Economics and Investment Principles

A set of flashcards covering key concepts about economics, investments, and financial principles discussed in the lecture.

Inflation

Excessive growth in the money supply, defined by Milton Friedman as a monetary phenomenon.

Monetizing the debt

Occurs when the Federal Reserve buys government debt by creating new money, turning debt into currency.

Equation of exchange

A formula representing the relationship between money supply, velocity of money, price level, and real GDP, expressed as $MV = PQ$.

401k plan

A retirement savings plan offering tax advantages to employees, allowing them to save and invest for retirement.

401k vs 403b

A $401k$ is offered by for-profit corporations; a $403b$ is for non-profits or educational institution employees.

Self-employed 401k

A Solo 401k, allowing self-employed individuals to establish their own retirement savings plan.

Social Security contributions

Workers pay $6.2\%$ and employers also pay $6.2\%$, totaling $12.4\%$.

Taxation of Social Security payments

Payments to retirees can be taxable if total income exceeds certain thresholds.

Risk-Adjusted Return

Performance measures like Jensen, Sharpe, and Treynor assess fund performance against risk.

Sharpe measure

Standardizes excess return by the portfolio's total risk (standard deviation) and assumes less diversification.

Jensen measure (Alpha)

Calculates the difference between actual fund returns and returns required by CAPM for the fund's level of risk.

Load fees

Front-end load is paid at purchase, while back-end load is an exit fee.

NAV (Net Asset Value)

The value per share of a mutual fund, reflecting the total market value of all assets minus liabilities.

Money market mutual funds

Invest in short-term debt instruments like Treasury bills and commercial paper.

Survival Bias

Exclusion of poorly performing funds from performance reports, making the average look better.

Price/Earnings (P/E) ratio

The ratio of a company's current share price to its earnings per share, indicating valuation.

Interest rates and bond prices relation

Generally, an increase in interest rates causes bond prices to decrease.

Volatility of high vs low Beta stocks

High-Beta stocks are more volatile; low-Beta stocks are less volatile compared to market returns.

S&P 500

The most commonly used index as the market benchmark in CAPM and performance evaluation.

Precious metal buying advice

Buy precious metals from reputable dealers; avoid third-party storage.

Average annual return of S&P 500

Approximately $10\%$ to $11\%$ over the last 20 years.

Investment vehicles in money market mutual funds

Typically include short-term debt instruments such as Treasury bills, commercial paper, and CDs.

Tax-deductibility of car loan interest

Interest on car loans is not tax deductible for individuals who itemize deductions.

401k loan interest repayment

When borrowing from a 401k, the interest is paid back to the borrower's account.