Deck 4: Financial Planning, Taxation, and the Efficiency of Financial Markets

Question 1

Contributions to an IRA appear on the individual's estimate of cash receipts and disbursements.

Answer 1

True

Question 2

The anticipation of a lower tax rate in the future is an argument for a Roth IRA instead of a traditional IRA.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

A small firm may offer a Roth IRA instead of a 401(k) or Keogh account.

Question 5

The potential savings from a 401(k) plan increases as the individual's tax rate decreases.

Question 6

Contributions to a Roth IRA are not tax-deductible.

Question 7

An income statement enumerates of an individual's receipts and disbursements.

Question 8

A tax shelter is not synonymous with tax evasion.

Question 9

The amount in a Keogh account appears on the investor's estimate of cash receipts and disbursements.

Question 10

Realized short-term capital losses are used to offset long-term losses for the purpose of taxation.

Question 11

Only the earnings, and not the amount invested, are
taxed when distributed from a 401(k).

Question 12

Pension plans permit investors to defer income tax.

Question 13

Capital losses may be used to offset capital gains.

Question 14

Interest earned and received appears on the individual's balance sheet.

Question 15

A Keogh account (HR-10) is a tax?deferred pension plan for the self?employed.

Question 16

A Keogh plan is a pension plan for an individual not
covered by a pension plan at place of employment.

Question 17

An individual's net worth is determined by subtracting liabilities from assets.

Question 18

Securities must be sold before capital gains taxation applies.

Question 19

The amount of an outstanding mortgage appears on the individual's balance sheet.

Question 20

Short-term capital gains are subject to higher tax rates than long-term capital gains.

Question 21

The efficient market suggests that, over a period of
time, the investor should earn a return that is consistent with the amount of risk the investor bears.

Question 22

The efficient market hypothesis says that no one can
outperform the market.

Question 23

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

Question 24

Examples of capital gains include sales of
1) IRA accounts
2) stocks sold for a profit
3) real estate sold for a profit

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

Question 25

Which of the following is excluded from an individual's cash budget?

A) wages and salary
B) retirement account
C) social security tax payments
D) alimony

Question 26

Investing in stocks purchased by insiders may generate superior investment results and that is inconsistent with the strong form of the efficient market hypothesis.

Question 27

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

Question 28

Examples of tax shelters for individuals include
1) interest on municipal bonds
2) realized short-term capital gains
3) IRAs

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

Question 29

In an efficient securities market, the investor should earn, over a period of years, a return comparable to the amount of risk the individual bears.

Question 30

U.S. securities markets are efficient in part because these markets are very competitive.

Question 31

One anomaly to the efficient market hypothesis is
that investments in the debt of large firms will earn
higher returns than investments in their stock.

Question 32

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

Question 33

The process of financial planning requires the
Individual to
1) establish financial goals and objectives
2) quantify the value of his or her assets
3) hire professional financial advisors

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

Question 34

According to the efficient market hypothesis, purchasing high P/E stocks should produce higher returns.

Question 35

Possible investment objectives may include
1) capacity to meet financial emergencies
2) preservation of capital
3) desire to finance retirement

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

Question 36

The tendency for securities prices to overreact may
create an anomaly that can lead to superior returns.

Question 37

Which of the following is included in an individual's cash budget?

A) common stock
B) social security payments
C) home mortgage owed
D) credit card balances

Question 38

Securities prices tend to adjust slowly as new information is disseminated in an inefficient market.

Question 39

The efficient market hypothesis suggests that the
current price of a stock reflects what the investment community believes the stock is worth.

Question 40

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 41

The weak form of the efficient market hypothesis
Implies

A) securities prices are randomly determined
B) studying past price behavior will lead to inferior investment decisions
C) past securities prices predict future prices
D) studying past price behavior does not lead to superior investment decisions

Question 42

The traditional IRA is

A) a tax?deferred retirement account
B) a non-tax-deferred retirement account
C) a means to generate tax?free income
D) a means to increase current income

Question 43

A 401(k) plan is a

A) tax?deferred retirement plan
B) savings plan for the retired
C) plan to increase current tax-exempt income
D) dividend or interest enhancement plan

Question 44

If financial markets are efficient, that
Suggests 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

Question 45

The strong form of the efficient market hypothesis
Suggests
1) inside information will not lead to superior
Investment results
2) inside information will lead to superior
Investment results
3) studying financial statements will not lead
To superior investment results
4) studying financial statements will lead to
Superior investment results

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

Question 46

With a Roth IRA, the individual

A) deducts the annual contributions
B) earns tax-free income
C) defers taxes
D) avoids estate taxes

Question 47

What is the federal income tax owed by an investor in the 35 percent income tax bracket? The tax rate on long-term capital gains is 15 percent.
a. Tristan
sold Stock A for a short-term capital loss of
$5,250;
sold Stock B for a long-term capital gain of $4,250.
b. Isolda
sold Stock A for a $2,000 short-term gain;
sold Stock B for a $6,000 long-term loss.
c. Elsa is 65 years old and withdraws $1,000 from her
traditional IRA account, She deposits $1,000 in her
Roth IRA.
d. Gertrude
bought 100 shares of IBM in March 2006 for $100 a
share and sold 40 shares six months later for $120.
e. Siegmund's traditional IRA is currently worth
$25,000. He sold a stock in the account for $2,000.
He had purchased the stock for $1,000 in 2012.

Question 48

If financial markets were inefficient,

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

Question 49

Which of the following currently reduces taxes?
1) contributions to an IRA
2) contributions to a Roth account
3) purchases of life insurance
4) contributions to a 401(k) plan

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

Question 50

What is the federal income tax owed by an investor in the 35 percent income tax bracket? The tax rate on long-term capital gains is 15 percent.
a. Megan
sold Stock A for a short-term capital gain of $5,500;
sold Stock B for a short-term capital loss of $2,100.
b. Margaret
sold Stock A for a short-term capital loss of $2,000;
sold Stock B for a short-term capital gain of $4,000.
c. Melissa is 70 years old and withdraws $1,000 from her
Roth IRA account. Would the answer be different if
she were 65 years old?
d. Morgan
bought 100 shares of IBM in March for $100 a share
and sold the shares in April for $110.
e. Murphy
contributed $4,000 to an IRA and used the proceeds to
purchase stock A for $4,000. The stock was
subsequently sold for $4,500 after a year had passed.

Question 51

An implication of the efficient market hypothesis is

A) securities prices are randomly 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

Question 52

The use of moving averages may produce superior investment results according to

A) the weak form of the efficient market hypothesis
B) the semi-strong form of the efficient market hypothesis
B) the strong form of the efficient market hypothesis
D) all forms of the efficient market hypothesis

Question 53

The efficient market hypothesis requires
1) financial markets to be competitive
2) prices to adjust rapidly
3) prices of undervalued securities to fall

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

Question 54

What is the federal income tax owed by an investor in the 35 percent income tax bracket? The tax rate on long-term capital gains is 15 percent.
a. Bob
owns a savings account that paid $350 in interest and
sold Stock B for a long-term capital gain of $1,200.
b. Bill
sold Stock A for a short-term capital gain of $3,500;
sold Stock B for a short-term capital loss of $3,100.
c. Brian
sold Stock A for a long-term capital gain of $3,700;
sold Stock B for a long-term capital loss of $5,100.
d. Barbara
sold Stock A for a $6,000 short-term loss and
sold Stock B for a $2,000 long-term gain.
e. Roberta's IRA account collected interest of $1,000
and a bond paid her interest of $1,000.

Question 55

Which of the following is not illustrative of a
Tax?sheltered retirement plan?

A) Keogh account
B) IRAs
C) 401(k) plans
D) life insurance

Question 56

Net short-term capital losses are used to offset

A) dividend income
B) unrealized long-term capital gains
C) 401(k) contributions
D) realized long-term capital gains

Question 57

Which of the following is a retirement account for the self?employed?

A) a 401(k) plan
B) Keogh account (HR-10 account)
C) 10?K report
D) tax-deferred annuity