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Chapter Review Chapter 39: A Student’s Guide to Investing

  1. Investment options for individuals include putting savings in a bank account of some kind or using them to buy real estate, bonds, or shares of stock or mutual funds.
  2. Returns on investment can be received in four ways: as interest, dividends, rent, and capital gains.
  3. Assets can differ in four ways: in their average returns, their riskiness, their treatment under tax law, and their liquidity.
  4. By holding assets that are widely diversified, individuals can avoid many of the risks associated with specific assets, but not the risks associated with the market as a whole.
  5. Today’s price of an asset is influenced by expectations of the asset’s price in the future. Expectation of a higher price in the future will cause the asset’s price to rise today.
  6. Asset prices can be very volatile because expectations about future returns can shift quickly.
  7. The efficient market theory holds that all available information is fully reflected in the price of an asset. Accord¬ ingly, changes in price reflect only unanticipated events and, therefore, are random and unpredictable.
  8. There are four rules for intelligent investors: (1) evaluate the characteristics of each asset and relate them to your personal situation; (2) give your financial portfolio a broad base; (3) look at all the risks you face, not just those in your financial portfolio; and (4) think twice before believing you can beat the market.
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