FFM Test 3 with Complete Solutions 2025
Transaction costs - ANSWER These costs come directly out of your return. An example
is the commission you pay when you buy and sell stocks.
Leverage - ANSWER Refers to the degree that you use borrowed money to make an
investment. Can greatly reduce your yield or enhance your yield. Thus, it enhances risk.
Securities markets - ANSWER These are the places where various securities are
boufht and sold. Markets go up and down over time.
Bear market vs. Bull market - ANSWER One that is declining over several months and
a bull market is increasing.
Market corrections - ANSWER A reverse movement of at least 10 percent to adjust
for recent rapid market rises. Long-term investors understand that these periodic
fluctuations do not last and that historical averages tend to hold true when looking
ahead 20 years or more.
Long-term strategy - ANSWER Long-term investors understand that timing the market is
extremely difficult. It is possible to make money once in a while by jumping in and out
of the market. But, the key to investing success is time not timing. Long-term investors
avoid following the crowd to a hot investment or a panic to sell. They do not trade to
frequently and they certainly stay away from buying high and selling low.
Buy and hold - ANSWER Buy and hold. Make sound choices in a diversified portfolio
and stay invested
Dollar-cost averaging - ANSWER You invest in a set dollar amount on a regular basis
rather than buy a specific number of shares each time. Monthly deposits into a tax-
shelter retirement plan at work or an IRA with dividend-reinvestment is the best
, example of such a technique. The result is that you pay a lower average share cost
over time
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.
Transaction costs - ANSWER These costs come directly out of your return. An example
is the commission you pay when you buy and sell stocks.
Leverage - ANSWER Refers to the degree that you use borrowed money to make an
investment. Can greatly reduce your yield or enhance your yield. Thus, it enhances risk.
Securities markets - ANSWER These are the places where various securities are
boufht and sold. Markets go up and down over time.
Bear market vs. Bull market - ANSWER One that is declining over several months and
a bull market is increasing.
Market corrections - ANSWER A reverse movement of at least 10 percent to adjust
for recent rapid market rises. Long-term investors understand that these periodic
fluctuations do not last and that historical averages tend to hold true when looking
ahead 20 years or more.
Long-term strategy - ANSWER Long-term investors understand that timing the market is
extremely difficult. It is possible to make money once in a while by jumping in and out
of the market. But, the key to investing success is time not timing. Long-term investors
avoid following the crowd to a hot investment or a panic to sell. They do not trade to
frequently and they certainly stay away from buying high and selling low.
Buy and hold - ANSWER Buy and hold. Make sound choices in a diversified portfolio
and stay invested
Dollar-cost averaging - ANSWER You invest in a set dollar amount on a regular basis
rather than buy a specific number of shares each time. Monthly deposits into a tax-
shelter retirement plan at work or an IRA with dividend-reinvestment is the best
, example of such a technique. The result is that you pay a lower average share cost
over time
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.
