FFM Test 3 with Complete Solutions 2025
Investing - ANSWER More than saving. Savings involves setting money aside when you
spend less than you earn. Investing is taking that money and making it work for you. You
want to earn money on your money. Most people invest in securities (stocks, bonds and
shares in mutual funds)
Portfolio - ANSWER All of your investments together. Should be a broad mix
Ready to invest - ANSWER Live within your income, save regularly, use credit wisely,
carry adequate insurance
Why invest? - ANSWER A secure retirement. Eventually, you will be able to receive
current income from your investments.
Return on investments - ANSWER Tied directly to the level of financial risk associated
with the particular type of investment. The higher the risk the higher the potential
return -- and potential for losses. The total return will come from a combo of current
income and capital gains
Current income from an investment - ANSWER Returns you receive while you own the
investment. Interest, rent and stock and mutual fund dividends are examples.
Capital gains - ANSWER Occur when you sell an investment for more than you paid for it
after subtracting any transaction costs
Rate of return - ANSWER The combination of current income and capital gains can be
translated to an annual percentage or yield on the investment. A useful way to compare
investment options.
, Pure risk - ANSWER Involves situations where the uncertainty pertains only to the
potential for a loss
Speculative risk - ANSWER Involves the potential for both gain and loss
Investment risk - ANSWER The possibility that the return on an investment will differ
from your expectations
Risk premium - ANSWER Investors demand this for willingness to make riskier
investments for which there is no guarantee of future success. It is the difference
between what an investment would pay and the return on Treasury securities
Risk on a T-bill - ANSWER Near zero, and, thus, the rate of return is near zero
Conservative investors - ANSWER Avoid taking on much risk. They hate the thought of
losing money in an investment and focus on preservation of capital
Moderate investors - ANSWER Accept the fact that investing involves risk. They seek
both capital gains and current income. They tie the level of risk they will take to the time
horizons of their investment goals
Aggressive investors - ANSWER Seek out investments with high levels of risk. They focus
primarily on capital gains and often looking to make very high returns in a short period
of time.
Active investors - ANSWER Pay close attention to their investments and the economic
environment as a whole. They move in an out of investments frequently in response to
preferred trends. One school of thought says that they are likely to do no better than
average over time because of market efficiency. This means that the speed at which
Investing - ANSWER More than saving. Savings involves setting money aside when you
spend less than you earn. Investing is taking that money and making it work for you. You
want to earn money on your money. Most people invest in securities (stocks, bonds and
shares in mutual funds)
Portfolio - ANSWER All of your investments together. Should be a broad mix
Ready to invest - ANSWER Live within your income, save regularly, use credit wisely,
carry adequate insurance
Why invest? - ANSWER A secure retirement. Eventually, you will be able to receive
current income from your investments.
Return on investments - ANSWER Tied directly to the level of financial risk associated
with the particular type of investment. The higher the risk the higher the potential
return -- and potential for losses. The total return will come from a combo of current
income and capital gains
Current income from an investment - ANSWER Returns you receive while you own the
investment. Interest, rent and stock and mutual fund dividends are examples.
Capital gains - ANSWER Occur when you sell an investment for more than you paid for it
after subtracting any transaction costs
Rate of return - ANSWER The combination of current income and capital gains can be
translated to an annual percentage or yield on the investment. A useful way to compare
investment options.
, Pure risk - ANSWER Involves situations where the uncertainty pertains only to the
potential for a loss
Speculative risk - ANSWER Involves the potential for both gain and loss
Investment risk - ANSWER The possibility that the return on an investment will differ
from your expectations
Risk premium - ANSWER Investors demand this for willingness to make riskier
investments for which there is no guarantee of future success. It is the difference
between what an investment would pay and the return on Treasury securities
Risk on a T-bill - ANSWER Near zero, and, thus, the rate of return is near zero
Conservative investors - ANSWER Avoid taking on much risk. They hate the thought of
losing money in an investment and focus on preservation of capital
Moderate investors - ANSWER Accept the fact that investing involves risk. They seek
both capital gains and current income. They tie the level of risk they will take to the time
horizons of their investment goals
Aggressive investors - ANSWER Seek out investments with high levels of risk. They focus
primarily on capital gains and often looking to make very high returns in a short period
of time.
Active investors - ANSWER Pay close attention to their investments and the economic
environment as a whole. They move in an out of investments frequently in response to
preferred trends. One school of thought says that they are likely to do no better than
average over time because of market efficiency. This means that the speed at which
