capital appreciation, current income after-tax, assets |
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Liquidity (Key area relating to investment objectives)-
If you are using your investment portfolio as a source of income (beyond the current income generated from dividends, interest, etc) you need to think about liquidity. Also, if you have a ________-term investment horizon, you need to think about ________. All else equal, liquidity lowers ________ slightly. As investors prefer liquidity, they typically will accept lower returns for investments that are more liquid. Also if you focus on liquid investments, it limits your potential ________. If you are not concerned with the liquidity of your investments, you may be able to generate slightly ________ returns. |
short, liquidity, returns, options, higher
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Short-Term vs. Long-Term Orientation (Key area relating to investment objectives)-
Two big concerns for short-term investors - 1. ________, 2. ________ With long-term orientation, much of the short-term ________ may wash out. This allows people with long-term orientations to take ________ risk levels on average |
liquidity, volatility, volatility, higher
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Tax Factors (Key area relating to investment objectives) - While most returns are on a pre-tax basis, what matters is ________ returns. It is critical to be aware of what impact taxes have on your returns and how to best maximize your after-tax returns (adjusted for risk). The two biggest mistakes people make in this area are ignoring ________ impacts and trying to ________ taxes (instead of maximizing after-tax returns)
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after-tax, tax, minimize
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Ease of Management (Key area relating to investment objectives) - Decision whether to be actively involved in all of their ________ decisions or mildly involved (ex: ________ fund)
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investment, mutual
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Retirement and Estate Planning Considerations (Key area relating to investment objectives)-
The rules and regulations associated with estate planning and retirement can require special attention in developing an ________ plan. |
investment
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ownership of individual common stocks or instruments that allow you to purchase individual shares (such as call options)
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direct equity
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stock exposure without actually owning individual shares (a stock-based mutual fund, within 401k plans)
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indirect equity
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The long-term investor buying short-term assets tends to more more ________ in that there is little time for the value of their investments to change substantially. These money market type securities tend to offer low rates of return, typically only slightly higher than the anticipated rate of ________.
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conservative, inflation
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A short-term ________ is often purchasing long-term assets (stocks and bonds) or volatile short-term assets (options and futures) in anticipation of significant changes in value for these assets over a short period of time. They will see more ________ returns and typically face ________ transaction costs. They are less concerned with avoiding losses on any one trade and more concerned with the cumulative impact of all their trades.
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trader, volatile, higher
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In a highly inflationary environment, investors tend to favor ________assets. As inflation drives up prices of good and services, the value of the real assets tend to ________ at a similar rate. However, the real key is based on expectations. If inflation is fully anticipated, ________ assets should hold up just as well as ________ assets. If inflation grows faster than expected, ________ assets will be a poor investment. On the flip side, you could see a period of high inflation that is still less than expected where ________ assets would outperform ________ assets.
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real, increase, financial, real, financial, financial, real
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the possibility of earning less than expected
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risk
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a way to measure risk that measures how much volatility we have in our returns, (all else equal the greater the volatility the more significant the chance of earning less than expected will become)
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standard deviation
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a way to measure risk that measures how sensitive our stock is to the overall market
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beta
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a way to measure risk that tries to measure the worst potential loss we might encounter given a percentage of the outcomes.
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value-at-risk (VAR)
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The three elements that impact an investors return are:
1. ________ - The compensation investors need to forego current consumption 2.________ - The compensation to maintain purchasing power 3. ________ - The compensation for risk of the investment. |
Real Risk-Free Rate of Return
Inflation Premium Risk premium |
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One issue that is often neglected when figuring an investor's return is ________ implications.
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tax
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Equation for Return
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(Real Risk-Free Rate + Inflation Premium + Risk Premium) / (1 - Tax Rate)
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Equation for Calculating Expected Return
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(P1-Po+D1)/Po
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How do you figure the arithmetic average?
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Add up all the returns and divide by the number of returns.
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How do you calculate the expected return for a probability distribution.
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Take the probability, multiply by the corresponding value and add all together.
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If the required return is greater than the expected return, DO/DO NOT invest.
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do not
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If the required return is less than the expected return DO/DO NOT invest.
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do
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To figure out after tax rate of return, you take the ________ return and divide by 1-(________ tax rate).
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expected return, marginal
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What rule is designed to prevent investors from selling stocks purely to claim the capital loss for tax purposes and then buying back the stock immediately afterwards? Therefore, in order to claim the capital loss, an investor may not buy back the stock until 31 days later. Note that you do not give up the capital loss if you buy back the stock before the 31 day window. Instead you just don't get to claim the loss at that time.
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wash sale rule
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