FFM Test 3 with Complete Solutions 2025
Lending investments - ANSWER Bonds. They represent a loan to a company,
government agency or any other organization that has issued the bond. They are a debt
to be repaid with interest. The debt itself is paid at maturity with interest paid while the
bond is outstanding. This current income is usually fixed income to the bondholder
Ownership investments - ANSWER Those where you own some asset totally or in part.
Referred to as equities. Stocks are a primary example of equities. You own a share of
the company when you own stock.
Long-term investments - ANSWER You can afford to take on more risk in the long-term.
Risky investments fluctuate in value but over time do better than investments with
little fluctuation. You can afford to ride out these fluctuation when you are investing for
the long-term.
Long-term investors - ANSWER Are interested in growth over time. Growth comes
primarily from capital gains. So they should focus on investments that are more likely
to provide capital gains. They do not need to be as concerned with current income.
When current income results they would simply want to reinvest it back anyway.
Random risk - ANSWER Arises out of the possibility that any one investment may go up
or down. If you pick any one stock you might or might not do well. But, if you pick
many stocks some will do well and others not so well and you will come closer to
hitting the average for all stocks. This technique is called diversification and is the key
to reducing random risk.
, Market risk - ANSWER Arises out of the possibility that an entire market might do well--
or poorly. It is much more difficult to avoid market risk. One way is to put money into
several markets; stocks and bonds for example. Ideally, when stocks are doing poorly
bonds will be doing better
Business failure risk - ANSWER Arises out of the possibility that an investment might
not succeed financially. Investors in General Motors were exposed to this type of risk
when the company went bankrupt
Inflation risk - ANSWER Can affect investments and thus many are subject to this.
Lending investments are especially prone to this.
Time horizon risk - ANSWER Relates to the fact that the more time your money
is invested, the more it is at risk
Business-cycle risk - ANSWER Results from the fact that some investments do better or
worse during various phases of the business cycle
Market-volatility risk - ANSWER Markets can be highly volatile (tendency to rise or
fall sharply) over short periods of time. This risk has been a characteristic of stock in
technology companies over the past several decades
Liquidity risk - ANSWER Some investments are difficult to sell quickly without
reducing the price you are willing to take. This is a characteristic of real estate
investing.
Marketability risk - ANSWER Investors in bonds experience this. They receive relatively
small interest payments periodically and have difficulty reinvesting them back into bonds
because of the high cost of a single bond relative to the interest earned
Lending investments - ANSWER Bonds. They represent a loan to a company,
government agency or any other organization that has issued the bond. They are a debt
to be repaid with interest. The debt itself is paid at maturity with interest paid while the
bond is outstanding. This current income is usually fixed income to the bondholder
Ownership investments - ANSWER Those where you own some asset totally or in part.
Referred to as equities. Stocks are a primary example of equities. You own a share of
the company when you own stock.
Long-term investments - ANSWER You can afford to take on more risk in the long-term.
Risky investments fluctuate in value but over time do better than investments with
little fluctuation. You can afford to ride out these fluctuation when you are investing for
the long-term.
Long-term investors - ANSWER Are interested in growth over time. Growth comes
primarily from capital gains. So they should focus on investments that are more likely
to provide capital gains. They do not need to be as concerned with current income.
When current income results they would simply want to reinvest it back anyway.
Random risk - ANSWER Arises out of the possibility that any one investment may go up
or down. If you pick any one stock you might or might not do well. But, if you pick
many stocks some will do well and others not so well and you will come closer to
hitting the average for all stocks. This technique is called diversification and is the key
to reducing random risk.
, Market risk - ANSWER Arises out of the possibility that an entire market might do well--
or poorly. It is much more difficult to avoid market risk. One way is to put money into
several markets; stocks and bonds for example. Ideally, when stocks are doing poorly
bonds will be doing better
Business failure risk - ANSWER Arises out of the possibility that an investment might
not succeed financially. Investors in General Motors were exposed to this type of risk
when the company went bankrupt
Inflation risk - ANSWER Can affect investments and thus many are subject to this.
Lending investments are especially prone to this.
Time horizon risk - ANSWER Relates to the fact that the more time your money
is invested, the more it is at risk
Business-cycle risk - ANSWER Results from the fact that some investments do better or
worse during various phases of the business cycle
Market-volatility risk - ANSWER Markets can be highly volatile (tendency to rise or
fall sharply) over short periods of time. This risk has been a characteristic of stock in
technology companies over the past several decades
Liquidity risk - ANSWER Some investments are difficult to sell quickly without
reducing the price you are willing to take. This is a characteristic of real estate
investing.
Marketability risk - ANSWER Investors in bonds experience this. They receive relatively
small interest payments periodically and have difficulty reinvesting them back into bonds
because of the high cost of a single bond relative to the interest earned
