Deck 20: Financial Planning and Investing in an Efficient Market Context

Question 1

If financial markets are efficient, thatsuggests that

A) investors cannot earn superior returns
B) investors cannot expect to outperform the market consistently
C) security prices are random
D) bearing additional risk will not increase return

Answer 1

B

Question 2

Portfolio risk encompasses1. a firm's financing decisions2. interest rate risk3. loss of purchasing power

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Answer 2

D

Question 3

In a well-diversified portfolio, the risk associated with fluctuations in securities prices (i.e., the market) is reduced.

Answer 3

False

Question 4

The process of financial planning requires theindividual to1. establish financial goals and objectives2. identify and quantify the value of his orher assets3. hire professional financial advisors

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 5

If the financial markets were not efficient,

A) all investors would profit
B) prices indicate the proper valuation of securities
C) prices would adjust rapidly
D) an investor may consistently outperform the market

Question 6

One of the first steps an investor should take is to establish the objectives of the portfolio.

Question 7

If an investor believes that financial markets are inefficient, that argues for the individual to pursue a more active portfolio strategy.

Question 8

Asset allocation is important to help diversify a portfolio but has little impact on the portfolio's return.

Question 9

Diversification reduces

A) systematic risk
B) unsystematic risk
C) market risk
D) purchasing power risk

Question 10

If financial markets are efficient, that negates the importance of financial planning.

Question 11

Even if financial markets have elements of inefficiency, the individual may still be unable to outperform the market.

Question 12

The tendency of investors to follow a "herd" mentality helps explain financial bubbles.

Question 13

Possible investment objectives may include1. capacity to meet financial emergencies2. preservation of capital3. desire to finance retirement

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 14

Sources of risk include1. fluctuating exchange rates2. a firm's financing decisions3. higher interest rates4. loss of purchasing power

A) 1 and 2
B) 2 and 3
C) 2 and 4
D) all four

Question 15

While the investor is able to reduce asset specific risk, other sources of risk remain.

Question 16

Price bubbles may be evidence that1. financial markets are inefficient2. financial markets are rational3. the investors have a herd instinct4. investors do not have a herd instinct

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 17

In an efficient securities market, the investor can not earn, over a period of years, a return comparable to the amount of risk the individual bears.

Question 18

For diversification to reduce risk,

A) the returns on the individual securities should be highly correlated
B) the prices of the stocks should be stable
C) the returns on the individual securities should be negatively correlated
D) one firm should offer dividends and the other should offer capital gains

Question 19

Since virtually all investments involve risk, theindividual should develop a diversified portfolio.

Question 20

An active portfolio strategy is premised on

A) the stock market being efficient
B) the stock market being inefficient
C) the investor's being able to obtain public information
D) the portfolio manager's access to corporate management

Question 21

Examples of a passive investment strategies include1. buy-and hold2. index mutual funds3. specialized ETFs

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all three

Question 22

An implication of the efficient market hypothesis is

A) securities prices are random determined
B) stock prices reflect historical information
C) few investors can expect to outperform the market over a period of time
D) after adjusting for risk, money market securities offer superior returns